The Competitiveness of Nations in a Global Knowledge-Based Economy
Paul A. David *
Common Agency Contracting and the Emergence of “Open Science” Institutions
American Economic Review, 88 (2)
May 1998, 15-21.
I. The Problem: Why “Open Science”?
II. The Argument: Noble Patrons, Mathematicians, and Principal-Agent Problems
III. Common Agency Contracting, with Rival Principals - The Legacy of European Feudalism
The Cold War’s ending has brought mounting pressures to recognize national science and technology research systems. Yet, by comparison with what has been learned already concerning institutional arrangements and business strategies affecting corporate R&D investments, surprisingly little is known about the economic origins and effects of the corresponding institutional infrastructures shaping the world of “academic” science, and the organization and conduct of publicly supported R&D more generally. The desirability of closing this particular lacuna in the economics and economic-history literatures has been just as evident to economists concerned with extending the analysis of modern institutions as to those who have begun to approach the whole area of science and technology studies from the perspectives and methods of industrial-organization economics.  Even before the “new economics of science” had begun to direct attention to such a program, Douglass North (1990 p. 75) saw a significant challenge and a promising opportunity in explicit exploration of “the connecting links between institutional structures... and incentives to acquire pure knowledge.” The research reported here has accepted that challenge (see also the other papers in this session: Timothy Lenoir , Christophe Lécuyer , and Marjory S. Blumenthal ). It is focused upon key episodes in the institutional evolution of “public science,” and its complex and changing relationship to the other organizational spheres of contemporaneous scientific activity: those in which research was conducted under “proprietary rules” for industrial profit-goals, and “defense-related” science and engineering knowledge was sought under conditions of restricted access to information concerning methods, findings, and their actual and potential applications.
I. The Problem: Why “Open Science”?
The particular historical development of interest here is the emergence of precisely those fundamental lines of cultural and institutional demarcation, to which I have referred in distinguishing the existence of the sphere of “open science” activities supported by state funding and the patronage of private foundations and carried on today in universities and public (not-for-profit) institutes. Although the conceptualization of science as the pursuit of “public knowledge” now seems to many a natural, even a primitive notion, it is in reality a complex social construct (see Robert K. Merton 1973, 1996 part III). The “communal” ethos and norms of “the Republic of Science” emphasize the cooperative character of the larger purpose in which individual researchers are engaged, stressing that the
Discussants: Kenneth Flamm, Brookings Institution; Zvi Griliches, Harvard University; David Mowery, University of California-Berkeley.
* All Souls College, Oxford OX1 4AL, U.K., and Department of Economics, Stanford University, Stanford, CA 94305-6072. This condensed presentation draws on David (1998), which should be consulted for refinements, qualifications, historical documentation, and references to the relevant literature. I am grateful to Avner Greif, Mario Biagioli, Partha Dasgupta, Weston Headley, Scott Mandelbrote, Joel Mokyr, Noel Swerdlow, and many other colleagues, institutions, and foundations whose intellectual and material generosity aided my research in this area since 1991. The comments and suggestions of the discussants improved the present version, although they did not make the task of compression any the easier.
1. With particular reference to “the new economics of science,” see Partha Dasgupta and David (1987, 1994), David (1994a), and the more recent surveys by A. M. Diamond (1996), Paula Stephan (1996), and David et al. (1998).
accumulation of reliable knowledge is an essentially social process. The force of its universalist norm is to render entry into scientific work and discourse open to all persons of “competence,” while a second key aspect of “openness” is promoted by norms concerning the sharing of knowledge in regard to new findings and the methods whereby they were obtained.
Open science is a quite recent social innovation, at least by historical standards. Accompanying the profound epistemological reorientation wrought by the fusion of experimentalism with Renaissance mathematics, the cultural ethos and social organization of Western European scientific activities during the late 16th and 17th centuries underwent a significant transformation, a break from the previously dominant regime of “secrecy in the pursuit of nature’s secrets.” This change should be seen as a distinctive and vital aspect of the Scientific Revolution, from which there crystallized a new set of conventions, incentive structures, and institutional mechanisms that reinforced scientific researchers’ commitments to rapid disclosure and wider dissemination of their discoveries and inventions. Yet the puzzle of why and how this came about has not received the notice it would seem to deserve, especially in view of the complementarities and tensions that are present today in relations between the regimes of open and proprietary science.
