Science funding under a nightwatchman state
A major milestone has been achieved. A drug that will make significant progress in eradicating AIDS has recently been approved. However, its delivery has been disrupted by the cuts to USAID and public health initiatives implemented by DOGE.
One might reasonably conclude from this that government funding for basic scientific research, pharmaceutical interventions, and R&D is essential. Indeed, the empirical literature, and foundational macroeconomic theories of endogenous growth, both imply a consensus that returns to investment in scientific research is high. Scientific ideas are nonrival, hence generate large spillovers, so producers cannot monetise the full surplus. Additionally, science projects can require massive sums over decades, so it is often uneconomical for the private sector to invest in these given the risk [1]. The result: underproduction of ideas and technologies relative to what is optimal if these ‘externalities’ were corrected. If the private sector and philanthropic models of research investment (e.g. Tyler Cowen’s Fast Grants program) were perfect substitutes to state funding, there would already be plans to develop an infrastructure to distribute lenacapavir without state involvement.
However, this poses a major challenge to traditional conceptions of libertarianism, hence imposes an onerous burden of proof on us libertarians to specify an alternative to government in this domain. In this post, I speculate on what that may entail, although (as unfortunately we lack the natural experiment of a polity adopting minarchy) this is indeed a somewhat speculative exercise, so a wide confidence interval should be applied to my conclusions.
We can broadly distinguish between two forms of libertarianism in the 21st century:
Minarchism. The government is relegated to “nightwatchman” status, with its role constrained to preventing aggression amongst citizens, enforcing private property and contracts, whilst providing the military, courts, and police required to enforce this. Likewise, anarcho-capitalists reject the role of government altogether, and maintain that voluntary transactions between private parties in a free-marketplace is sufficient to provide defence and security.
State-capacity libertarianism. Pioneered by Tyler Cowen in 2020, this nascent variant seeks reduced involvement in the lives of citizens and the marketplace much as traditional libertarian does, alongside a smaller state with less redistribution. Where it differs from minarchism is that it accepts government involvement in the provision of public goods [2]. The goal of expanding individual liberty is balanced alongside political constraints [3], and making the state leaner and more efficient.
I am relatively agnostic as to which version of libertarianism I subscribe to. As a consequentialist and utilitarian, I am only interested in what works to provide happiness for the greatest number. It just so happens that allowing individals to live their lives free from interference, and a free-market capitalist economy, are time-tested and proven means to achieve such. Unlike Nozick, I do not subscribe to deontological approaches to libertarianism. Yes, this opens me to the all too common charge of not being “a real libertarian”, yet such slandering does nothing to address the substance of the arguments involved, and so is a persistent pet-peeve of mine in libertarian circles.
Therefore, the question we seek to answer is, is it optimal for government to provide scientific funding? Richard Hanania, a prominent libertarian, believes such, as do those aligned with the state-capacity variant. Others disagree. This could become a burgeoning debate within libertarian circles as science becomes more salient in political discourse, with RFK increasingly dominating the headlines and X discussions.
The core issue here is whether the government crowds out private sector or philanthropic funding. Hanania cites evidence of a crowd-in effect within fields of inquiry, however (as he notes) this can be consistent with an aggregate crowding-out effect if resources are diverted between fields of inquiry. More importantly perhaps, philanthropy is not included in the scope of these studies. As much research is conducted without expectation of a future financial payoff, universities and nonprofits play a vital role in scientific advancement. In a nightwatchman state, it is likely that philanthropy would play a central role in scientific discovery for this reason.
As a thought experiment, suppose that the government announces the adoption of a minarchist ideology, so the state becomes a nightwatchman. The public sector goes from north of 40% of GDP to a miniscule proportion. That is a huge magnitude of wealth and cash that would otherwise service tax revenue, now in the hands of private citizens and organisations.
If one considers donations as a normal good (and indeed the foundations of billionaires strongly imply this is the case), then the philanthropic sector will undergo rapid growth. Moreover, unprecedented deregulation efforts and minimal levels of taxation will increase economic growth, so private citizens become wealthier; a second-order rise in donations not captured by the studies (which tend to neglect general equilibrium effects to focus on partial equilibrium questions [4]). Indeed, when considering the welfare state in general, a crowding-out effect of up to 50% on personal savings has been found. We should not just consider the science industry in isolation, but consider how tax and spending decisions affect the whole economy, and the possible interactions at play which could yield a downstream effect on research institutions. More tax equals less private saving or consumption, which could otherwise be used to increase financing for philanthropy, which could fund innovation where there is no immediate financial motive. Plenty of wealthy individuals share our love of knowledge and discovery merely for the sake of knowledge and discovery, so there is no reason for philanthropy to not provide scientific funding in a nightwatchman state.
