This article is adapted from a lecture delivered at the Revisionist History of War Conference at the Mises Institute, May 17, 2025.

The National Science Foundation (NSF) is usually described as a neutral promoter of basic scientific research, which is useful in its own right but also leads to “spin-off” technologies and other improvements in the quality of life. That’s, of course, what you’re hearing now. People who are upset about the situation at Harvard—where the Trump administration is seeking to end various government research grants—are claiming lives will be lost and catastrophic damage will occur because of cuts to federal research grants held by Harvard personnel.

What Is the Rationale for Government Research Subsidies?

Now, this is mainly a case-study talk, but it’s worth having a little bit of theory in the backs of our minds before we get into it.

In the standard textbooks, the rationale for government subsidies for scientific research is the idea that science, or at least basic scientific research, is what mainstream economists call a public good. That is, it has a number of important spillover benefits that accrue to the private sector, to other actors. And the public goods nature of basic science means that it’s very difficult for those who invest in basic science to profit from it or to capture the economic returns of those investments. Therefore, it is assumed the free market won’t produce enough basic science and the government has to step in. But the usual way that this argument is illustrated is by pointing to successful, or supposedly successful, examples of innovations that were funded by the government, and even cases where the research was conducted by state actors, particularly during wartime.

Keep in mind that there are, even at this level of the conversation, some important theoretical challenges and difficulties. One is that we don’t really have a way of evaluating or measuring the value to society, the value to the market, the value to humanity of things that are not bought and sold in markets. So, it’s one thing for the scientist to say, “This book that I’ve written, this article I’ve published, this thing that I discovered in the lab is going to have these enormous benefits for society.” Does it? We don’t really have a mechanism for evaluating the merits of such activities outside of the market mechanism, how much people are willing to pay to obtain a marginal unit of that thing. When the thing isn’t traded at all, this is all just a sort of speculation, right?

There’s also a technical point that I think hasn’t been explored as much among Austrian economists as it could be: that the public goods characterization of basic science is probably not correct. There are a number of papers by Terence Kealey, Martin Ricketts, and others characterizing scientific research as what they call a contribution good. By this they mean you have to be a contributor to basic science to understand the work well enough to profit or benefit from it. So, it’s not the case that the benefits just spill over to the general public. They only spill over to other people who are also invested in doing the research themselves.

As far as the empirical case for the standard argument goes, what we most often see is a list of a bunch of examples of successful inventions, innovations, in which government funding played a role. The standard-bearer for this argument in our day is an Italian economist in the UK named Mariana Mazzucato, who published a book called The Entrepreneurial State. She looked at the iPhone and said, “Well, if you trace back all of the technologies in an iPhone, there was some state involvement in that discovery process through federal labs or federally funded university labs and so forth. Therefore, government spending on science and technology is good.”

You can probably immediately see the flaw. There’s a statistical, or methodological, flaw in this kind of argument. The technical name for it is sampling on the dependent variable. If you pick a bunch of examples of useful innovations and then trace the role that government funding played in them, that doesn’t tell you what the role of government funding is for the average innovation or activity. You’re just picking a few winners and trying to trace backward. It’s like those articles you see on your phone saying things like “Billionaires do the following things every day. They get up. They brush their teeth. They make coffee. Therefore, if you do these things, you too can be a billionaire.” It’s exactly the same kind of argument.

But you could find just as many useful innovations that were not federally funded. The argument in favor of government funding relies on cherry-picking a few examples, and that doesn’t tell us anything about the average expected value of a dollar of federal science funding.

Origins in the Second World War

Now, let’s get to the case evidence. During World War II, and up until about 1950, when the National Science Foundation was created, there was quite a lot of US government funding of scientific research. The biggest funder by far was the Office of Scientific Research and Development (OSRD), which was a World War II–era agency that funded research—from radar to the Manhattan Project—both in government labs and in private and university labs. By the end of the war this office was giving out about $500 million a year, constituting the majority of all federal research funding for science. Most of it was going to universities, so universities were the paid contractors who were executing these projects on behalf of the federal government. This was a very widespread, broad-based program. Some 600 projects at more than 80 universities received OSRD funding through the end of World War II.

There were a couple of other federal entities that were important science funders. These were the Office of Naval Research and the Atomic Energy Commission, which, of course, would become more important at the end of the war and remain so up until 1950. Both of these organizations were also spending considerable amounts of taxpayer money to support scientists and researchers who were mainly devoted to wartime technologies and some spinoffs of these wartime technologies.

This pattern of federal spending had a significant impact on what kinds of projects scientists worked on during this time, the ways that scientists collaborated, and so forth.

A very well-known twentieth-century social commentator named Seymour Melman made the argument in a series of books and articles that the national defense orientation of all this federal research and development funding tended to bias or influence research in a particular direction. He found that it crowded out private funding for other research and development.

Melman, even though he was known as a polemical writer, did a lot of very detailed case studies as a social scientist.