Any familiarity with the antecedent intellectual orientation and social organization of scientific research in the West would be sufficient to suggest the utter improbability of that historical bifurcation, which saw a new and quite antithetical mode of conducting the search for knowledge emerge alongside (and in some sense in competition with) the older, secretive hunting of nature’s secrets. Medieval experimental science was shaped by a political and religious outlook that encouraged withholding from the “vulgar multitude” arcane and occult knowledge that might impart immense powers over material things (see William Eamon, 1994). The imperative of secrecy was particularly strong in the medieval and Renaissance traditions of alchemy, and it persisted there side-by-side with the emergent institutions of open science throughout the 17th and into the 18th century. Social and economic regulations during the Middle Ages, along with rent-seeking strategies, worked in the same direction: knowledge of recently discovered geographical secrets and maps indicating trade routes would be closely guarded. Similarly, technological recipes were kept from the public domain by craftsmen, even when they were not compelled by guild restrictions to preserve the “mysteries” of the industrial arts. 
Why then, out of such a background should there have emerged a quite distinctive community of inquiry whose members came to be governed by a distinctive reward system based upon priority (and hence, necessarily, the revelation) of discoveries? Why, especially when in the modern context we see few if any differences between the methods of (scientific) inquiry used by university researchers working under the institutional norms of open science and the procedures that they (or others with the same training) employ in the setting of a corporate R&D laboratory? Can the social organization of open science then be simply an epiphenomenon of the philosophical and religious changes that some cultural historians see as underpinning the Scientific Revolution, if not of the epistemological transformations that it constituted? Stating the problem more synthetically, is it not plausible that these two discontinuities, the one taking place in the social organization of scientific inquiry and the other transforming its intellectual organization, were interdependent and entangled with each other in ways that need to be more thoroughly understood?
Considering the economic logic of the organization of knowledge-producing activities provides a start toward answering this question; it is possible to give a complete functionalist account of the institutional complex that
2. From the 14th century to the early 18th century in Europe, the issuance of “letters patent” and granting of royal “privileges” conferring monopoly rights in exchange for the disclosure of technological information were aimed primarily to effect the transfer and application of existing industrial arts and engineering practices (i.e., techniques already known to master-craftsmen and engineers in other territories), and not particularly at inducing fresh inventive activity (see David, 1993a).
characterizes modern science in such terms (see Dasgupta and David, 1987, 1994). In brief, the norm of openness is incentive-compatible with a collegiate reputational reward system based upon accepted claims to priority; it also is conducive to individual strategy choices whose collective outcome reduces excess duplication of research efforts and enlarges the domain of informational complementaries. This brings socially beneficial spillovers among research programs and abets rapid replication and swift validation of novel discoveries. The advantages of treating new findings as public goods in order to promote the faster growth of the stock of knowledge are thus contrasted with the requirement of restricting informational access in order to enlarge the flow of privately appropriable rents from knowledge stocks. This functionalist juxtaposition suggests a logical basis for the existence and perpetuation of institutional and cultural separations between two normatively differentiated communities of research practice: the open “Republic of Science” and the proprietary “Realm of Technology” are distinctive organizational regimes, each of which serves a different (and potentially complementary) societal purpose.
The foregoing, “logical-origins” style of explanation for the institutions of modern science (and technology), however, is unconcerned with the details of their actual historical evolution. A rationale of this kind, at best, seems to presuppose a creationist fiction, namely, that these arrangements were instituted ab initio by some external agency, such as an informed and benevolent political authority endowed with fiscal powers. A response to that objection requires probing for the historical origins of the institutions of open science, since these remain outside the set of logical origins arrived at simply from a consideration of the present-day functional value of an extant, cooperative mode of scientific research.
II. The Argument: Noble Patrons, Mathematicians, and Principal-Agent Problems
I contend that the historical emergence of the norms of disclosure and demonstration and the rise of “cooperative rivalries” in the revelation of new knowledge (the “open-science revolution”) had independent and antecedent roots. These lay in the social and institutional contexts in which the new breed of scientists were working: the formation of a distinctive research culture of open science was first made possible and, indeed, was positively encouraged by the system of aristocratic patronage prevailing in an era when kings and nobles (both lay and ecclesiastical) were immediately concerned with the ornamental benefits to be derived by their sponsorship of philosophers and savants of great renown. To sustain this interpretation I argue that the economic logic of the patronage system in post-Renaissance Europe induced the emergence and promoted the institutionalization of new reputation-building proceedings; these entailed the revelation of scientific knowledge and expertise among extended reference groups that included “peer-experts.” Patronage, however, already was an old system in the 17th century, for the sponsorship of intellectuals was a longstanding prerogative and responsibility of Europe’s social and political elites. It is necessary then for me to explain that something new had appeared on the scene at that particular juncture; something which by disturbing that system induced the primitive formation of conventions and norms that can be identified with open science. The core part of my proposed explanation derives from considering, first, the economics of patronage in general, and then the specific implications of the newly arising problems of principal-agent contracting that were created by the late-Renaissance patronage system’s encounter with the new (mathematical) form of “mechanical philosophy,” in which the likes of Galileo, Johannes Kepler, and their contemporaries came to be engaged.
