Gee, is there a market failure? If life sciences are so important to society, why doesn't the market reward researchers the way it does hedge fund managers? Does government really need to interfere? Obviously I agree with Summers, but I don't think strong believers in markets as resource allocators for society can do so without questioning some of their beliefs.
Note, though, it's a bit more complicated than Summers makes it out to be. Biologists who start companies can become rich, but it's a longer and riskier road than heading directly into business or finance.
See related posts here, here and here.
[Very nice discussion over at DeLong's blog, including explanation of market failure vs externalities, why the science track is for masochists, comparative advantage, etc.]
FT.com / Columnists / Lawrence Summers - America must not surrender its lead in life sciences: If the 20th century was defined by developments in the physical sciences, the 21st century will be defined by developments in the life sciences. Lifespans will rise sharply as cures are found for chronic diseases and healthcare will come to be a larger share of the economy than manufacturing. Life science approaches will lead to everything from further agricultural revolutions to profound changes in energy technology and the development of new materials....
It is natural to ask whether the US will lead in the life sciences in this century as it did in the physical sciences in the last. It is a profoundly important economic question, but one whose implications go far beyond to embrace issues of national security and moral leadership. At present, if one looks at levels of investment or at research output or at the prestige of leading institutions, the US is clearly leading in the life sciences. But past performance is no guarantee of future success. In the first third of the 20th century, Europe and Europeans were the dominant source of discoveries in physics....
If America is to maintain its leadership in life sciences in the 21st century, important steps must be taken. Most abstract but most important, there needs to be respect for the scientific method and its results. In sharp distinction to the situation in other industrial countries, there is an increasing move away from respecting the scientific method in US schools....
Second, funding.... During the past three years, when there has been more possible in the life sciences than there has ever been, when we are on the cusp of achieving important breakthroughs in everything from stem cells to the treatment of cancer, government funding for science research has been cut in real terms. This has been particularly hard on young researchers starting out in their careers....
In today's economy an outstanding graduate of a leading business school earns a substantially higher salary than a potential Nobel prize winner graduating with a PhD in biology. Several years after graduation the differences are even more pronounced. It should not be a surprise that in light of this economic reality more of our talented young people are not headed towards careers in basic research in the life sciences.
Third, we need to control the role of politics in allocating science dollars, which are currently tossed around like so many political footballs.... [I]t is not a step towards a healthier 21st century to allow the views of a vocal minority in effect to cut off funding for embryonic stem cell research -- which is likely to lead to revolutions in the treatment of Parkinson's disease, diabetes and cancer within the next generation.
Finally, we need to support clusters of extraordinary performance. If competition is individualistic, the US is going to have a very difficult time because salary levels adjusted for talent are going to be much lower in other parts of the world. Rather than focus on each individual as an island unto him or herself, the US needs to focus on fostering clusters of innovation such as Silicon Valley in information technology, Boston in the life sciences, New York in finance -- where each talented individual derives his or her strength from all that is around. Competing with that on price is much more difficult...
> If life sciences are so important to society, why doesn't the market reward researchers the way it does hedge fund managers?
ReplyDeleteLife science takes place in a heavily regulated environment and biotech companies have to overcome the hurdles of FDA approvals etc.
On the other hand, patent protection (i.e. regulation) works often in their favor but sometimes against them.
On top of it the US companies have to deal with the whole pro-life issues (e.g. with stem cell research).
Outside of the US the profit of pharma and biotech companies is affected by direct price control via national health insurance etc.
It is not surprising that the free market does not work efficiently in such an environment (and you are right in pointing out that it does not).
By the way, I see little reason that
anything will change here anutime soon, knowing that health care is mostly a political issue.
The market failure in question is the fact that basic research is a public good. It is costly and needs to be done "in the open" where it is tough to capture the IP.
ReplyDeleteIf you want to make an analogy between researchers and hedge fund managers, I'd say a typical researcher is about 150% long in an esoteric penny stock with no book value, little-to-no revenue and questionable management. Clearly not a very good fund manager.
Now scientific research as a whole could be a good field for investment if you were to build a portfolio of the leading research teams in several disciplines with a strong track record of spin off technologies being brought to market. So now we have a hypothetical hedge fund manager who is -- once again -- NOT doing science, but simply appraising scientific work.
EXCEPT ... there's that bit about the IP. For some reason, basic truths of nature just need to be free. I really believe that, though I'm not sure I could defend the notion except on quasi-religious grounds.
So we're back to a public agency acting as the investment manager. Let's hear it for dramatically increased funding for NSF, NIH, etc.
OK Steve, I'll bite at your obvious troll (though Wolfgang already covered it pretty well). The market heavily discounts any investment with a payoff time longer than 5-10 years, as most investors just can't wait that long for their delayed gratification.
ReplyDeleteSpaceflight is a good example. It would have been very hard to replace NASA with private enterprise back in 1970, but we're starting to see it now.
Theoretical physics offers great long-term payoffs too, but you won't see hedge funds issuing research grants any time soon.
I'm guessing we still see life-science research as "long-term" and "high-risk".
"Note, though, it's a bit more complicated than Summers makes it out to be. Biologists who start companies can become rich, but it's a longer and riskier road than heading directly into business or finance."
ReplyDeleteDo you have any evidence for this claim? I suspect not.
Dave Kane
David,
ReplyDeleteIf you need to get a PhD and probably at least a postdoc or two in order to have the credentials to even start a biotech company, the road is definitely longer.
I don't think anyone argues that a tech startup is a higher risk (though *perhaps* higher return) path than getting a job in finance. Just look at venture economics - 7 or 8 out of 10 portfolio companies are expected to fail, and only a few to succeed. You have to be pretty impressive to get your company funded (in my mind, more impressive than someone who gets a job at Goldman right out of B-school), and getting to liquidity in biotech takes a long time (e.g., due to FDA trials, etc.). So, it's clearly high risk.
It's a bit apples and oranges, since the people who are going to become research biologists aren't necessarily the ones who would otherwise become MBAs, but it's Summers who posed the dichotomy that way. In his formulation, you should probably compare Harvard bio PhDs with HBS grads, look at their total earnings distributions at age 40, and I imagine you'll find what I said, although I'm not claiming that I've seen any specific studies.