deadly, we can seize the opportunity to channel excess funds to the President's war on poverty, to expanded programs such as urban renewal, education, vocational training, and technical retraining; also to retraining the labor force that is being replaced by automation; to a public works project; to conservation and public recreation; to air and water pollution programs.

We must use this opportunity to make an orderly conversion of the waste of war into the betterment of human life for all of our people.

Therefore, I respectfully request a favorably report on Senate bill 2274. Thank you.

STATEMENT OF WERNER Z. HIRSCH, PROFESSOR OF ECONOMICS AND DIRECTOR, INSTITUTE OF GOVERNMENT AND PUBLIC AFFAIRS, UNIVERSITY OF CALIFORNIA, Los ANGELES

There is much evidence that, at least for the time being, employment related to defense and space exploration has reached a peak. For example, members of the Aerospace Industries Association reported a 3.2-percent drop in jobs during the 6 months ending March 1964. I would like to argue that an all-out effort would be made so that the billions of dollars spent by the Federal Government in R. & D. will not only promote the scientific and military health of the United States, but also facilitate economic conversion. Specifically, I suggest that for the sake of economic growth and greater employment opportunities, we actively engage in the process of knowledge transformation.

New knowledge in its various forms often can be translated into novel processes, materials, products, and procedures. Some such technological advances increase the quantity of existing goods and services which were not available before and which meet certain needs better than did previously available alternatives. In short, new knowledge that is transformed from specialized space and military uses into commercial uses contributes to economic growth in two ways: it increases the ability of the economy to produce more of the old as well as produce new goods and services. The United States today faces a wide variety of problems: many of our cities are blighted and congested; first-rate education and health care is available for far too small a proportion of those who could benefit from it; there are pockets of poverty at home and there is widespread poverty abroad. In order to make a lasting contribution to these problems, it is essential that our economic performance improve and that our economy achieve sustained and rapid growth.

There is a good chance that much new knowledge will ultimately find a variety of useful applications. However, the autonomous transfer or transformation of new knowledge often lags far behind its discovery. For example, Gilfillan estimated that for the 19 most useful inventions introduced between 1888 and 1913, between the time the invention was first conceived and the time it was first brought into important commercial use, an average of 126 years had elapsed. This is too long a period, too chancy a process, and completely inadequate to our present-day growth requirements. Transformation of new knowledge must today be managed transfer.

Knowledge can be considered a kind of capital or resource. It is akin to other economic goods in that it is subject to obsolescence; it may be marketed, processed, stored, distributed, and used in the further production of goods and services. The utilization of new knowledge can proceed along two lines—it can be channeled into uses for which the knowledge was originally intended, as for example, was the development of the transistor by Bell Laboratories; or it can be channeled into other, unexpected and, consequently, additional uses. The former we designate "application" of knowledge; the latter, "transformation" of knowledge. An example of a successful transfer is the story of an exceptionally sensitive instrument which was initially developed to measure micrometeoroid activity in outer space. This device, which is so sensitive that it can measure the heartbeats of a chick embryo through the eggshell, is now used by the Food and Drug Administration in testing the effects of new drugs. What makes the knowledge transformation process economically attractive is that it is like finding a use and market for, say, peanut shells; it is, as it were, a byproduct. While the creation of new knowledge is very costly, its transformation into new uses costs little or nothing.

The creation and transformation of new knowledge contain several contradictory elements which, if left unexplored, could serve to cancel out their potentially desirable economic effects. First, the results of research are difficult to

insulate. Knowledge has no boundaries, unless they are artificially created, and even then they are not easily maintained. New knowledge, whether in the form of new ideas, processes, materials, products, or procedures, spills over from one person to the next, and this fact is of great importance. Knowledge spillover has two negative effects which lead to great complexity and require an enlightened public policy toward the spillover process. On the one hand, the fear that new knowledge will not long remain restricted in ownership dampens the willingness of private industry to invest in it even though such investment would be profitable from a national standpoint. On the other hand, spontaneous spillover appears too limited and too slow a process to permit the Nation to benefit fully from its large investment in new knowledge. Spontaneous, laissezfaire dissemination of new knowledge therefore leads to underinvestment in private research and development and, while it produces growth, the latter is not as great and as fast as it might be.

