I disagree. Capitalism makes investments much more fungible than they would otherwise be, changing the incentive landscape. It can set up a prisoner's dilemma (i.e. a failure of global optimization due to induced local optimization) which preferentially allocates capital away from investments which are intrinsically difficult to value in a timely fashion or intrinsically difficult to capture value from (i.e. science).
Correct tulip speculation gets you $$$, making a correct incremental step towards curing cancer gets you nothing on the market. Nobody will be able to tell if your contribution was valuable for the next 30 years, and by then you won't have any mechanism by which you could retroactively hold back your contribution in order to obtain a fair market price for it. According to capitalism, this unfortunate (but completely incidental!) state of affairs is a good reason why investors should speculate in tulips rather than fund biotech. Yuck!
Can we do better? In the narrow sense of solving this particular problem, the answer is yes: a prestige-based economy (see: academia) is able to reward investments whose value can't be captured by a market economy, such as the "incremental progress towards cancer cure" example above. Of course, a prestige-based economy would fall flat on its face if one tried to generalize it to more mundane facets of everyday life, so it's not a satisfying solution for the general problem. But it IS a good way to get free-market drum-beaters to acknowledge their very constrictive assumptions about timely valuation and value capture :-)
You point out that capital will not flow towards investments who are difficult to value, or investments which are hard to extract value from.
I don't think the first point has merit. Any new venture is intrinsically hard to value, and even a global optimizer would be reluctant to invest in those. This is no different from risk aversion, which I've already cover. The second point on the other hand has merit. If it is difficult to extract value from an endeavor, you have an externality problem. However, this is a distinct concern than an alleged short-term bias in capitalism, an idea which I was attempting to refute.
The problem you describe exists just as much in the short run as in the long run.
As for what it is to be done, I think several things can help:
- Relax antritrust legislation: large companies who aren't threatened by competitors can capture a lot of externalities and tend to develop new science and technology. General Electric Research Laboratory, Bell Labs, Google X...
- Develop technology which lower the cost of coordination. Prisoners dilemma arise when there can be no coordination. In fact, if players can enter into arbitrary self-enforcing contracts, every game admits a strong Nash-Equilibrium, and the equilibrium is Pareto optimal! In practice, this means crowdfunding, and mechanisms like dominant insurance contracts[1]. Smart-contracts on blockchains are also interesting in that they are pretty close to the ideal "arbitrary self-enforcing contracts".
> As for what it is to be done, I think several things can help:
> - Relax antitrust legislation
Why do you think it is better to fund labs through monopoly rent (where shareholders, administration, and inefficiency due to lack of competition all take a cut) than by simply increasing the budget funneled into the brutally competitive NSF grant process? If you assume that private labs are 10x as efficient as public labs, maybe, but I'm not convinced of 1x let alone 10x.
> Any new venture is intrinsically hard to value, and even a global optimizer would be reluctant to invest in those.
> ...
> mason.gmu.edu/~atabarro/PrivateProvision.pdf
So... crowdfund science by asking people to compute the monetary value of an "unknown unknown" (which is what science produces)? I don't think you would have trouble convincing people that the aggregate returns on science are pretty great, but I do think you would have a hard time getting the consumer excess of one of these contracts to exceed the friction induced from reasoning about unknown unknowns. A very hard time. Hell, I'd be willing to bet you that scientists figure out the secret to eternal life before bean-counters figure out how to crowdfund science at NSF scale with rational contracts.
Because even large trusts are still competing with each other. If the funding process within an organisation becomes too political, it will shrink. In general, a large corporate entity has good governance from the mere fact that it succeeded, it's good at allocating money to different projects and managing people. Governments are good at holding political power by playing through political alliance. Thus, I think they will tend to do a worse job in allocating grants. The process is likely to become more politicized than it would in a private organisation. There are of course exceptions, I am talking about general tendencies.
No matter who funds science, someone, even if it is the government, has to reason about the unknown unknowns when deciding what to fund and to which extent. The amount spent by the NSF is about $7B, which is a blip on the budget, and a blip in the amount contributed to private charities. The YMCA alone gets about $5B. The problem is that people just don't care that much about scientific research, and capitalism is good at producing what people want.
I disagree. Capitalism makes investments much more fungible than they would otherwise be, changing the incentive landscape. It can set up a prisoner's dilemma (i.e. a failure of global optimization due to induced local optimization) which preferentially allocates capital away from investments which are intrinsically difficult to value in a timely fashion or intrinsically difficult to capture value from (i.e. science).
Correct tulip speculation gets you $$$, making a correct incremental step towards curing cancer gets you nothing on the market. Nobody will be able to tell if your contribution was valuable for the next 30 years, and by then you won't have any mechanism by which you could retroactively hold back your contribution in order to obtain a fair market price for it. According to capitalism, this unfortunate (but completely incidental!) state of affairs is a good reason why investors should speculate in tulips rather than fund biotech. Yuck!
Can we do better? In the narrow sense of solving this particular problem, the answer is yes: a prestige-based economy (see: academia) is able to reward investments whose value can't be captured by a market economy, such as the "incremental progress towards cancer cure" example above. Of course, a prestige-based economy would fall flat on its face if one tried to generalize it to more mundane facets of everyday life, so it's not a satisfying solution for the general problem. But it IS a good way to get free-market drum-beaters to acknowledge their very constrictive assumptions about timely valuation and value capture :-)