One was on the machine tool industry, which was one of his areas of specialization. He pointed out that this industry, during the 1940s, became transformed into one that basically served a single customer, the Pentagon. This had a number of impacts on what the industry was doing and contributed to its failure in the postwar period. As a result of its orientation toward the government, it was not internationally competitive, and it did not have a diversified set of capabilities because it had been serving exclusively one customer. The failure of private investment to support other kinds of research activity to develop the machine tool sector contributed to that sector’s decline.

A similar argument was made by the historian Paul Forman in what has been called the distortion thesis. He argued that if you look at some scientific fields, their path of development was altered by the influence of military objectives and military funding. Certain scientific fields like solid state physics and quantum mechanics became more important than they otherwise would have because that’s where all the federal dollars were going, especially for nuclear projects.

This led to the transformation of the scientific enterprise into one where the new view among scientists was “We’re all working together in a team for the common good.” This was a transformation of how scientists understood their roles in relation to each other, their roles within society, and their roles in relation to funding agencies.

Being asked to serve on a military commission as a scientist was a great honor. So, scientists were, of course, choosing certain projects and presenting the work in such a way as to make it more attractive to the people who could invite them to be on these commissions.

Government-Funded Research in Peacetime

At the conclusion of World War II, and in the years immediately following World War II, it was recognized that something like the OSRD was not designed appropriately for peacetime. There were several proposals for some kind of a national science agency. Probably the most popular vision at the time for a national science agency was the one articulated by a man named Harley Kilgore.

Kilgore was a senator from West Virginia. He was a New Dealer and a progressive, populist type. He believed that just as the New Deal had harnessed the resources of society, under the leadership of Washington, DC, to pull us out of the Depression, the scientific community likewise needed to be mobilized to serve the common good under the guiding hand of the federal government. Science, he said, is a national resource, just like agricultural land or minerals.

In this way of thinking, these natural resources can’t be left to the decentralized process of scientists and universities competing with each other. It needs to be organized by the federal government. Kilgore wanted to produce a cadre of scientists trained by the federal government and loyal to the needs and objectives of the federal government, which for him was a proxy for the people at large. Kilgore thought that federally funded science should serve the “public interest” and should serve national needs, including applied research and social science work. Government officials should be in control. In fact, he wanted Congress to be in control of how the resources were distributed and how projects were evaluated. He wanted things distributed equally across states and regions, and he wanted the government to own the intellectual property rights and to hold any patents that came out of federally funded research.

There was another competing vision of a national science agency around this time, and it was articulated by a man named Vannevar Bush (who was not related to the other Bushes). Vannevar Bush was a very important early twentieth-century engineer, public servant, and intellectual. He was a successful inventor, and had a number of important patents for radio tubes. He was a cofounder of the company that later changed its name to Raytheon. He was dean of the engineering school at MIT, he then became president of Carnegie Mellon University, and he was the head of the OSRD during World War II.

Bush articulated a vision of a different kind of national science agency, one that would be controlled by scientists who would pursue scientific research on its own merits, outside of political interference. He wrote a famous, lengthy essay that was published as a book called Science, the Endless Frontier in 1945. In the book, he made the standard arguments you get in mainstream text today: Science is a public good, and it has all these spillovers, and to improve the lot of humanity, we need to spend more on basic science than what the market will allow. His vision for an agency was that it would not do any applied, technical work. It would only do basic work. No social science. Scientists themselves would be in charge. The work would all be done in universities and governed by universities, not by federal labs. Projects would be selected purely based on their scientific merit as judged by other scientists. So, the public would write the checks, but the public would not have any influence on what got done.

Several bills were introduced in Congress in the 1940s on this topic. There was a bunch of intrigue and debate and jockeying for positions. If you go to the NSF website and look at its little essay on the history of the NSF, the story you get is the following: The foundation was established by Congress in 1950, and it was a full endorsement of the Vannevar Bush model of a scientist-led, basic science–oriented, pursuit-of- science-for-its-own-good kind of organization without any military or political influence. The reality, as you can imagine, is more complicated.

There was ultimately a debate between the Kilgore model and the Bush model, and the Bush model won out, so the NSF was created to do basic science along the lines articulated by Vannevar Bush. But, of course, the reality is that the true NSF was kind of a compromise that reflected elements of both the Bush proposal and the Kilgore proposal. It was not independent of federal influence; it was not independent of the military, contrary to what you typically hear about this.

So, what did the NSF end up looking like? Well, it does emphasize basic research, not applied R&D, conducted in university labs rather than government-owned labs. Priorities and disbursements are generally set by scientists, through peer review, and not by Congress. Universities can own the patents, and universities make billions today from patents that they receive through federal funding. (That’s one of the controversial issues that Trump has raised.) However, at the same time, the head of the NSF is appointed by the president, subject to Senate confirmation. The budget is established by Congress, and there is a mandate in the NSF charter to develop what they call national priorities, to direct science in the interest of the nation as articulated by the federal government.

