Political Economy

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POLITICAL ECONOMY

Political economy is commonly defined as that branch of social science dealing with the production and distribution of wealth. The political economy of science and technology would thus focus on the production and distribution of scientific knowledge and technological capabilities that affect "who gets what." Although students of political economy sometimes claim to be objective, ethical issues are intrinsic to the subject.

Technology associated with the industrial revolution stimulated the pioneering political economic inquiries of Adam Smith (1723–1790) and David Ricardo (1772–1823). Smith and Ricardo were particularly interested in public policies that would maximize wealth creation. With the integration of science into the industrial value chain during the second industrial revolution of the late nineteenth century, it too became a subject of political economic scholarship.

From Ethics to Political Economy

The word ethics typically connotes issues of personal choice. In the context of science and technology, one might associate it with whether or not to use extraordinary means to extend life or to conceive a child. Yet society makes collective choices about science and technology as well, and these choices have profound moral implications. Many extraordinary means in medicine, for instance, emerged from research and development (R&D) projects that were supported directly by government funding or were subsidized indirectly through other policy measures.

In the absence of complete and unquestioned unanimity within a polity, collective choices involve the exercise of power. Persuasive or coercive authorities extract and redeploy resources or, equally important, determine how those who hold resources may use them. The U.S. government, to continue the example, spends nearly $30 billion per year on biomedical R&D. Its regulations, especially those of the Food and Drug Administration (FDA), further shape the flow of private biomedical R&D funding.

The prospect of action by the authorities induces the mobilization of interests. Individuals and organizations with a material, ideological, bureaucratic, or other stake in whether and how power is used seek influence. The potential recipients of biomedical R&D funding lobby governmental officials; think tanks advocate changes in the regulatory process; and groups representing patients work to enlarge the shares of the R&D pie devoted to the diseases with which they are most concerned.

Political economy embraces all of these activities: the intertwined exercise of public power and exertion of private influence to shape the allocation and use of societal resources. In the contemporary political economy of science and technology, money is the resource that is most visibly at stake, but it is not the only one. Property rights, access to markets, and skilled people are also very important.

Centralization and Decentralization

Technological innovation is an ancient and, some would argue, characteristically human process. The political economy of technology is nearly as old. Douglass C. North (1994), for instance, ascribes the invention of agriculture to the assertion of property rights over land. Agricultural production stimulated ancient industries such as metalworking only after centralized empires were established.

Yet highly centralized political economies, such as empires and communist systems, have fostered technological innovation only intermittently. They are vulnerable to bureaucratic ossification and the whims of leadership. During the Middle Ages, for instance, the Chinese Empire developed arts such as textile production and shipbuilding to a level that astonished European visitors. Then fifteenth-century emperors put an end to these endeavors, going so far as to impose the death penalty on any subject who dared to build a three-masted ship.

Capitalism has proven the most technologically fecund of all the great political economic systems, in large part because decision making about how technologically-relevant resources are used is largely decentralized. Competition among producers leads to experimentation with new ways of making things and with the making of new things, experimentation that is enabled by property rights and mediated by market prices (Rosenberg and Birdzell 1986). The results of these experiments are judged by a multitude of end users who, through their buying decisions, feed both resources and information back to the innovation system.

One must take care not to exaggerate the degree of decentralization. Capitalist enterprises are embedded in a larger framework of social institutions that depend on collective authority, albeit an authority that is circumscribed by constitution and culture. These institutions vary dramatically over time and across political jurisdictions, coevolving with the economic system and in response to military and other external challenges. The delicate balance of public and private power, of centralized control and decentralized experimentation, is a core theme of the political economy of science and technology.


Intellectual Property Rights

Intellectual property rights (IPR) exemplify the delicate balance. Patents, copyrights, and other forms of IPR allow holders to use the coercive power of the state to prevent others from using specific bits of knowledge for defined purposes for limited periods of time. This control over potential competition is designed to induce the substantial additional investment that is usually required to convert the protected knowledge into a commercially viable product or process. In the absence of IPR protection, potential innovators might be deterred by the prospect of rapid imitation. Yet very broad, very long, or very rigid IPR protection may be an equally powerful constraint on innovation, inhibiting cumulation and competition.

This basic theory of IPR has been articulated by Kenneth J. Arrow (1962), F. M. Scherer, and other economists, but it provides little practical guidance for setting the balance. This is left to political and legal processes. The historic contrast between Germany and the United States is striking in this regard. The German government has generally been much more tolerant of cooperation among rights-holders, building on the medieval guild tradition of exclusive control over the arts of production. The United States has often struck down such arrangements, not only when they take the form of contractual agreements, such as patent pools, but even when they result from single firms amassing market-dominating positions. Antitrust law has often been used to compel the licensing of intellectual property.

