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The Island Nation of R&D Inc.

Summary: 

A fanciful narrative on how an island nation funds R&D

Innovation must be financed by turning to a source of credit above and beyond the circular flow (i.e., today’s money tied up in today’s economic equilibrium) namely, to the banks, the only institutions with the unique ability to create new money [and] new purchasing power above current savings out of current income. paraphrased from the introduction to Schumpeter, J. A., & Opie, R. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle

We set up a new nation, R&D Inc., an island nation with its own currency (RD$) and its own Central Bank.

In signing a research funding agreement with our nation you agree to move to our island to do your research and to abide by the rules of our government. In exchange you gain access to essentially unlimited funding from our Central Bank to execute your research (assuming you show steady progress).

You will get paid and be rewarded in our national currency, the RD$. RD$ are used to purchase necessities of life and anything else needed to perform research.1

Economic Policy

Ours is an R&D-based economy. Our national productivity comes from taking raw intellectual property (IP) and turning it into designs for finished products to be exported to other nations for manufacture (or use in manufacture) of consumer goods and services.

Our economy is founded upon the following structural elements:

  • new entrants bring fresh ideas and their participation in our economy is per se deemed to increase capital flow
  • citizens “save and invest” significant portions of their earnings back into our economy (e.g., into even greater R&D productivity)
  • citizens are significantly more effective than their counterparts in other nations (e.g., we practice mandatory certification in the nature of effectiveness)

You come to our nation and we hand you a stack of RD$. We do this by running the printing press at the Central Bank. The existing citizenry is not alarmed because we’ve already shown we’re good at recruiting new citizens who take the initial stack of RD$ and turn them into even more RD$. Citizens are conditioned to ignore the slight dilution in the value of their RD$ during Open Season+, when we admit new citizens. New citizens need funds for personal maintenance and to exploit their intellectual property. Citizens know these stacks of RD$ are given in exchange for the promise of even greater stacks over the long term.

Current citizens understand the economic rationale for growing the citizenry, especially a hand-picked, talented citizenry (i.e., fresh blood and new ideas). The strength of our economy comes not from growing natural resources, of which we have few beyond our gorgeous beaches, rather from the ability of our citizenry to rearrange current resources into new forms proven to improve human well-being. Our economy grows in step with the growth in the productivity of its citizenry.

As a community we jointly agree on a measure for productivity for intermediate research, that is, for research not yet contributing to human well-being. Our interim measure looks at the social maturity of the research team, as evidenced by their understanding and commitment to the nature of effectiveness in R&D. We invite new citizens based on expectations they will contribute significantly to economic growth. Are they living up to this expectation? We don’t measure maturity by looking at tangible research results, because we know research is worthless until developed into commercial products and services. Instead we ensure the team still has the mettle it takes to stay the course; to transform intermediate research into valuable commercial products or services.2

It takes a special kind of person to overcome these difficulties. In contrast to the "economic man," who carefully calculates marginal costs and revenues of alternative courses of action on the basis of known data, the entrepreneur must be a man of "vision," of daring, willing to take chances, to strike out, largely on the basis of intuition, on courses of action in direct opposition to the established, settled patterns of the circular flow. The entrepreneur is more of a "heroic" than an "economic" figure: he must have "the drive and the will to found a private kingdom" as a "captain of industry"; the "will to conquer", to fight for the sake of the fight rather than simply the financial gains of the combat: the desire to create new things — even at the expense of destroying old patterns of thought and action. Schumpeter, J. A. (1951). Ten Great Economists

Have you advanced in your maturity? Then we formally reward your advancement+, handsomely. You are now handed an order of magnitude larger stack of RD$ with which you can ramp up your research efforts.

When we print and hand you RD$1,000 the economy has just grown by RD$1,000. The economy can now support RD$1,000 more in economic activity. We achieved this based on a government-sanctioned price adjustment to the value of your research. The citizenry agrees, because they too have been there and know the controls we place on measuring advancement really do mean you have the promise to add that much more back into the economy. We would have paid that much had you first shown up at the border showing your advanced level of maturity.

Foreign Investors

As an investor visiting from another country I see I’m eventually going to buy commercial products and services from entities in your nation. First I must purchase RD$. All the government analyses published by R&D Inc. show a robust, growing economy, much more so than in my home country. This means the price of RD$ rises with respect to my home currency. Indeed, R&D Inc. makes sure of this through deliberate intervention into its balance of payments.3 As a foreign  investor perhaps I should invest into these research pursuits sooner rather than later – if for no other reason than to enjoy price increases from the appreciation of RD$.

