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Science needs an economics revolution

December 6, 2008 – 9:00 am by John

Here in the scientific research world, there is considered to be a vast dichotomy between the atmospheres and work environments in academic (university) research labs and private (big pharma and biotech) research labs. Whether it’s true or not, I don’t know. The impression is that in academia, you are free to work on what you (and your funders) think is important, you are free to take your projects where your results lead you, you are free to discuss and disclose as much as you and your colleagues deem necessary, and everyone moves the field forward by publishing their work in publicly accessible journals and building on publicly accessible knowledge. On the contrary, the line goes, in private research, you must work on what businessmen and non-scientist managers tell you to, you spend too much time in meetings, you can only do science that will be profitable for your company, you must switch fields entirely (or be fired) when some manager or executive decides on it, you must keep most of your results secret, and unfavorable results are suppressed because of the profit motive.

I know an academic researcher who used to work for a couple of private companies, Roche (a huge pharmaceutical company) and Chiron (a biotech research firm that was bought by Novartis). He says Roche had the most miserable work environment he’s ever experienced. The work day was 9–5, and no one worked any more than that. He would get there a few minutes early, like at 8:50 or 8:55, and the parking deck and lab buildings would be almost completely empty. Then between 8:58 and 9:00 everyone swarmed in. At 4:58 everyone would be sitting at their desks with their brief cases or purses on their desks ready to go, and at 5:00 they would all file out at once. No one liked working there, and this attitude spread to every new person who came.

His other experience was much better, but he still doesn’t want to go back to biotech. He works in a university lab now, and despite making a little more than half of what he made in industry, he says he is staying in academia and would only go back to industry in desperation. He is moving away soon, so he’ll have to find a new job, and even though he could probably find another biotech job, or the same biotech job, he won’t pursue it.

I get the impression that a lot of people feel that way. Maybe that’s because I’m surrounded by people who made the choice to stay in academic research, though. I won’t be much longer, I know that much.

I wish I could comment more on what’s wrong (and right) with industry jobs and the work environment at those companies, but that isn’t my goal in this post.

There were two commentaries published in scientific journals recently that prompted this post. The first was an essay, Economics needs a scientific revolution, in the October 30, 2008 edition of Nature, by Jean-Philippe Bouchaud. Here are some good excerpts:

Compared with physics, it seems fair to say that the quantitative success of the economic sciences has been disappointing. Rockets fly to the Moon; energy is extracted from minute changes of atomic mass. What is the flagship achievement of economics? Only its recurrent inability to predict and avert crises, including the current worldwide credit crunch.

Austrian economists and other libertarians did predict the housing bust and credit crunch and are the only ones who have offered anything other than the same old same old as measures to avert future crises (for instance, see the Mises Institute’s Bailout Reader).

To me, the crucial difference between modelling in physics and in economics lies rather in how the fields treat the relative role of concepts, equations and empirical data.

Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents (the premise that every economic agent, be that a person or a company, acts to maximize his profits), the ‘invisible hand’ (that agents, in the pursuit of their own profit, are led to do what is best for society as a whole) and market efficiency (that market prices faithfully reflect all known information about assets), for example. An economist once told me, to my bewilderment: “These concepts are so strong that they supersede any empirical observation.” As economist Robert Nelson argued in his book, Economics as Religion (Pennsylvania State Univ. Press, 2002), the marketplace has been deified.

Economic and praxeological reasoning from universal or near-universal truths (axioms) is perfectly legitimate and is the basis of Austrian economics, which has proven correct time and time again, at least on the large scale, especially as relates to the housing bust and credit crisis. Just because economists predict that everyone rationally acts to maximize his profits (which aren’t limited to money), it doesn’t mean they are always successful or even somewhat good at it. If economic agents, in the pursuit of their own profit, don’t to do what is best for society as a whole, then how the hell would government agents? Markets are efficient, especially compared with the alternative (State coercion), and all “empirical observation” to the contrary is pro-State trolling that probably confuses corporate-State socialism with capitalism.

The supposed omniscience and perfect efficacy of a free market stems from economic work done in the 1950s and 1960s, which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused in the short-term and blind in the long-term, and errors get amplified, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets.

No one except strawman-erecting Statist morans ever refer to “the supposed omniscience and perfect efficacy of a free market.” Libertarians are the ones repeatedly reminding everyone that bankruptcies are necessary and beneficial in a free market! Of course companies will fail! New ones should take their place—or not! Libertarians are the ones who say prices (of goods, of labor, and of money) should be allowed to adjust, dramatically, if necessary, and often, if necessary, to major economic events; socialist Statists are the ones who think they are omniscient and perfect enough to help everyone by keeping prices stable!

The most ardent and principled 20th-century defenders of free markets and debunkers of socialism were Ludwig von Mises, Eugen Böhm-Bawerk, Friedrich Hayek, Henry Hazlitt, and Murray Rothbard. Only Rothbard published any seminal writings that I’m aware of in the 1950’s or 1960’s.

Errors can only get amplified on a wide scale if governments use the violent, deadly police power of the State to prevent corrections from occurring immediately. Literally every economic crisis of the 20th century that I’ve read about can be explained in this way.

Reliance on models based on incorrect axioms has clear and large effects. The Black–Scholes model, for example, which was invented in 1973 to price options, is still used extensively. But it assumes that the probability of extreme price changes is negligible, when in reality, stock prices are much jerkier than this. Twenty years ago, unwarranted use of the model spiralled into the worldwide October 1987 crash; the Dow Jones index dropped 23% in a single day, dwarfing recent market hiccups.

