THE CORPORATE R&D WELFARE BUMS: Most consumer products come from taxpayer-funded research

What do the Internet, maxipads, Eli Whitney's invention of interchangeable parts, and lactose-free milk have in common?

Answer: None of them was the product of the free market.

Who "invented" Deet bug repellent, permanent-press cotton, shrinkproof wool, lactose-free milk, the soybean ink used now used in USA Today, the basic materials used in disposable diapers and maxipads, and made frozen foods viable?

They were not invented by the corporations that sell them to us and profit from them.

Time magazine, in its Oct. 11, 2004 issue, reported that these and many other products we associate with corporate brands were actually invented by the Agricultural Research Service of the U.S. government. They do the research in public facilities with public funds and then turn the exclusive production rights over to corporations to bring the products to market.

According to policy analyst Donald Light, the best-kept secret in America is that American taxpayers pay for most of the research for new drugs, not the drug companies, especially for basic research to discover breakthrough new drugs. They subsidize the entire NIH budget for basic research (about $27 billion), and they pay for most of the training and research infrastructure that industry draws on.

Taxpayers also subsidize a good deal of corporate R&D through deductions and tax credits. American drug companies are spending very little on the basic research needed to find breakthrough new drugs. According to the most objective data, from the National Science Foundation, drug companies spend just 10% of their domestic sales on R&D, and only 18% of that on basic research. Thus, only 1.8% of sales (18% of 10%) is spent on discovering breakthrough new drugs.

A major theme in the writing of Lester Thurow (the former Dean of Management at MIT) has been the necessity of recognizing capitalism's market failure with respect to long-term investment. he points out that private rates of return for R&D investments are on average less than half the social rates of return accruing to society as a whole. There is significant evidence that there are large positive spillovers from research and development, but that, left to themselves, firms will spend too little because they cannot capture all the benefits that flow from these investments.

In addition to the disadvantageous effects of self-interest in a competitive economy, there is also the issue of the time-frame that often dominates a competitive firm's decision-making. The private sector, with its preoccupation with shareholders' rates of return and competition, has a short-run timeframe and therefore tends not to invest in advancing basic knowledge. Because governments tend to be indifferent about who reaps the benefits from taxpayer-funded R&D, they play an essential role in the long-term investment in capitalist economic growth-and have done so for a very long time.

Thurow informs us that, in the U.S., everything from Eli Whitney's invention of interchangeable parts, the national highway network, cross-continental railroads, public airports, atomic energy, and the exploration of space, to the Internet and biotechnology-all have owed their origins to government investment. The basic knowledge and technology for these industries were financed by the National Science Foundation, the Defense Department, and the National Institute of Health.

"The only private labs that have ever focused on anything other than short-run results," says Thurow, "are those such as Bell Labs and the IBM labs that were run by quasi-monopolies." The minute AT&T (forced by government) and IBM (forced by the market) joined the normal competitive capitalistic world, they cut long-term research out of their laboratory budgets.

The neoliberal mantra is that the solution to whatever problems remain in this era of triumphant capitalism is that it must be freed of the constraints that inhibit the production of its miracles.

In fact, left to its own devices and bereft of taxpayers' help, modern-day capitalism would collapse.

[Sidebar]

"The best-kept secret in America is that American taxpayers pay for most of the research for new drugs, not the drug companies."

[Author Affiliation]

(Robert Chernomas is a professor of economics at the University of Manitoba and author and co-author of many studies and reports, including the CCPA's The Cancer Epidemic as a Social Event.)