It is because of these effects that management and organization of the spillover process become imperative for effective and speedy knowledge transformation. Here, our efforts can be concentrated at the beginning or at the end of the process; that is, we can try to improve either the spillout or the spillin of new knowledge. In the case of most inventions, the natural flow of new knowledge is from the inventor to the ultimate user. Improving the process by which the new invention is brought to the attention of potential users involves spillout management. On the other hand, the user's organized search for new knowledge potentially applicable to his business calls for spillin management. It is clear that Government, quite properly, is concerned mainly with managed spillout.

Upon careful investigation, however, we can see that expediting the transformation of new knowledge into commercial uses by managing the spillouts is much more difficult and hazardous than efforts to manage spillins. There are very large numbers of new contributions to knowledge which are being made every month, and each one may have an almost infinitely large number of potential uses and users. The problem of matching bits of new knowledge to its end uses is correspondingly large. On the other hand, the manager of a particular plant at any one time has a relatively small number of problems that can be solved with the aid of new knowledge originating in a more or less small, specified number of fields, and therefore a matching process initiated by the user involves a more manageable number of bits of new knowledge.

In addition to the advantage that the potential user has over the creator in matching bits of new knowledge to end uses, it is also easier for him to translate a potential into an effective match because he is often in a position to take definitive action. For example, if the manager of a consumers goods division of a company manufacturing electrical equipment assembles a small group of scientists and engineers and assigns them the task of searching the literature and any other sources for methods to improve a given process or to reduce its cost, the manager is in an eminently strong position to initiate action shoulld promising potential matches be put before him. On the other hand, the scientist who creates new knowledge and even identifies commercial applications can at best plead with the industrialist to try out his new method, process, or material. He also might discuss it in scholarly and popular magazines, but his chances of translating a potential into an effective match are much more slim.

Before we discuss the Government's role in the utilization of new knowledge, I would like to mention some reasons for Government involvement in this area. First, new knowledge is being created at a breathtaking rate, and the Government has a dominant role in this creation. However, there is a distinct bias in the emphasis and direction of new knowledge toward military and defense uses, with a resultant neglect of commercial uses. The Government has the responsibility of correcting some of this distortion.

Another consideration is that Congress appears to be reluctant to continually allocate huge amounts of money for relatively weakly defined objectives of national defense and space exploration. The Department of Defense is using cost effectiveness analysis and program budgeting to evaluate some of the defense implications of its budgetary requests. Still, the Defense Department and NASA encounter major difficulties in rigorously defining the implications of their budgets to justify their magnitude. If it can be demonstrated that effective transformation and use of new knowledge will be byproduct of defense and space expenditures and will lead to augmented economic growth, both Government and Congress may find their respective tasks eased.

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What is the Federal Government doing now to aid the process of knowledge transformation? What should the Government's emphasis be in the future, and what techniques can be used to further its aims?

There are three major Federal departments that are making large-scale substantive contributions to new knowledge the Atomic Energy Commission, the Department of Defense and the National Aeronautics and Space Administration. The Atomic Energy Commission is engaged in two programs-the industrial participation program and the technical information program. The latter not only concerns itself with the reporting and disseminating of technical information developed through AEC but also operates a comprehensive nuclear technology information program. The Department of Defense, not required by statute to make its research and development findings available to the commercial economy, has done very little in this area so far. Its Armed Service Technical Information Agency, however, provides a central service for the interchange of scientific and technical information of value to the defense research and development community. Of the three agencies, NASA has developed the most sophisticated program. It consists of two related efforts. First, NASAfinanced programs in research institutes and universities have attempted to provide potential users with information on the new knowledge created by the space effort. Examples here are the ASTRA program of the Midwest Research Institute, the Technology Information Center at the University of Indiana, the Wayne State University effort designed to accelerate the industrial applications of aerospace related technology, and the technology utilization workshop subjects study of the Northrop Space Laboratories. Second, the NASA in-house program, which is organized around the Office of Technology Utilization, has attempted to expedite the knowledge transformation process through technology utilization officers in NASA centers, and engineers and scientists at headquarters.

In addition to the work of these three Federal agencies, the U.S. Department of Commerce has just initiated a civilian industrial technological program to supplement and extend the efforts of its Office of Technical Services, which operates as a clearinghouse for technological, scientific, and engineering information resulting from Government-sponsored research.