I have read, with some skepticism, Austrian economists’ pooh-poohing of mathematical models. I mean, they don’t think they’re useless, they just think economists rely on them too much. That could be, but not being an economist, I have the impression that if sound math is applied to the relevant data, the right diagnoses can be reached and right predictions be made. Either way, the author’s criticism of math-reliant models applies to every economic school except Austrian economics.

Ironically, it was the very use of a crash-free model that helped to trigger a crash.

Ironically, it is the very use of a supposed price- and inflation-stabilizing system (the Fed) that causes inflationary booms and subsequent busts.

Brouchaud’s main point is that economists need to stop relying on laws and axioms that aren’t really true, and start doing data-driven research into what really happens in economies and base our policies only on what’s supported by reality. That’s true as far as it goes, but he goes in the wrong direction by assuming that these policies should consist of telling us how to supervise and guide markets from on high instead of getting out of the way.

The second item that sparked my interest was a letter to the editor of Science by Rui Sousa of UT-San Antonio:

Research Funding: Less Should Be More
The Policy Forum “Structural disequilibria in biomedical research” by M. S. Teitelbaum (1 August, p. 644) discussed structural problems in U.S. biomedical research funding, particularly NIH funding, but neglected to mention one of the most perverse structural problems in the system: Scientists are incentivized to secure as much funding as possible for their work, irrespective of whether an increase in funding leads to a proportionate increase in productivity.

The problem can be illustrated by a simple comparison. Suppose a pharmaceutical company has hired two researchers to run two new research labs. After 6 years, both researchers are evaluated and both have been similarly productive in terms of papers, patents, and new drugs in the pipeline. However, one researcher has sustained this productivity with a modest budget of $800,000 per year, whereas the other has constantly requested funds from the company for more equipment, more technicians, and more resources and now spends $3 million per year of the company’s money. Which researcher is the company more likely to reward and promote to a position of greater responsibility?

Now, let’s switch to a research university or medical school and talk about two assistant professors who, at the end of 6 years, have been similarly productive in terms of papers and other achievements. One has done so with a single RO1, whereas the other has managed to secure three major grants. Which assistant professor will the deans and administrators be more enthusiastic about promoting and rewarding with raises, endowed chairs, and other perks?

The discrepancy between the financial priorities in these two settings is no mystery. At the company, the funding for research comes out of the company’s pocket, and it has an interest in encouraging economic efficiency in scientific output. At the university or medical school, the funding comes from outside the institution, and there is an interest in maximizing the money secured for research, irrespective of its effect on actual productivity.

Even if the academic research model is self-correcting in the long run, would it not be more economically efficient in the first place to eliminate the incentives to secure funding over and above what a scientist feels he can most effectively use?

How can we remove these incentives? There must be a change in culture. No prestige should be attached to the level of funding that an investigator has managed to secure. The most basic of truths must be emphasized: Money is a means, not an end. We do not do science to get money. We get money to do science. Funding cannot be a measure of productivity, because scientists do not produce research dollars. Research dollars are produced by taxpayers (and to a lesser extent by philanthropists and charitable individuals). The amount of money spent by a researcher is not a measure of his productivity, but of his consumption, and might even be counted on the negative side of the ledger when he is evaluated.

I thought that was a really interesting perspective on private vs. public research funding!

In the absence of coercive funding of academic research, there would be fewer research scientists in some fields and more in others; the Imperial Federal Government’s broad role in subsidizing graduate education suggests to me that the overall number of academic researchers (grad students, post-docs, technicians, and professors) would decrease in a free market. But the waste inherent in State funding of everything suggests that the work would be more productive overall, in terms of products, services, and knowledge provided to consumers and medical professionals in a free society.

The Statist might object, “But, without taxes wisely imposed on us and distributed by our Leaders, no basic research would ever get funded! How would universities get funds for research?” Where does the money come from now? The people! If the people want to spend it on that, then they will make donations, investments, and purchasing decisions that result in universities and other research enterprises receiving some of the ample additional wealth they would have in a free society. If the people don’t want to spend it on that, then I submit that they would better off not spending it on that than they would be with you and millions of other arrogant busybodies creating States and agencies to take the money against their will.

It is interesting to think about the ways in which the nature of private pharmaceutical and biotechnology companies would be different in a free society. That is too deep and broad of a topic to go into in this post, but I will say that the state of biomedical research would be better off if some aspects of academia (openness, publication and sharing of results, pursuit of knowledge for its potential benefit to the field and not always directly for profit) and industry (the primary concern of any business should, however, be long-term profit; the reason science is funded is to make the public healthier or wealthier; and an emphasis should be placed on controlling costs, not securing as much of the pie as possible) were combined.

Also, as is widely believed by libertarian economists and non-economists alike regarding every other type of company, there would be more and smaller pharmaceutical companies in a free society. The non-importance of intellectual property and existence of multiple, competing safety-evaluating agencies would help this.

When I am able, I am pretty sure my calling in life will be to use my scientific background to write about science in 21st century America, science funding policy, the pros and cons of academic and private research, and the relationship between science and the State. Additionally, I really want to write two books titled “Health Care in America” and “Health Care and the State.” Or maybe just the latter. The value I hope to add to society in that capacity is to provide detailed information about State actions and policies that affect the scientific and medical industries, evaluate the perturbations these actions cause, and recommend changes in governmental and private policies that could improve the state of medicine and basic research.

Posted in Economics, Medicine, Science