Another conceptual issue with these calculations – not limited to this paper – is the valuation of social rate of return/public rate of return on a striclty monetary basis. The presumption is that it’s the only return the government values on its investment. If this investment attracts new students, who would then be prompted to generate other knowledge and invention, that would be a value the government would seek that the private sector wouldn’t necessarily care about.

“Conventional wisdom holds that the social rate of return to R&D significantly exceeds the private rate of return and, therefore, R&D should be subsidized. In the U.S., the government has directly funded a large fraction of total R&D spending. This paper shows that there is a serious problem with such government efforts to increase inventive activity. The majority of R&D spending is actually just salary payments for R&D workers. Their labor supply, however, is quite inelastic so when the government funds R&D, a significant fraction of the increased spending goes directly into higher wages. Using CPS data on wages of scientific personnel, this paper shows that government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50% too high. The results also imply that by altering the wages of scientists and engineers even for firms not receiving federal support, government funding directly crowds out private inventive activity.”

Gary Becker has also written that public support often drives out, or substitutes, for private money.

Maybe Gibbs will tell us what is going on?