The 2020 economics Nobel prize went to the American pair Paul Milgrom and Robert Wilson “for improvements to auction theory and inventions of new auction formats”, including the sorts of auctions governments use to allocate natural resources and telecommunications licenses. From the perspective of the Gulf countries’ science policy, there is a deeper lesson in the form of linkages between the private sector and universities, and it comes at an important time, when depressed oil prices are accentuating the need for Gulf economies to elevate their homegrown levels of innovation.
Gulf universities generally operate in an intellectual oasis, and many have weak links to the private sector and government. This is a grave error, as many of the most important scientific advances that humans make are the result of university researchers working on real life problems posed and grappled with by non-researchers, such as government officials and company executives.
The way in which the science of auctions developed – and the Nobel it earned Professors Milgrom and Wilson – illustrates how to build university science in the correct way. Gulf governments should consider restructuring their university systems to ensure that knowledge and commercial institutions enrich one another through dense networks of exchange, as this will help increase innovation, conferring great benefits upon the economy.
Part of the problem with existing universities in the Gulf is that they usually operate according to the linear model of science developed by the 17th century English philosopher Sir Francis Bacon. In this model, governments invest in basic science that involves abstract questions with few links to real world problems. Entrepreneurs then use basic science to develop applied science to solve real world problems, which yields commercial and governmental benefits.
In the Gulf, universities are tasked with creating basic science, and so it is not their responsibility to forge ties with other sectors; in the Bacon model, it is the job of entrepreneurs in the government and private sectors to study the output of universities and use it to solve the problems they face in their daily lives. This lack of incentive on the part of universities is a major obstacle to creating links, and it is reinforced by the secure jobs and high salaries enjoyed by many university academics in the Gulf region.
The Bacon model was shown to be wrong by the 18th century Scottish philosopher and economist Adam Smith. As the industrial revolution unfolded before him, Smith noted that insights did not flow in one direction, as implied by Bacon’s linear model. Instead, entrepreneurs who face problems invest in applied research to develop solutions to those problems, and that can often lead to the development of useful basic science that supports the development of further applied science.
In today’s context, knowledge flows in a complex web where universities and entrepreneurs learn from one another, rather than dripping down from the ivory tower of basic science.
The auction theory mentioned in the 2020 economic Nobel prize is an example of why Smith was right and Bacon was wrong, and illustrates how Gulf countries should structure their university systems. In the middle of the 20th century in the US, telecommunications licenses were allocated using complex administrative procedures or lotteries. These processes led to inefficient allocations of licenses, and generated meager revenues for the government. Economists, including university academics such as Ronald Coase, who himself earned a Nobel prize for separate work on the theory of the firm, proposed using auctions as a way of addressing both weaknesses, and this started a wave of field experimentation with different auction types.
In line with the Smith model, and in contrast to the Bacon model, these experiments motivated academic economists like Milgrom and Wilson to develop the basic science behind auctions, which in turn spawned newer, more effective auction designs. As a result, by the late 20th century, governments were making billions of dollars from auctioning telecommunications licenses, and the quality of services that consumers were getting rose, because the processes ensured more efficient use of licenses by the companies bidding.
Had the Bacon model been true, we would have had to wait for Professors Milgrom and Wilson to develop auction theory first; but Smith correctly inferred that scholars like Milgrom and Wilson needed to be embedded in a knowledge-exchange network with policymakers and company executives to ensure the highest quality of basic and applied research. This ebb and flow between universities, the private sector, and the government continues today in auctions and many other important fields in economics, such as environmental policy and financial markets.
In the Gulf countries, these webs form relatively infrequently, because the basic tenets of the Smith model often fail to be incorporated in the design of university systems. For example, to aid knowledge exchange, US cities such as Paolo Alto, California and Cambridge, Massachusetts feature universities physically adjacent to top companies, leading think tanks, and government policy institutions. However, Gulf universities are often in remote locations, indicating a lack of appreciation of the importance of knowledge exchange between university scholars, policymakers and company executives.
Moreover, leading universities in western countries, including Stanford University, where both Professors Milgrom and Wilson work, give their faculty low teaching loads, and furnish their top scholars with armies of research assistants. This affords faculty the resources required to produce high quality basic research, and the time to attend conferences and have coffee with people working in the private and public sectors, so that they can help tackle real world problems. In contrast, Gulf universities often give their faculty large teaching loads and zero research assistants, impeding their ability to benefit from these sophisticated knowledge networks.
Some of these issues can be addressed by the Gulf universities themselves, but others require the government to change its own approach. For example, in the Gulf countries, there is a culture of governments tackling problems behind closed doors, relying on in-house human resources. In contrast, in countries such as the US, governmental organizations will invite university researchers to their premises and openly explain to them the policy problems that they are facing, seeking insights, and encouraging the development of solutions.
Even when Gulf governments do look beyond their organizations for assistance, they often rely on consultancies who also operate outside the knowledge transfer webs that generate the best solutions. This reinforces the emergence of disconnected knowledge silos that stunt technological advancement in the Gulf region, and slow down the much-needed transition to a knowledge economy. Instead, as humans surmised during the Enlightenment era, when science acquired a unified language and system of exchange, more connectivity will lead to greater results: this is how auctions transformed from ways of selling art to important policy tools, and this is how the Gulf countries can boost the homegrown, economically significant innovations that their universities provide.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain
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