The nature of the lab

OR: Mike reads Coase

This is the 4th in a series of posts wherein I attempt to apply economics principles to neuroscience. Econoneuroscience if you will. Previous posts covered transaction costs, specialization, and currency.

Why is most research done in labs of five to fifteen people? Certainly, one can see why labs don't just consist of a solo PI: people working together get more done than one person alone. On the other side, one can see why there aren't just a few mega-labs of hundreds of people. Ignoring the issues of funding, or finding qualified people, coordinating that many people is a task in itself. But why have labs settled into this middle ground of size?

The question of why companies exist, and what factors influence their size, have been bandied about in economics for over a century. The seminal paper on this topic is probably Ronald Coase's Nature of the Firm. His basic argument is that firms (labs) exist to minimize transaction costs, and grow to the point at which marginal transaction costs equal the cost of organizing within the firm. In this post, I will first summarize Coase's paper, then consider how it can be applied to neuroscience.

Coase's Nature of the Firm

(If you prefer a more straightforward summary, wikipedia is decent.)

Coase starts by observing that in capitalist economies, prices help individuals and firms decide what to buy; in other words, resources are allocated by the price mechanism. For example, if I am a scientist, and Aperture Research will pay me more money than Black Mesa, all else being equal, I will work for Aperture Research. In contrast, firms are not capitalist societies, and do not have a price mechanism; resources are allocated by managers. That is, if my boss transfers me onto a new project, I generally say yes. Quoting DH Robertson, in the sea of market prices  these top-down managed firms are like, "lumps of butter coagulating in a pail of buttermilk."

If, in general, the price mechanism is more efficient at allocating resources than planning, why do firms exist? Coase first considers two odd ideas. First, he suggests that someone might take a pay cut in order to be managed by someone else, but rejects this idea since people like to "be their own master." (Interestingly, I think there is some validity to this idea. People often trade the inconsistent, but potentially higher, income of being a freelancer or consultant for a guaranteed salary.) He also suggests the converse, that people may take a pay cut to manage other people. Again, however, this is contrary to reality where managers get paid more than employees.

Eventually, he flat out states that firms exist in order to minimize transaction costs. For example, rather than hiring employees daily, and negotiating a contract for each day, firms employ people for months or years. And when you hire a long-term employee, you reduce the cost of ensuring the work is done right, since the employee has a history. As a modern bonus, firms are a great way to minimize taxes, since "purchases" within a firm are untaxed, while outsourced purchases are taxed.

If firms reduce transaction costs, why aren't all workers organized into gigantic firms? Coase proposes that the cost of coordination increases as the firm size increases. Without the guidance of prices, a manager makes mistakes in resource allocation, and these mistakes multiply as his or her attention is spread thinner. These coordination costs will also increase with other parameters, like the spatial size of the firm. This is why two firms that do the same thing can exist in different cities, while firms in the same city specialize in different products. Technology that reduce distances, like phones, airplanes, and the internet, would theoretically allow for the organization of larger groups of people.

So why do firms exist, and how large can they get? Firms exist because they reduce transaction costs, and they will reach a size such that marginal transaction costs are equal to the cost of coordination.

The nature of the lab

Given this framework, I would like to consider the organization of science from the perspective of labs-as-firms, and funding agencies-as-firms.

Historically, the size of labs has continually increased. Ramon y Cajal typically primarily published as sole author, there are many famous dyads from the post-war period (Fatt and Katz, Hodgkin and Huxley, Hubel and Wiesel, etc.), and even as recently as ~1990, papers were published with only a few authors. Today, many papers have at least a half-dozen authors.

So what does the typical lab do in-house, versus what does it outsource? The most obvious thing labs do themselves are experiments, as this allows them to control all the variables. If a lab wanted to outsource its experiments, each time it wanted to try something new, it would have to enumerate the parameters, and trust the outsourcing agency to follow its instructions. Similarly, data analysis and light software development also fit under this umbrella, in that they are done often, and with slightly different parameters each time. (Computational neuroscience labs are an interesting corner case, in that they often outsource data collection, and mine exist data sets for new insight. This allows them to reduce costs by not performing experiments, and forces them to specialize in analysis to generate comparative advantage.) Labs do sometimes outsource data acquisition, which we call collaboration. Collaborations are usually limited, however, to reduce transaction costs. For example, if I need another lab to do Western blots for me every 6-12 months, I would collaborate; if I need them monthly, I would do them myself.

Labs outsource many non-scientific tasks. Some tasks are capital intensive, like virus development, or the fabrication of recording amplifiers. Other labs and firms specialize in these tasks, decreasing their costs, and we purchase them so infrequently that the transaction costs here are relatively low. On the cheap side, commodities like pipette tips or wild-type mice are outsourced, too. Here again, other firms are able to specialize in production, and compete with each other to lower highly visible, known prices.

There are a small number of tasks that fall somewhere in between. The Carleton lab has developed our own olfactometer, since there are none commercially available (to my knowledge). Yet we don't do all the development ourselves, but rather work together with the department's shop, which provides expertise in electrical engineering. I have also argued in the past that we could outsource our transgenic line maintenance, but that would require a reorganization of how science is done.

In general, I would argue that given their funding constraints, labs do a good job of finding their optimal size, and outsource the correct tasks.

The nature of the funding agency

What is the next level up from the lab? Some might argue that a department is a firm, but I think departments are more like holding companies: they have lots of disparate labs that occasionally coordinate, but they're more like lumps of butter than a stick.

Instead, I think the most interesting large firm-like organizations in science are funding agencies. The NIH, for example, has the job of dispersing large amounts of money to try to improve human health. For some of this money, they disperse it in a top-down, firm like manner through their intramural funding program. As I understand it, for the internal programs, one gets a funding level for a period of ~5 years; then at the end of five years, you get reviewed, and a new funding level for the future.

For the rest of the money, the NIH funds outside labs through competitive grants. And as someone who has applied for these grants, I can tell you the transaction costs here are high. For my grad school fellowship, I probably spent a man-month (or is it person-month now?) writing it, making figures, and discussing it with my boss. I understand that full-fledged R01s can take many months of time. For all of this time spent, one has only a chance to get funded. And from the NIH's perspective, they spend a lot of time through their program officers, and review committees, trying to figure out who to give money to.

From the Coasian perspective, then, Janelia and Max Planck have the right idea of giving trusted scientists a large chunk of money under intermittent review. Rather than engaging in the high transaction cost process of reviewing applications, they simply hire people. Thinking about it from this view, I actually agree with their policy of preventing people from applying for grants. I wouldn't want scientists I'm paying to perform research to spend their time creating transaction costs applying for more money. Just perform the research, and if you do well enough, you'll get more money at the next review.