Aristocratic patronage systems historically reflected two kinds of motivation: the utilitarian and the ornamental. Most political elites, in addition to recognizing some need in their domain for men capable of producing new ideas and inventions to solve mundane but nonetheless important problems, also have sought to enlist the services of those who profess an ability to reveal the secrets of Nature, and of Destiny. Kings, princes, and lesser nobles sought to surround themselves with
creative talents whose achievements would enhance their self-esteem and their public image. Thus, poets, artists, musicians, chroniclers, architects, instrument-makers, and natural philosophers found employment and protection in aristocratic courts, both because their skills might serve the necessities and pleasures of the court and because their presence “made a statement” in the quest among nobles for prestige. Patron-client relations often were precarious, being uncomfortably subject to the volatility of aristocratic tastes and moods, and to the abrupt terminations that might ensue on a patron’s disgrace or demise. Nonetheless, these dyadic connections existed in this era as part of a well-articulated system characterized by elaborate conventions and rituals that provided calculable career paths for men of intellectual and artistic talents (see Bruce Moran, 1991; Mario Biagioli, 1993).
Those motives for extending patronage as symbolic acts of public self-aggrandizement are here subsumed under the heading “ornamental.” Such reasons should be understood to have been no less instrumental in their nature and roots than were the utilitarian grounds for the patronage of intellectuals. Grandeur and ostentatious display could serve to reinforce the claim of a prince to rightful possession of authority; the public display of “magnificence,” in which art and power were closely allied, was a stock item in the repertoire of Renaissance state-craft (see Roy Strong, 1984). This is significant, because inventions and discoveries that met utilitarian needs in many instances would have to be kept secret if they were to be most useful, whereas it is in the nature of the ornamental motive for the patronage of creative talent that its fulfillment elicits the disclosure of new, marvelous discoveries and productions - that the client’s achievement on behalf of the patron be widely publicized. Indeed, it was very much in the interest of a patron for the client’s reputation to be enhanced in this way, for the fame of the latter augmented his own.
Into this setting a new element had been interjected during the 16th century. The more extensive and rigorous use of mathematical methods formed an increasingly important aspect of the work of natural philosophers and others.  A side-effect of this intellectual advance was, however, to render the basis of the mathematically sophisticated savants’ claims and reputations less immediately accessible for evaluation by the elites in whose service they wished to be employed. The difficulties thus posed by the asymmetric distribution of information were rather unprecedented, not having been encountered to the same degree in the patronage of intellectuals and artists who followed other, less esoteric callings. The new breed of scientists, however, claimed to specialize in revealing the unfamiliar. Opportunities for charlatanry here were more rife, and so were the risks of embarrassment for the patron, should it turn out that one had sponsored a fraud - or much worse, a heretic. Thus, even where the services of the mathematically trained intelligencia might be sought for essentially practical, utilitarian pursuits (designing machinery for public spectacles, surveying and cartography, ballistics, or the correct use of perspective in pictorial arts), the soundness of the candidates’ qualifications had become more problematic and far from inconsequential.
This shift was tantamount to the emergence of especially compelling reasons for noble patrons readily to delegate more of the responsibility for evaluating and selecting among the new breed of savants; those screening functions were thereby devolved initially to informal networks of correspondents, and increasingly to more institutionalized communities of their fellow practitioners and correspondents. Except for those few who were themselves adepts, patrons were inclined to refrain from passing personal judgment on scientific assertions, or involving themselves in substantive controversies (see Biagioli, 1993). It was left to the initiative of the parties dependent upon such patronage to organize the production of credible testimonials to their own credibility and scientific status. Not alto-
3. See C. B. Boyer (1985 Ch. 15) and Noel Swerdlow (1993) on Renaissance mathematics; A. Keller (1985) on the program and rhetoric developed on behalf of mathematical training during the 1570’s and 1580’s; and M. Feingold (1984) and Biagioli (1989, 1993) on the patronage of mathematicians.
gether surprisingly then, the beginning of the era of modern mathematics also witnessed the formation of active networks of correspondence among Europe’s algebrists and geometers, announcing newly devised techniques and results; the mid-l6th century initiated the tradition of publicly posing mathematical puzzles, issuing scientific challenges, announcing prizes for the solutions of problems, and the holding of open competitions to test the claims of rival experts in the mathematical arts. On the interpretation proposed here, the new practices of disclosure constituted a functional response to heightened asymmetric-information problems that the mathematization of natural philosophy and the practical arts posed for the Renaissance system of court-patronage.
III. Common Agency Contracting, with Rival Principals - The Legacy of European Feudalism
The foregoing sketch of the early modern court patronage system presents features recognizable to economists as those of “common agency contracting,” involving the competition of incompletely informed rival principals for the dedicated services of an expert agent. Establishing that correspondence suggests three significant propositions about the economic organization of scientific activities in Europe during the late 16th and early 17th centuries.