But wait! We have wealthy philanthropic foundations already. Why are they not stepping in to distribute lenacapavir? Game-theoretic dynamics are at play. As Zvi Mowshowitz has noted, the philanthropic sector will not substitute lost government investment if it believes that the absence of funding will pressure the state to restore funding. Only if there exists a credible commitment to permanently halt all government spending in this area will philanthropy and the private sector offset lost government spending. This is both consistent with crowding-out, and evidence for crowding-out if one adopts Bayesian epistemology [5]. Under Bayes’ theorem, evidence supports a hypothesis if the evidence is more likely given that the hypothesis is true than if the hypothesis is not true. If the crowding-out effect was zero, then we would expect private sector spending to be invariant to what the government does. On the other hand, if the state declares that it will relinquish involvement, then these organisations will be likely to step in.
Now we have established that the government likely crowds-out private sector and philanthropic investment in scientific discovery, there is no reason to advocate for the state to play a role here [6]. The standard thesis that the private sector is superior to the state in allocating resources efficiently applies, and as all libertarians subscribe to this, I will not go any further into this. Just note that if allocative efficiency in scientific funding is the prevailing equilibrium when the government plays a role, then we would not expect to see much directed to DEI nonsense [7].
In addition, I would also highlight moral hazard. The reason why the Trump administration’s attempt to politicise academia is so effectively disastrous in the first place is that academia is dependent upon federal funding. Lack of reliance upon the government in the first place is a powerful hedge against the risk that the government can withhold funding to pressure institutions to align with its political goals. As Hanania himself emphasises in his book ‘Origins of Woke’ (which I highly recommend!), wokeness has been so effective in reshaping civil society in large part due to the government using its funding to coerce firms into being race and sex conscious.
Finally, and this is the most speculative point, we must not neglect the role of creative destruction here. A nightwatchman state may well see the rise of new institutions that replace what the government did before, and these new institutions competing against each other will guarantee dynamism. For instance, consider the immense changes to the arts and music industry with each technological change (most recently, with the internet). Not only does the creative sector demonstrate that there is an incentive-compatible means of private-sector provision of nonrival goods, but that this propensity is resilient to unforeseen seismic changes. One could imagine in a nightwatchman state, that although universities and other established scientific institutions will diminish in prominence and status (as the government no longer subsidises them), philanthropic institutions devoted to academic fields of inquiry would emerge.
For these reasons, I consider the minarchists to have an upper hand over the state-capacity libertarians in this debate. Libertarian arguments in favour of laissez-faire capitalism and against the welfare state, and government involvement in education, apply to science too. In aggregate, the state representing north of 40% of GDP (and the taxes required to finance this) crowds out private involvement and dynamism in every avenue of life, so limits the possibilities for the advancement of humanity. We would not be libertarians if we were not idealistic. We must not lose sight of our idealism for the flourishing of humanity even when the rare cases when the government appears to do something good, as the private sector and philanthropy could do better. The latter has the incentives and the dynamism wrought by creative destruction to do better, unlike the government.
1. Although philanthropic organisations may be more willing to, for the obvious reason that they do not expect a financial return. Exhibit A, OpenAI.
2. Ideas are nonrival, however can be made excludable via intellectual property regulations such as patenting and copyrights. Hence, science mainly falls under the semi public-goods category.
3. A nightwatchman state will almost certainly never occur in a democracy, as even if a libertarian party was to be victorious in an election, incumbent parties eventually get voted out. I tend to think of minarchy as a baseline ideological framework for providing policy prescriptions, which can then be updated and bargained upon based on current realities. Think of this as analogous to how a Bayesian reasons: start with a base rate to define one’s priors, then update given all the available and new information on the hypothesis at hand.
4. In general, empirical studies seek to isolate and measure a causal effect in one micro domain. Given the intense rigor involved in the identification design, it is incredibly difficult to generalise the causal mechanism identified to all possible interactions in aggregate, which may offset each other or generate higher-order effects. External validity is a well-known limitation of even RCTs. Indeed, the Lucas Critique perhaps makes this implicit. No relationship between different variables is guaranteed to last forever, especially if people's incentives and behaviours change.
5. On a superficial level, this provides evidence of crowding-in, yet this only considers the behaviour of actors in an environment where the government already plays an active role, and is expected to indefinitely. My overarching point: change the environment and the constraints (in this case, those imposed on post-tax wealth via taxes), and the behaviour of organisations will change.
6. Of course, as mentioned in footnote [3], a nightwatchman state is probably unrealistic anyhow, so the game-theoretic scenario above applies. Political constraints are vital to inform how a libertarian should approach public policy. I will ignore this however, as the political feasibility of a libertarian platform is another blog post in itself. Just note that a second-best solution is not an optimal solution, and the topic of this post is what is the optimal solution.
7. I cannot believe this needs to be said; it is a sad state in our public discourse that this is the case. Most science is not politicised nor DEI nonsense. Do not fall for the conspiratorial attacks on science itself prevalent on the right.