Game theory on innovation

Angus writes:

Class, repeat after me:

1. Green jobs are NOT a zero sum game where nations are competing for a fixed number of them.
2. If China or Germany or anyone develops “innovative energy technology”, that is NOT bad for us.  It is in fact *awesome* for us, as we can then adopt it and use it.

People, ideas are public goods. That is the whole basis of new growth theory. If China is now doing cutting edge R&D, that is an unmitigated blessing for everyone on the planet.

Wilkinson adds:

This is why it ought to be an embarrassment to exclaim in horror that the U.S. may be “falling behind” in the development of green technology. It is rather more illuminating to see government subsidies to research and the development of speculative technology as contributions to a collective global effort to explore the space of technological possibility.

The expected return to the average German taxpayer from German state science and technology subsidies is probably negative. But the global citizen’s expected return to global investment is probably positive. And the more others invest, the more positive the expected return is.  If some Taiwanese firm makes an enormous breakthrough, everyone will get to internalize the benefit of this new technology. We just don’t know in advance if the Germans or the Taiwanese or the Canadians or the Americans or whoever will make the discovery.

This kind of global cooperation sounds nice, doesn’t it? But we know all about games like this, don’t we? If Canada, say, puts an end to all state subsidies for science and tech, this really won’t much affect the probability of a major efficiency-enhancing discovery somewhere or other. Which implies that the average Canadian taxpayer, now paying for no national R&D subsidies, would see her expected return from international R&D subsidies go up. (And the greater the extent to which subsidies tend to go to the best subsidy-seekers rather than to the best innovators, the less taxpayers should worry about the downside of withdrawing their state’s support from the global effort of discovery.)

As a general rule, if nothing bad will happen to you if you free ride, it’s smart to free ride. Worrying that other countries are pulling ahead is like worrying that the other oarsman in your boat will beat you to the destination if you’re lazy. You’re in the same boat! The smart thing is to goad everyone else into going as fast and hard as they can. For a good while now, America has been a dim kid with ape strength happy to carry half the world as long as he gets to fist-pump, flex his pecs, and chant U.S.A.! U.S.A.! in the mirror each night. It’s a darn good deal for the rest of the world. America’s just too dumb to feel exploited. And too idiotically vain to enjoy a free ride.

Commenter nickbacklash goes further:

Worth noting though that, according to a fairly quietly released OECD study, state R&D subsidies don't make any net contribution to technological innovation, explained in this talk by Terence Kealey.

Science is not a standard public good. Not that this invalidates your wider point, there is just an even better reason for not [publicly] investing in R&D.