Berlin 3.5 percent of economic output, that’s the minimum government spending on research in Germany. For the economist Benjamin F. Jones, however, the target quota of the federal government is far from sufficient.
“The state invests far too little in innovations, by far,” Jones said in an interview with the Handelsblatt. A rate of three percent would have to be “easily doubled,” says the researcher from the Kellogg School of Management and Northwestern University.
Jones is currently one of the most important minds in the innovation economy. In particular, his study on state research spending, which he prepared together with former US Treasury Secretary Larry Summers, is received worldwide. Jones summarizes the result as follows: “For every dollar that is put into research and development, five dollars in additional economic output come out again.”
Crisis is currently following crisis, first a pandemic, now a war in Ukraine. How important can the development of innovations currently be in companies?
Especially in a crisis, we have to keep working on innovations. They ensure our standard of living, our progress and our health. The pandemic has been the ultimate testament to the power of innovation, especially when it comes to the vaccine. Without it we would be in a much worse situation, of course in terms of our health, but also in terms of the economic situation.
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But the overall picture is different. In Germany, for example, fewer companies want to invest in innovations than they have since 2003, partly because of the burden of high energy prices.
That may be the case in the short term. But even the high energy prices are drivers for innovations. When oil and gas are expensive, investments in green technologies are all the greater. That’s given a huge boost to price increases in the past, and it’s going to be the case again now. Also in Germany.
In your opinion, who is primarily responsible for innovations, the state or the private sector?
Both. Markets have many advantages when it comes to where innovations can emerge and who can implement them. But that is not a plea for completely free markets. Because on the other hand, there is a constant, massive market failure with innovations. Government intervention in this area is therefore extremely urgent.
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You have to explain that.
As a rule, the state has to intervene when too much of something is produced in the free market, which reduces the overall prosperity of society. The best example is the emission of climate-damaging CO2. When it comes to innovation, it’s the other way around. When a person flips a light switch, he or she is not the only one who can see. Everyone else in the room benefits too. It’s the same with innovations: when someone invents something, many more people benefit from the innovation than the inventor alone. Not enough innovations are developed on the market because the inventor only calculates with his own profit. So we have to ask ourselves: how do we get as many people to turn on the lights as possible?
How does that work? Is the simple way that the government gives itself a quota for state research expenditure in relation to economic output enough? The German federal government specifies 3.5 percent here.
The evidence is clear across economies, especially in developed ones such as the USA and Germany: the state invests far too little in innovations, and by far too little. We would easily have to double the rate of 3.5 percent. For every dollar that goes into research and development, five dollars comes out in additional economic output.
You came up with this result in a sensational study with Larry Summers. How did you calculate that?
We have developed a new method for the social benefit of innovations. In general, it is not easy to calculate this. For example, what is the social benefit of the Internet? That can hardly be measured. And many attempts at innovation fail. So it’s not enough to look at individual cases to get a general picture. So we calculated the ratio of R&D expenditure to total economic development to include both the successful and the failed research.
In what form does the state have to invest more?
A whole bundle of measures is needed. Tax breaks for research and development in business are extremely effective. And you also have to support basic research – scientific progress. But it also needs the right framework conditions, for example to protect competition in the markets.
Your calculations refer to the USA. To what extent can this be transferred to Germany at all?
Right on two levels. On the one hand, it is not only the people in a country who benefit from innovations that have been created there. That means the social benefit is likely to be even greater than we calculated. And the invoice itself is also transferrable. The logic of innovation, one turns on the light and many are enlightened, it works all over the world.
In Germany, we always have the problem that innovations fail because of bureaucracy, not because of money. Isn’t that more of a problem?
Yes, that can be a problem. And it can be closely related to funding. The bureaucracy is often high because there is a preoccupation with wasting money, i.e. investing in projects that fail. But innovations are fundamentally uncertain. When there’s no failure in innovation, you’re not really trying to innovate, and bureaucracy that breeds conservatism is problematic. Budgets should be increased and we need to move away from investing money only in projects that are certain to work. If we accept that projects can fail, the bureaucracy is also significantly reduced.
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