As a foreign investor I notice the R&D Inc. government is infatuated with ensuring steady growth in the economy, a growth extending far beyond anything I can find elsewhere. No egalitarianism, homage to Gaia-centric theologies, universal health-care or many other ills seen in my home government (see Schumpeter’s Blog). R&D Inc. is singularly focused on top-line economic growth and protection of the value of its RD$ currency.

I can’t move my money fast enough to invest in this country. I’ll be the first to jump on the next IPO+ offered by one of its research units, even though it’s denominated in RD$.

Windfall+

One of the research teams develops a product or service with unequivocal blockbuster+ potential. Foreign purchasers line up to bid on the item, offering premium prices based on our national reputation for quality and openness. Citizen-researchers sell products and services under contractual agreements where they participate in the commercial success of these products or services (e.g., ratcheting royalties+), and as such citizens are seen to take much more care in ensuring their products and services can achieve success in foreign hands.

You, as a foreign manufacturer, need RD$ to purchase R&D products and services. These RD$ are not extracted from the current money supply. There’s not enough for both your purchase and the needs of our island’s ongoing research. The Central Bank prints more RD$, you purchase these RD$ and use them to purchase the product from the researcher. The economy has just grown by the amount of your purchase, and our Central Bank now has a store of foreign currency to use in maintenance of the purchasing power of RD$ vis–à–vis foreign currencies. The researcher uses the RD$ received from the purchase to fund future operating expenses and to invest back into the economy (i.e., their own and other research pursuits). The researcher, of course, could not find a better place to invest excess RD$ than into R&D Inc., but in any event this reinvestment is mandatory.

Citizenship

Citizenship is in high demand. We are recognized for tough, effective and uniformly applied rules of law, administered by a government with a reputation for honesty, humility, continuity of rule, and competence. Our humility is reflected in our openness to new ideas and new forms of governance, as proffered by our citizenry (and as seen to be effective in copy-cat island nations). Our honesty comes from the way we structure our decisions, reward our officials, and open our books to public scrutiny. Honesty and openness is reinforced by an independent watchdog+ agency, funded and staffed by individuals independent of the administration.

What about researchers who want to retire back to the old country (because of relatives or sentimental attachments)? R&D Inc. originally invested into their research by running the printing presses at the Central Bank and expects payback for this investment before researchers will be allowed to exit. The original contract stipulated repeated commercial success as the terms of exit. Once achieved researchers are invited to convert their RD$ investments to the currency of their choice and take the next flight home. During the interim, researchers enjoyed a safe and lucrative home for their investments in R&D Inc., and it’s not surprising many expats decide they do not need to convert all their investments.

Conclusion

The following are the salient features of our island nation:

  • Our economy grows when we add new citizens
  • Our economy grows the moment we formally recognize advancement in our citizens
  • The total productivity of our citizenry increases over time (we’re fast to deport under-performers, and the growth of productivity more than outpaces the growth of new citizens)
  • Currency in circulation tracks closely to the economic activity of the nation, as tightly managed by the nation’s Central Bank
  • Our economy grows at a rate outpacing most industrialized nations, and as such our RD$ currency fetches increasingly higher prices vis–à–vis foreign currencies
  • The quality of our products puts them in high demand by foreign purchasers, who purchase RD$ in advance in anticipation of sales of these products

We do not advocate setting up a new island nation (although it’s hard to see why this isn't a viable option for the super-wealthy). Instead the above island nation narrative illustrates what can be achieved in how we finance R&D via more conventional methods. Concepts like Internal Rate of Return (IRR) or Net Present Value (NPV+) are emptied of meaning on our island nation. Unpredictable R&D+ means we no longer have (or allow) the variable t=time for those equations.4 Much of what has been achieved on our island nation can be achieved through creativity in the design of funding mechanisms for unpredictable R&D, which you can now appreciate by reading Franchise Capital Management+.5


Home Page April 2011

  • 1. At first folks will fire up the conversion app on their iPad to see how many RD$ convert into their home currency. But R&D Inc. greatly influences data feeds into the iPad app and soon folks are behaviorally conditioned to only think in terms of RD$.
  • 2. How well are you progressing toward becoming an even greater social misfit? We are a nation of entrepreneurs and don’t much care for status quo thinking. Instead we look for those who revel in doing things differently just because of the difference.
  • 3. They do this by throttling the sale and purchase of RD$. Only the government can engage in this activity and it ensures foreign balances track with economic growth.
  • 4. We abandon these measures because we only seek major commercial products and services. Outrageous (interocular+) financial returns from these investments swamp the nit picky 1 - 2 percent differences that are the realm of IRR and NPV. We also religiously ignore sunk cost+. The future is all that matters.
  • 5. Hint. The role of RD$ is taken up by i-shares+.
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