“Be kind, for everyone you meet is fighting a hard battle” - Often attributed to Plato but likely from Ian McLaren (pseudonym of Reverend John Watson)

## Sunday, November 13, 2011

### Bell Laboratories and incentives

For decades, Bell Laboratories and innovations in fundamental research leading to commercial production were nearly synonymous. Claude Shannon and information theory, Shockly, Bardeen, and Brattain and the transistor, Tibor Rado's amazing 1962 paper "On Non-Computable Functions" which introduced us to the busy beaver function, radio astronomy, the C programming language, the laser, and a truly incredible variety of geniuses and inventions owe their origin to Bell Labs. Seven Nobel prizes stem from work at Bell Laboratories.

Unfortunately (imho, ymmv),  in 1982 AT&T entered into a Modification of Final Judgement pursuant to an antitrust suit filed in 1949 which required the divestiture of the Bell Operating Companies from AT&T. Bell Laboratories is now the R & D subsidiary of a French-owned firm, Alcatel-Lucent. Alcatel-Lucent announced in 2008 that it was withdrawing from basic research in materials science, physics, and semiconductors to direct its research investment to more "immediately marketable areas."

This is a symptom of the incentive system built into capitalism in its current implementation. Obviously, I'd rather have a dollar in this quarter than a dollar in a year. Even given the choice of, say, $1.00 now versus$1.10 in a year I need to determine the likelihood that the contract to give me the $1.10 in a year will be honored, that the entity promising the$1.10 to me will have the means to pay it, that my assumptions regarding what $1.00 will buy today versus what$1.10 will by in a year are valid, etc.

When adjusting for investment in basic research, I must add to this the likelihood that marketable results will follow from the funded research. And, if I'm on a board of directors for a publicly held company (or even a closely held company) then I must satisfy the owners (to whom I owe, by law in theory if not in actuality, a fiduciary duty) that my research and development investment should provide the largest return on the invested capital. If I don't satisfy them, there's a body of attorneys ready and willing to sue me on a contingency basis.

So who's to fund basic research? The Federal Government has had an active role in this research both through the system of United States Department of Energy National Laboratories and through the funding of research at various Universities. Of course, prospective President Rick Perry, among others, will do away with the Department of Energy (at least if he can remember or, perhaps, write it on his hand). And Republicans (a party of which I used to be a member) cast a very wary eye on the National Science Foundation - the governmental agency that provides the lion's share of basic research funding (leaving out the National Institues of Health, which funds much medical research but is, course, also under attack, along with the National Oceanic and Atmospheric Administration - particularly hated due to its support of research on anthropogenic global warming).

So non-governmental industry is highly incentivized not to undertake basic research and the government not only has the Republican hatred for objective research but also startlingly large budget deficits and an enormous debt thwarting its ability to provide funding for this research. No wonder we're falling behind.

Government can't or won't do it, private industry can't or won't do it - whom does this leave? I would propose that a few fundamental changes in the structure of incentives would go a long way. I advocate the following:
• Amend the antitrust laws to allow consortia of companies to work together through an organization funded by the participating organizations
• Change the tax structure on capital gains to significantly reduce the incentives to pursue short term results at the expense of long term gains.
• Litigation reform to make the losing party responsible for court costs and legal and expert fees of the prevailing party.
• For suits that would require massive expenditures to defend, require plaintiffs to post a bond.
• A "basic research risk bank" under the direction of arpa-e with 10 figure funding.
• Reconfigure and then make permanent the Research & Experimentation Tax Credit. This reconfiguration would be toward applying the credit to basic research and eliminating the requirement that it be "useful in the development of a new or improved business component" of the taxpayer.
Over the next few weeks, I'll try to hang some meat on the bones outlined above since I'm certain that Congress and the President are reading.

Update: on the other hand, maybe all is not lost.