What are the separate yet interrelated roles of Government and the industrial community in reaping fuller economic benefits from knowledge transformation? My conclusions are heavily influenced by our new understanding that managing spill-in of new knowledge is much more feasible, potent, and effective than spillout management. Therefore, spill-in management should predominate and spillout management should be coordinated with the dominant spill-in approach. It follows that Government emphasis should be on research designed to improve methods and administrative procedures for the identification and description of new knowledge as well as user-oriented codification. Hand in hand with such research a number of small pilot projects could be initiated through the establishment of joint Government-industry-university codification committees and through financial support to research institutes specializing in the transformation of knowledge to small- and medium-size companies and local government. In addition, about a dozen companies which produce both space products and consumer goods, have dynamic management, and are in an industry likely to benefit from new knowledge might be selected to demonstrate, with the aid of some Federal assistance, the feasibility and probability of adapting new methods, materials, processing and products to commercial uses. This "lighthouse" approach can produce early and rapidly spreading results. Such a step is fully consistent with the profit motive of private industry. The selection of a small number of key companies to serve as experiment and example does have precedent in our economic life. For example, the U.S. Justice Department has for decades used the method of selecting one key company as a target for antitrust suits in the hope of affecting an entire industry.

However, it is obvious that, in addition to improving its own techniques of information identification and codification, the Federal Government will have to take a more active role in encouraging business and industry to invest in the knowledge transformation process. There are a number of institutional impediments that will have to be removed.

The fact that spillover is a characteristic of newly created knowledge, that, basically, knowledge recognizes no boundaries, works to make participation in the transformation process unattractive to private investors. As a countermeasure we must evolve a more appropriate patent policy and at the same time provide new, incentive-creating Federal tax provisions.

Experience so far has shown that the objective of those companies who do utilize knowledge transformation is limited to the reduction of costs rather than the creation of new products, which involves risk. There is risk in the creation of new products; yet new products are main contributors to economic growth. How can we encourage risk taking? We can provide more readily available risk capital at attractive interest rates for those who are willing to apply new knowledge to the development of new products, and, again, we can consider the use of special tax provisions for these special situations.

Those companies who in a major way participate in the creation of new knowledge, for example, the aerospace companies, are gravely handicapped in diversifying their activities to benefit from knowledge transformation. First, there is some evidence that, rightly or wrongly, many aerospace companies feel that contract officers of the Department of Defense look with disfavor at companies who do not devote all of their energies and loyalty to the manufacture of mili tary hardware. In addition, most aerospace companies are geared to manufacturing products to very fine specifications and high levels of reliability. They are high-cost companies who have little tradition in the manufacture of inexpensive items for the commercial market. Also, they have little marketing capability and lack commercial market orientation. One result of the lack of market orientation is the evidence that engineers in the aerospace industry, although producing many products for potential patents, generate relatively few patent applications. Some of the unique problems of aerospace companies could be mitigated if defense and space contracts would make provision for some costs for research and development and engineering designed to lead to new commercial uses.

It is obvious that knowledge transformation which is profitable to industry and contributes to the Nation's economic growth is a much more demanding and costly undertaking than has been recognized so far inside and outside of Government. A period of excessive optimism about the use of knowledge transformation by industry, lasting through early 1963 and now thoroughly dissipated, appears to have been based on three unwarranted assumptions bordering on wishful thinking: the first was that NASA and the Department of Defense were providing industry with a great many transferable ideas, processes, materials, and procedures which could be adapted by many firms with little effort. Then, too, it was thought that the industrial community was anxiously waiting for these possible transfers and would avail itself of them once firms became aware of the resources that could be had for the asking. Finally, there had been a naive notion that the transfer process was simple, natural, and automatic. of more realistic thinking is being ushered in.

A period

The Government must decide whether the financing and administration of knowledge transformation activities should be carried out by one or several Government agencies. The next step that should be taken is Government sponsorship of a large-scale effort designed to identify and store new knowledge. It is essential that private industry, universities, and research institutes be able to retrieve such information easily and apply it effectively on short notice. Such a step will lead to the founding of a great new industry in America, the knowledge transformation industry. Within a few years it is likely to take its place next to research and development, and education in the family of knowledge industries. The day may not be far off when private companies will give careful consideration to the question of whether to invest more in research or in building up their knowledge transformation capability.