The political economy of intellectual property has become increasingly complex and contested as science and technology have grown in economic importance and the capacity to produce them have diffused globally. The pharmaceutical industry, for example, is more dependent than any other on patents. Pharmaceutical firms, not surprisingly, have lobbied and litigated to expand the scope and duration of IPR, with great success during the last decades of the twentieth century. New kinds of inventions, especially in biotechnology, have gained protection in the United States, and legislators, administrators, and judges have generally treated rights-holders more favorably than in the preceding decades.

Pharmaceutical firms were also at the forefront of an advocacy push that extended Euro-American principles of IPR protection to much of the rest of the international community through the agreement on trade-related aspects of intellectual property rights (TRIPS) within the World Trade Organization framework. TRIPS, however, seems to many actors and observers to have tipped the delicate balance too far in the direction of rights-holders. In response, a global movement has emerged to secure low-cost access to patented medicines for the treatment of diseases that are widespread in developing countries, such as tuberculosis and AIDS. Invoking the ethical principle that current human needs ought to be valued more than future corporate profits, this movement has for the moment stemmed the drift of international policy in favor of stronger IPR.


Trade

The association of IPR with the international trade regime is a new development in the political economy of science and technology. Traditional regulation of trade in goods, though, has long been understood to be a potentially powerful factor bearing on science and technology and the distribution of the benefits and costs associated with them. Indeed Adam Smith, one of the progenitors of the concept of political economy, argued in The Wealth of Nations (1776) that larger markets facilitate occupational specialization, which in turn fosters the development of science and technology. Among the specialized occupations to which Smith attributed economic significance was science itself: "philosophers or men of speculation, whose trade it is not to do anything, but to observe everything; and who, by that account, are often capable of combining together the powers of the most distant and dissimilar objects" (Penguin Classics ed. 1986, p. 115; or Book 1, Chapter 1).

The nineteenth-century German political economist Friedrich List (1789–1846) disputed the association that Smith made between the extent of the market and the development of scientific and technological capabilities. List argued that free trade allowed those who already had such capabilities to deepen them and reduced the odds that those who did not have them would acquire them. List's arguments have been cast in modern form by the theories of the developmental state and strategic trade. By striking a careful and dynamic balance between trade protection and openness to the world market, clever and powerful governments could—at least in principle and under particular circumstances—induce the creation of domestic high-technology industries that would not have flourished otherwise. The great inspiration for and proving ground of these theories has been East Asia, where first Japan and more recently the four tigers of Hong Kong, Singapore, South Korea, and Taiwan, joined the ranks of global high-technology powers.

An even greater test of these theories looms ahead as other developing countries, especially China and India, with more than a third of world population, seek to follow suit. China and India have both aggressively sought foreign direct investment since the 1980s, especially in areas such as semiconductor manufacturing and software development. They have also opened domestic markets to sales by foreign high-technology firms, but usually conditionally, using the leverage of market access to secure benefits from foreign firms for their own infant high-technology industries.


Whether these infants will mature into healthy adults that help to raise living standards in previously impoverished countries remains to be seen. Their growth could be stunted by, among other things, inept governance, capture of policy-making by narrow interests, or aggressive protectionist reactions in developed countries. The aspirations of billions of people for a better life hang in part on whether world trade policy-makers can steer effectively between the perpetually inequitable Scylla of unregulated trade and the stifling Charybdis of ratcheting protectionism.


Human Resources

The effectiveness of strategic trade policy depends not only on the intelligence and agility with which it is implemented, but also on the capacity of an economy to absorb ideas from abroad and generate new ones. Access to the richest scientific literature and the best blueprints, even in the context of cleverly protected markets, is no guarantee that domestic enterprises will move to the cutting edge of global competition. Tacit knowledge, which cannot be written down but is acquired through experience in doing science or operating technological systems, is another necessary ingredient in the development of scientific and technological capabilities. The people who have such knowledge, or have the capacity and incentive to acquire it, are thus critical resources in the political economy of science and technology.

Karl Marx (1818–1883), who put science and technology at the center of his pioneering political economic analysis, claimed to the contrary that technological innovation under capitalism merely displaced human capabilities. This process of alienation, as he called it, would ultimately motivate revolutionary upheaval as workers came to recognize their interest in controlling the means of production. The threat of technological displacement has occasionally prompted workers to exercise their collective power, albeit never to the point of overthrowing governments. Trade unions have fought to have a voice in the process of technological change in the workplace. Labor victories in such contests have sometimes led to slowdowns in the pace of innovation, but (contrary to Marxist expectations) have also often allowed enterprises to tap more effectively into the expertise of workers and even accelerate the pace of change.

