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Pete,on "studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects – especially because the government invests more heavily in important basic research", Sinclair Davidson dug out this:
In 2003, the OECD published an official report into ‘The Sources of Economic Growth in OECD Countries’.

As part of that analysis the OECD investigates the impact of R&D on economic growth. Specifically, they disaggregate R&D into a private and public component.

As expected there is a positive and statistically significant relationship between overall R&D and economic growth, and also between private R&D and economic growth.

In contrast to the usual assumption... there is a statistically significant negative relationship between public R&D and economic growth.

At least he's over trying to reduce the actions of free agents in a complex system to a co-variance matrix...

All sorts of positive externalities are attributed to government funding of all sorts of research and knowledge production schemes. Most of the time there little hard evidence that, at the margin, there is anything significant there. In any event, one thing is certain: No one has shown that government subsidy of economic research has produced social benefits even remotely proportional to its costs.

Stiglitz argues that governments can sometimes do a better job than private actors at identifying and supporting good ideas (those with positive externalities). What seems to be missing from this discussion is the far more compelling evidence of the contrary effect. An equally powerful aspect of free markets is their almost magical ability to stop investing in lousy ideas. Is there any doubt from the historical record that the free market is far more effective in removing support for failing ideas?
Customers stop buying what no longer works for them and the business is forced to change for the better or wither.
Governments frequently increase their investments in failure, perpetuating costs and negative externalities far into the future.

Terence Kealey devastated the Stiglitz thesis in a massive, historically informed book on the economics of scientific research, summarized here
http://www.the-rathouse.com/2010/Kealey-EconomicsofScience.html

On the agricultural revolution in England he showed that innovations such as crop rotation and systematic improvement of crops and pastures were driven by gentleman farmers such as “Turnip” Townsend and associations such as the Lunar Society which consisted of a mix of scientists, engineers and industrialists. By 1850 agricultural productivity in Britain was increasing by 0.5% per annum, unprecedented in history. Laissez faire ruled (almost) and there was no state involvement in research or industry policy.

He described the way science Czars used the wars of the 20th century to advance Big Science on the back of Big Government. One of the results is the scandal of climate science, driven by the politics of the IPCC and massive government funding of research.

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