Private industry, too, faces a major challenge. It will have to learn how to effectively retrieve stored new knowledge and apply it. There is much evidence that those companies who have a sophisticated R. & D. capability have automatically created the skills which will make for effective management knowledge spillin. In part this is recognized by business executives. For example, Roy L. Ash, president of Litton Industries, remarked recently: "Companies that are aggressively contributing to new knowledge and staying up to date are freed from 'profit squeezitis.'" Those companies who intend to use new knowledge for the production of commercial products that require high reliability and precision, as for example, medical instrumentation, are likely to benefit more readily from knowledge transformation than others. Also, State and local governments, which in the past have been very slow in adopting improved techniques, are especially good candidates for managed spillins of new knowledge.

As always, the question remains whether the payoff from knowledge transformation will be great enough to justify the necessary costs. Actually, we cannot be sure. But the prospects are good, and the goal of economic growth

is so important that we must assume the risk. If we are enterprising, we can visualize the emerging of a new major branch of our exciting knowledge industry. Organized knowledge transformation in years to come is likely to become a joint Government-university-private industry effort of major proportions, hopefully attracting men of the highest caliber who will develop a common language between originators and users of new knowledge. The rewards to companies in terms of enhanced profits and to the entire Nation in terms of new products for better living, accelerated economic growth and fuller employment can be large. In short, these steps could facilitate the reconversion process.

TESTIMONY ON S. 2274 BY SENATOR HUBERT H. HUMPHREY, OF MINNESOTA

S. 2274 seeks to bring responsible study and planning to a situation which is becoming increasingly important in our national life. I wish to encourage the concern this proposed legislation presents.

The Department of Defense makes, from time to time, substantial changes in procurement of weapons and material it needs for the military security of the United States. In addition the Department of Defense has found it possible to reduce the overall defense budget of the Nation. Two and one-half billion dollars has been saved in the current budget. The Department of Defense looks forward to even greater reductions in the next several years. That this can be done at the same time that we are provided with the strongest military forces of any nation, either now or ever in the history of the world, is encouraging to all of us. Nevertheless, the situation presents us with both problems and opportunities which require our attention. I will summarize the outstanding facts as I judge them, and amplify briefly on each in turn.

1. Both shifts in DOD procurement, and cutbacks in total procurement do create economic and social dislocation-in some cases severe hardship-for both individuals and communities.

2. We do not have a "war economy" in the United States. We could absorb both the resources and the personnel released from defense activity, if we planned to do so.

3. The private, civilian economy needs some of the resources and high-level technical skills which may be released from the defense industry, in order to obtain the growth and development the private economy must have for full employment. In addition, there are many unmet needs in America whose achievement is also a part of American security. These too can absorb resources in men and money.

4. The defense industry is a special industry with special problems. It needs the help of various levels of government, State, local, and Federal, and the cooperation of different groups in order to solve the problems of its absorption.

5. While we understand the gross dimensions of the problem, sufficient detailed study has not been made to get all of the facts necessary for sound policy and legislative guidance.

6. The problem is getting urgent and the leadtime for study is dwindling. It is necessary that we make the studies that will permit wise and humane decisions.

When an aircraft plant is shut down because the plane it makes is no longer required, thousands of men may simply be out of work. That is the projected cutback of 3 of the 9 plutonium-producing reactors at Hanford is due to eliminate 2,000 jobs. Commissioner James T. Ramey of the AEC in testimony before the Joint Atomic Energy Subcommittee of Congress stated that this will have a large effect on the community economy at Hanford.

We have had periodic instances of this just from shifts in procurement. In a period of rising overall defense budgets, the situation was obscured and many people did have the mobility to transfer themselves to other segments of a defense industry. In a situation however of cutback on the magnitude of billions we may expect to have many situations such as an NBC documentary illuminated several years ago. The camera then took us into several communities where a defense industry had suffered loss of contracts. There were interviews with workmen, tradesmen, mayors, chambers of commerce, and other people. The universal lament was, "We want jobs back." The lament was justifiable. These people had no stake in "war." They were