First, since what the scientist-clients had to offer their patrons was “novelty,” at any point in time the welfare of a scientist’s several patrons could not be jointly advanced by the same degree. In the early history of modern science, as a consequence of the dominance of patrons who were concerned with the ornamental rather than the utilitarian value of scientist-philosophers, the services a client provided to his several patrons were more in the nature of positional goods, and hence essentially were “substitutes” rather than “complements.”
Second, in the majority of cases, the material rewards offered to clients by any single patron were not sufficiently large and certain to relieve them from the quest for multiple patrons. But in the absence of full information and concerted action on the part of principals, the nature of the incentive contracts offered by the latter would have reflected their awareness of the possibility that a client/agent could use the means provided by one patron to serve the ends of another. Under these common agency conditions the resulting Nash equilibrium in the game among rival principals would be a set of patronage-contracts that offered clients comparatively weak material incentives to devote their efforts exclusively to the service of any one patron (see Avinash Dixit, 1996). Such an outcome, of course, would be consistent with the necessity of seeking to serve a number of patrons concurrently for “piecemeal compensation.” Even though a scientist such as Galileo might deplore that situation as demeaning (Biagioli, 1993 p. 29), it worked nevertheless to reinforce would-be clients in their adoption of research and publication strategies that widened the circle of their repute.
Third, as Lars Stole’s (1990) analysis of mechanism design under common agency contracting has shown, the equilibrium outcome in the case of “contract substitutes” is in general more favorable to the agent than is the case when the services performed for different principals are complements. In effect, the competition among patrons to command the faithful attention of an agent/client (when they cannot free-ride on the knowledge products delivered to their rivals) leads to incentive structures that allow the client to retain more of the “rents” from the specialized information he possesses. The situation therefore tended to provide greater rewards for scientific activities than would have been the case otherwise, were there only a single possible patron on the scene; or had the patrons predominantly enjoyed positive externalities from others’ support of the agent’s efforts. The latter, of course, is the characteristic situation when there are significant spillovers of (utilitarian) benefits from new knowledge.
In the story related here there is an historical irony well worth remarking upon, especially as it underscores the tenacity of the past’s hold on the incrementally evolving institutions that channel the course of economic change.  Here
4. On “path dependence” in the dynamics of economic systems, see, for example, David (1993b, 1994b, 1997).
is the nub of it: an essentially precapitalist, European aristocratic disposition to engage in the patronage of intellectuals of renown for ornamental motives came to confer value upon those who pursued knowledge by following the new science in the late 16th and 17th centuries. The norms of cooperation and information disclosure within the community of scientists, and their institutionalization through the activities of formal scientific organizations, emerged (in part at least) as a response to the informational requirements of a system of patronage in which the competition among noble patrons for prestigious clients was crucial. Those rivalries were a legacy of western European feudalism: the medieval fragmentation of political authority had set the stage for common agency contracting in substitutes. An instructive contrast might be drawn with the alternative circumstances of a monolithic political system, such as had prevailed elsewhere, as in the Heavenly Empire of China during an earlier epoch, to cite a well-known case of a society that clearly possessed the intellectual talents for great scientific accomplishments, yet failed spectacularly to institutionalize the practice of open science. Might one then see open science to have been European feudalism’s great gift to the economic vigor of capitalism in the modern age?
Some important part of the impact of science today derives from the radical social innovation that the open-science regime constituted. A corollary proposition, to which the historical experience recounted here also lends support, is that the methods of modern science in and of themselves were not and still are not sufficient to form the unique cultural ethos associated with the “Republic of Science.” Nor can they be expected automatically to induce and sustain the peculiar institutional infrastructures and organizational conditions of the open-science regime, within which their application has proved so conducive to the rapid growth of the stock of reliable public knowledge and all that flows therefrom. Rather than being the robust epiphenomena of a new organum of intellectual inquiry, the institutions of open science are independent and in some measure fortuitous social and political constructs; along with the cultural ethos they have served to transmit from generation to generation, they are in reality intricate legacies of European history.
Features of the institutional infrastructure of public science, being thus in some significant degree exogenous to actual scientific practice, may be subjected to substantial redesign and otherwise manipulated as potent instruments of state science and technology policies. In one sense that is the good news. But it comes with a caution. While the norms of openness play a critical part in maintaining the systemic efficacy of modern scientific research, they are terribly vulnerable to the withdrawal of public-minded patronage and protection. Wise policy-making in this critically sensitive area must pay especial heed to the complex and contingent histories of the organizations of public science and so respect the potential fragility of the peculiar institutional matrix within which modern research evolved and has flourished.
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