More important, the Marxist focus on particular labor processes ignores the broader transformation of the economy brought about by the development of science- and information-based industries that began to appear in the waning years of Marx's life. Even if technology displaces and deskills workers in older industries, the growth of newer industries that rely more heavily on knowledge workers more than counterbalances those losses in the long run. Such industrial transitions do not occur solely as a result of shifts in private investment. Public investments are typically critical catalysts as well. While the balance between worker voice and capitalist flexibility is important for the political economy of science and technology, the balance between current consumption and future-oriented public and private investments may be even more so, as suggested by the work of Robert Solow (1957), Paul Romer (1990), and others.

Universal public education at the primary and secondary levels, for example, seems to be a prerequisite for the development of a knowledge economy. The United States and Germany surpassed the United Kingdom in science and technology during the nineteenth century in part because they were willing to impose taxes (and break down social barriers) to provide education. The more recent East Asian development miracle similarly rests on a strong educational base.

Private investment enters the balance more forcefully at higher levels of education. University and graduate students may be able to recoup the costs of education through future earnings, even if they borrow funds to pay tuition. Responsibility for such an investment will tend to encourage diligence and attune students to the likely needs of future employers. Yet information about the future is sufficiently uncertain and the spillover benefits to society of a highly-trained workforce sufficiently great that significant public subsidies to higher education are justifiable. The U.S. university system has more private elements than most, but its rise to world leadership in the twentieth century coincided with an infusion of resources from taxpayers to students, such as scholarship grants, tuition loan guarantees, and publicly funded research assistantships.

The migration of highly skilled people complicates the political economy of science and technology. The immediate social benefits of graduates who emigrate spill over to their new neighbors, not those who paid for their education. The threat of a brain drain may prompt preventive or compensatory measures, such as controls on movement or exit taxes. In the longer run and under particular conditions, emigrees may nonetheless pay back the investment made by their places of origin by creating channels through which knowledge flows. Taiwanese astronauts in Silicon Valley, for instance, have helped to make their home country a global center for the information technology industry.

R&D Funding

Higher education is increasingly joined at the hip with scientific research in the institution of the research university. Involvement in research conveys tacit knowledge to students even as they produce formal knowledge, such as publications and patents, in conjunction with their professors and other researchers. The benefits of formal knowledge spill over even more easily than those of tacit knowledge. Indeed the academic scientific community has a distinctive political economy in which collective rewards in the form of prestige flow to individuals whose work has spilled over most broadly. This system discourages scientists from trying to appropriate the financial benefits that flow from an idea by keeping it secret or gaining IPR protection for it, because prestige can only be gained through widespread, low-cost diffusion of ideas.

Of course, as union organizers at Harvard once put it, "You can't eat prestige." Fortunately for scientists, material rewards tend to correlate with prestige, although less systematically than licensing fees correlate with intellectual property holdings. Private patrons inspired by the scientific spirit and the desire to bathe in reflected glory were a particularly important source of sustenance for scientists in the early-modern era. Private patronage continues in the early twenty-first century, but it is overshadowed by government and corporate support underlain by baser motives. Where the communist (as Robert Merton [1973] characterized it) or shared knowledge political economy of science meets the capitalist political economy of science and technology, sparks often fly.

The standard economic theory behind government funding of R&D carries forward the tradition of the noble patron: The financial burden of R&D with benefits that accrue to all in society should be shouldered by all. R&D that benefits only a few should be funded privately by those few. Economic research by Richard R. Nelson (1959) and Edwin Mansfield (1977), among others, suggests that many opportunities for socially valuable R&D go unrealized. Because the constituency for diffuse future benefits is usually weak, political processes tend to favor other uses of societal resources. In U.S. politics, a more specific and urgent mission, such as national defense or public health, must typically be marshaled to win significant government R&D funding, although those who manage and disburse these funds have often seen fit to support projects highly regarded by scientists but with only a distant relation to the stated mission.

That political forces impede the achievement of the socially optimal level of public investment presents no challenge to economic theory. A deeper problem is that prospective public and private benefits are more difficult to distinguish in practice than in principle; in fact some public benefits may be impossible to obtain unless people get rich providing them. The division of labor between the public and private sectors is not nearly so clean as the conventional categories of basic research, applied research, and development imply.

