Saturday, February 03, 2007

Economics Missing in Action: Opportunity Cost

In today's Washington Post, Joseph Fuller (founder of the Monitor Group) and Brock Reeve (executive director of the Harvard Stem Cell Institute) argue that the United States may soon lose its leadership position in stem cell research. Their concluding paragraph:

In short, the stem cell sector is at risk of experiencing a failure to launch at the national level. Yes, some progress is being made: WARF has just revised some of its licensing policies; venture capital activity has picked up recently; and academic research and clinical centers, disease foundations and patient-advocacy groups are adopting a more aggressive stance in breaking down existing barriers. But will this be enough? Or will foreign governments, using America's biotech success as a model, systematically encourage the development of stem cell research and, not satisfied with emulating our competitive performance, succeed in outstripping us?
This experience is contrasted in the body of the op-ed with past successes in biotech, and the consumer electronics and automotive sectors are held out as examples where the United States "fumbled" its global leadership position.

It is quite possible that everything the authors argue is true, but even in that case, their argument is incomplete. Consider the last question they pose in their concluding paragraph. So what if foreign governments tax their citizens to support stem cell research? What have we lost?

We will not have lost the opportunity to benefit from that research. Some part of the research will find its way into products--those products will be available here at prices similar to what they would be if the products were developed domestically. No loss to the consumers.

We will not necessarily have lost the opportunity to invest in these technologies as private entities--the capital markets in Europe and Asia are generally open to U.S. investments. The governments on these continents would have to specifically block or discourage that investment.

We will not have taxed our citizens to support production of these goods. So we will have that money, whether in the government or the private sector. How do we know whether that money is better spent on stem cell research than keeping it in the private sector or with the government?

That's the key element that is missing from the op-ed: what is the opportunity cost of committing the money to stem cell research relative to its best (or most likely alternative use)? Ultimately, the authors cannot be persuasive just by claiming that the gross returns to stem cell research conducted domestically are positive or high. The returns to the activity--net of the opportunity cost of the investment--must be positive or high.

3 comments:

bakho said...

How many Silicon Valley startups are by immigrants from Asia?

If the best students that want to develop stem cells go to Korea, Australia or elsewhere, then what does that do to recruiting the best talent in the world?

Regions that are first to develop an industry often have a comparative advantage that is difficult to match. For instance, companies go to Silicon Valley because of the pool of workers with the needed skill. The best workers end up there because that is where the opportunities are and it spirals up. Anytime a new technology is ceded to someone else, there is no assurance that other will catch up.

The Soviets pulled the same BS with Lysenko and their grain breeding program. By 1970, Soviets were buying massive amounts of wheat from American farmers that were relying on breeding programs based on Darwinian principles and not communist ideology. American agriculture bet on science over ideology and were laughing all the way to the bank.

Anonymous said...

Excellent point. I would like to add another point.

As a scientist I must say that the debate swirling around stem cell research is grossly inaccurate. One of the unintended consequences of Bush's policy has been the resurgence of adult stem research in the US. This research has outperformed the "superior" alternative to date with little effort. This is true both domestically and globally. One may wonder why this would be the case. The answer is simple. When Bush limited (a key word that’s often missed by those hyperventilating about this topic) the received research pecking order was toppled. This permitted many new ideas from researchers not at the "best" universities and research centers to get into the game. The results have been astounding. The number of new lines of research and thinking is breath taking. A real win for humanity.

As a researcher I am astounded by our progress. I challenge those bemoaning the ban to speak to all that we have learned as a result of the ban. I am not saying we should ban more research areas, I am simply saying that we should explore more carefully how the received establishment controls the direction of research. This ban clearly is showing that the "best" are not the best. They do not like the challenge they are having to deal with and thus are crying foul.

I would also ask those who bemoan the ban to point to research abroad in this area that is achieving any material results. Where are we being passed by (Korea)? I would also ask them to comment on the tremendous progress that is being made on the adult stem cell front.

In summary, those crying are really bemoaning their loss of power which arose from the Bush policy inadvertently created. I am not saying that the Bush policy is genius, it merely surfaced a real problem with how research is managed and executed in the US. I for one a very pleased with the unintended consequences of the Bush policy and so should all who favor the advancement of science.

Anonymous said...

There are no cheerleaders for the second-mover strategy, but that's how Microsoft wins. Allow other countries to fund basic research and locate promising areas. Then the US can fund research in those areas and regain leadership where it matters: in latter stage research and product development. It's very unlikely that another country can create a "Silicon Valley of stem cell research". They would have to attract large numbers of American researchers, too. That's unlikely in the short term (a decade or so).