The NSF certainly does have a mandate, at least an implicit mandate, to organize itself and to support activities that in some sense are consistent with national priorities, whatever those might be. And incidentally, the concerns raised by people like Melman and Forman were already being realized. The things they were worried about were already taking place: the crowding out, the distortion.

It’s not the case, as you sometimes hear, that the NSF reversed all that by supposedly taking science away from the military, deemphasizing military needs, and allowing for bottom-up, peer-reviewed scientific progress purely on its own merits. Rather, science continued to be dominated by Cold War concerns in the 1950s, ’60s, and ’70s, and this even continues to some extent today. It’s certainly important to keep the military context in mind. We never would have had this conversation about the need for a national science agency had it not been for the Second World War and the belief that the reason the Allies won the war was their superior science.

Because of this view of the war, there was also a concern that the market was not producing enough scientists and therefore we needed the NSF and similar agencies to train and fund scientists. I don’t know if you’ve read Rothbard’s article on science—“Science, Technology, and Government”—which was written in 1959 but only published by the institute in 2015. Rothbard points out that being a scientist is a contribution to the labor market just like any other kind of labor activity. If there’s a genuine shortage, then wages will rise to clear the shortage. There’s no evidence that the number of scientists that we have on the free market is somehow less than the optimal amount.

The growth of government research also helps to illustrate Robert Higgs’s ratchet effect in government spending.

All the key personnel at the NSF were performing essentially the same functions that they had performed at wartime agencies. Understanding government contracts and knowing how to get federal grants was now part of what it meant to be a scientist.

What Are the Benefits, Really?

Now, there are a number of recent studies by economists and other social scientists on the impact of the NSF and similar agencies. There’s a very interesting 2023 National Bureau of Economic Research paper—“America, Jump- started: World War II R&D and the Takeoff of the U.S. Innovation System,” by Daniel Gross and Bhaven Sampat—on the OSRD which essentially claims that there were large positive spillovers from OSRD funding, but also claims that this defense-related funding permanently changed the trajectory of overall US innovation in the direction of OSRD-funded technologies.

So, what would markets for telecommunication and computing and aviation and other high-tech sectors look like had the funding come from private sources? Well, it’s impossible to describe that counterfactual precisely, but it would almost surely be different from the pattern of scientific development that occurred during the Cold War, largely due to government funding.

There are studies that look at the impact of government funding on specific outcomes—the amount of R&D that private firms do, the amount of patents that private firms get, and how scientists do in their careers—typically showing positive relationships. So, when the government spends more on scientific research, you get these other “beneficial” spillover outcomes.

But I just want emphasize for you what the outcomes are: the amount of R&D that private companies do, the amount of patents that private companies get, and the career advancement of government-funded scientists. Well, it’s probably not shocking that there are some positive correlations there. You can call it cronyism if you want. It’s not the same thing as establishing societal benefit from government science funding. As I mentioned before, it’s impossible to measure the impact of government funding on socially useful innovation, which is not the same thing as R&D expenditures by large corporations or patents.

Nor can we just cherry-pick a few cases. Rather, you need to look at what they call the average treatment effect. There’s a lot of variety in the sense that the vast majority of federally funded research projects probably have a negative social impact. Think about the humanities. In many other cases we might see a neutral impact. There’s a lot of heterogeneity there.

In any case, we’re putting government-funded actors in charge of picking winners. So, you have a politicized research university. It’s no surprise that all this stuff going on at Harvard, Columbia, etc., is going on now because these university actors are the primary contingent chasing federal funds.

I’ve written and spoken about the broader issues around using taxpayer funds for science, which is kind of where I started the talk today. Well, one of these issues is the assumption of what you might call the linear model, or the naïve linear model, of science, in which scientists unconcerned with application do very basic research that spills over into some applied research. Then, private actors do research and development, and eventually you get useful gadgets. The idea is that research flows from basic to applied to sellable.

That model is almost certainly wrong descriptively, and even, if you think about it, theoretically. Rothbard talks about this in the article that I mentioned. Also, I recommend a great book by David Noble—America by Design—on the role that tinkering by private actors plays in stimulating even basic scientific advances.

At the end of the day, the linear model is one in which scientists are independent but are engaging in their independent activities at the taxpayer’s expense. So as a result, we have all the problems that we’ve already been describing. These scientists have been transformed into grant hunters, and that gives them lots of incentives to lobby for even more federal funding. So, scientists themselves are among the most up in arms at the proposed cuts to federal research funding among universities today. This even includes, by the way, outrage over proposals to simply cut the overhead rate that universities charge on federal grants. It almost sometimes seems like a lot of this is about scientists who just want to be able to do more science on your dime. Understandably, you might be led to think that scientists just want your money. The sophisticate tells you, “No, no, no, this is about basic research and spillovers and public goods.” But probably, at the end of the day, the scientists just want your money.