The biotechnology industry is the most prominent case in point. Publicly funded science underlies the industry, and publicly funded scientists routinely start firms to capitalize on their findings, often with investments from their own universities. Large pharmaceutical firms are major funders of academic researchers and entrepreneurial start-ups as well, making deals that may impose restriction on the free exchange of ideas in order to preserve the funder's pecuniary interest. At this flash point between the communist and capitalist political economies, hot debates have erupted over the rules that govern public funding as well as the norms that regulate the behavior of scientists and research universities.

As with property rights, access to markets, and human resources, the diffusion of scientific and technological capabilities globally has complicated efforts to find a workable balance in the allocation of R&D funding. Spillovers that accrue across borders, whether in the public or private sector, weaken incentives for governments to make public R&D investments. Collective action on behalf of the global public good is a tortuous process in the absence of a global authority capable of levying taxes. The largest multinational corporations have globalized their R&D infrastructures, drawing on brainpower from Barcelona to Bangalore to Beijing to Boston. But these firms do not yet form a cohesive constituency that lobbies for global public goods, nor should one expect that if and when they do their interests will coincide with the greatest good for the most people or any other broad ethical principle.


Creative Destruction

At any point in history, people who seek "to promote the progress of science and the useful arts" (U.S. Constitution, Article 1, Section 8) depend on access to ideas and materials to do their work. Access to these resources has never been free and unencumbered, but is instead conditioned by public power and private influence. Marx imagined an end-state to history in which all people would engage in creative work, but this utopia is, at best, far in the future. Real existing socialism, as the people's republics of the twentieth century were sometimes referred to, was far less efficient in its allocation of technologically-relevant resources than its capitalist competitor. It was also far less fair in allocating the costs and benefits associated with scientific research and technological innovation.

Capitalism, to borrow from Winston Churchill, is the worst political economy of science and technology, except for all the others. Critical resources, including property rights, access to markets, highly-skilled people, and R&D funding, are allocated through a messy mixture of market exchange and state action. The appropriate division of labor between the two mechanisms is clarified only somewhat by theory, and even these partial insights are honored in the breach. Some people get extraordinarily rich, and others are displaced, injured, or otherwise left out. The process of creative destruction, as Joseph Schumpeter (1950) famously labeled it, is intrinsically disruptive.

The political economy of science and technology is itself a continual work in progress. Globalization is forcing public authorities and private actors to reconsider priorities and rethink routines that were previously taken for granted. In this moment of transition may lie opportunities to nudge the system in more ethically satisfying directions.


DAVID M. HART

SEE ALSO Capitalism; Economics and Ethics; Marx, Karl; Science, Technology, and Law; Smith, Adam; Socialism.

BIBLIOGRAPHY

Arrow, Kenneth J. (1962). "Economic Welfare and the Allocation of Resources for Invention." In The Rate and Direction of Inventive Activity: Economic and Social Factors. Princeton, NJ: Princeton University Press. Fundamental neoclassical economic model of science.

Harhoff, Dietmar, Francis Narin, Frederic M. Scherer, and Katrin Vopel. (1999). "Citation Frequency and the Value of Patented Inventions." Review of Economics and Statistics 81: 511–515. Demonstrates the highly skewed distribution of value of inventions.

Mansfield, Edwin, et al. (1977). "Social and Private Rates of Return from Industrial Innovations." Quarterly Journal of Economics 91: 221–240. Shows how benefits spill over from innovations.

Merton, Robert K. (1973). "The Normative Structure of Science." In Sociology of Science. Chicago: University of Chicago Press. Originally published in 1942. Exposition of the value system of academic science.

Nelson, Richard R. (1959). "The Simple Economics of Basic Scientific Research." Journal of Political Economy 67: 297–306. Economic rationale for public support of science.

North, Douglass C. (1994). "Economic Performance Through Time." American Economic Review 84(3): 359–367. Links innovation process to institutional incentives.

Rosenberg, Nathan, and L. E. Birdzell. (1986). How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic. Economic history from late middle ages centered on science and technology.

Romer, Paul M. (1990). "Endogenous Technological Change." Journal of Political Economy 98: S71–S102. Economic theory of increasing returns to knowledge.

Schumpeter, Joseph A. (1950). Capitalism, Socialism, and Democracy, Harper Colophon edition. New York: Harper and Row. "Creative destruction" as the core feature of capitalism.

Solow, Robert M. ( 1957). "Technical Change and the Aggregate Production Function." Review of Economics and Statistics 39: 312–320. Econometrically demonstrates importance of technological change in economic growth.