(FORTUNE Magazine) – SCIENCE BESPEAKS power, both military and economic. The U.S. has long had the most productive scientific establishment in the world: Since the explosion of the first atomic bomb in the New Mexico desert proclaimed American dominance for good or ill, the work of U.S. researchers has transformed the lives of millions with a cornucopia of breakthroughs from wonder drugs to computers to video recorders. Now global commercial competition and the trade deficit have produced greater alarm about U.S. primacy in science and technology than at any time since the Soviets launched the Sputnik satellite in 1957. Americans are better off than they may think -- at least so far. It is not chauvinistic but simply realistic to note that the U.S. remains the world's leading producer of basic research: -- Americans write 35% of all scientific and technical articles published. -- U.S. researchers get more patents than the rest of the world combined. -- Since World War II, 127 American scientists have won the Nobel Prize, compared with 98 Europeans and five Japanese. -- Federal research facilities such as the National Institutes of Health and the Department of Energy labs at Los Alamos, New Mexico, and Livermore, California, are doing pioneering research in theoretical physics, molecular biology, and computer science. -- Independent research institutes like Rockefeller University in New York and Massachusetts's Woods Hole Oceanographic Institution are leaders in their specialties. -- The 100 or so U.S. research universities, which perform more than 60% of the nation's basic research, are unequaled. Says Erich Bloch, director of the National Science Foundation: ''It's no surprise that our universities draw students from all over the world and attract investment from foreign companies. In the competitive educational market, they deliver the best product.'' Even so, the U.S. no longer enjoys the commanding position it had in the decade after Sputnik. Led by Japan and to a lesser extent West Germany, the rest of the world is catching up. In a few areas -- robotics, for example -- the competition has surpassed the U.S. in discovering and exploiting new knowledge. Every industrial nation recognizes that success in fiercely competitive global markets depends on building an edge in science and technology. As precision robots and digital control systems take over the factory floor, most manufacturing is becoming more science-based. In high- growth sectors, such as semiconductors, synthetic materials, and biotechnology, access to inexpensive labor and raw materials like coal and iron ore no longer matters as much as access to knowledge. Twenty years ago the U.S. would almost certainly have been the first to take advantage of a development like the discovery of new superconducting ceramics. Today Japanese researchers are determined to grab that honor. Says Daniel S. Greenberg, editor of the Washington newsletter Science & Government Report: ''What's rocking our country is an attack -- and it's not coming from the Soviet Union. It's coming from the Japanese, who are turning their good minds and ample resources to basic research. They openly acknowledge that they're plunging into basic science because they've pretty well exploited the Western pool of knowledge on which they've long depended.'' Amid growing demands that science be harnessed to strengthen the economy, Americans are wrestling with some tough questions about U.S. basic research priorities: Should the government push ahead with megaprojects like building the superconducting supercollider, the world's largest atom smasher (latest price tag: $5.3 billion), and deciphering the entire human genetic code (another $3 billion)? How can the U.S. ensure that a steady flow of talented youngsters -- from high school to the graduate level -- fills the research training pipeline and meets the work force needs of an increasingly technological economy? What roles should universities, government laboratories, and companies play in basic research? LAST YEAR the U.S. spent some $123 billion on research and development, with government and industry contributing nearly equal amounts. In basic research -- the pursuit of new knowledge, as opposed to the development of actual products -- spending amounted to about $15 billion. The federal government anted up nearly two-thirds of that; corporations contributed another $3 billion, and the rest came from individual states and from such nonprofit institutions as the Guggenheim Foundation and the Howard Hughes Medical Institute. Despite constraints on federal spending, support for basic research in the U.S. is on the upswing. Over the past decade, government appropriations rose 60% in constant dollars. Contributions from industry for the same period grew % even faster, by nearly 70%, following nine years in which industrial spending for basic research fell at an average annual rate of 2.3%. But in the same period, total German spending doubled and Japanese outlays tripled. Japan, not previously renowned for basic research, now devotes to it 13% of total R&D spending, a slightly greater proportion than the U.S., where 12.2% goes for that purpose. The number of citations of Japanese research in the world's scientific journals has risen 25% in the past decade. The U.S. still ranks first by a wide margin, but its lead over the Japanese is diminishing. West Germany epitomizes the new European commitment to basic science. As a percentage of GNP, the West Germans spend as much on total R&D as the U.S. But an impressive 22% of their R&D budget goes to basic research, and they publish twice as many articles in scientific journals per researcher as the rest of the world. COMPETITION IN basic research benefits all humankind in many ways. The rapid spread of information throughout the internationally minded academic community virtually guarantees that. Reports of the new superconducting materials, for example, circled the globe in a matter of days. Moreover, in many areas of pure science such as astronomy and particle physics, investigators often speak of satisfying their own curiosity, or seeking to find the beauty in the natural order. Prosperous countries subsidize such research out of a desire to add to the sum total of knowledge -- and perhaps pick up a Nobel Prize or two in the process. Giant corporations like IBM and AT&T often support pure science for the same reason -- although AT&T's celebrated Bell Labs, where vice president Arno Penzias directs a vast research staff that includes 3,430 Ph.D.s, has become more result-oriented since the breakup of Ma Bell (see following story). Like AT&T's present managers, most Congressmen support basic research because they consider it a good investment. They appropriate money in the hope that scientists will discover something economically beneficial. Lyndon Johnson was fond of asking his science advisers, ''Tell me what science can do for grandma.'' Massive research undertakings often do unforeseen things for grandma -- or at least for companies she may own stock in: U.S. military research on high strength materials in the 1960s provided a major boost to the aerospace industry, and a decade later President Nixon's war on cancer led to breakthroughs that spurred the growth of biotech companies. $ Despite intense pressure to cut the deficit, the 1988 U.S. budget includes increases for most of the basic research arms of the government -- the National Science Foundation and the National Institutes of Health as well as the Pentagon. Says William D. Carey, former chief of the American Association for the Advancement of Science: ''There isn't a better climate than economic competition to bring about a national policy commitment to widely based research and development.'' Developing innovative research programs is a specialty of the NSF's Bloch, who was a vice president at IBM before he joined the government. An early initiative: creating five national supercomputing centers, now up and running. Already some 6,000 researchers are using the powerful machines on 2,000 separate projects ranging from molecular biology simulations to astrophysics.

OVER THE PAST three years Bloch has also opened 14 engineering research centers devoted to basic research on emerging technologies. The center at the University of California at Santa Barbara, for example, is devoted to robotics and precision manufacturing systems. A second NSF-sponsored group at Carnegie Mellon University in Pittsburgh is developing computer software to help solve manufacturing design problems. Says Bloch: ''These areas require just as much basic research as certain areas of physics. There is no book on robotics or manufacturing design that you can look up your answers in.'' Since Bloch suggested last year that the research center concept be extended to pure science, the NSF has been flooded with more than 700 Science and Technology Center proposals from universities across the country. More and more, American corporations are picking up the scent. Though industry contributions for basic research at universities waned in the 1970s, the connections between science and industrial innovation are becoming so inescapable that hundreds of companies are reaching out to universities again. Corporations spent $670 million on university research last year, up from $235 million in 1980. They now pay for 8% of all university research in science and technology -- about the same as in the 1960s. Equipment donations are up too: In 1985 computer manufacturers contributed $74 million worth of products. Many U.S. companies still appear ill at ease on campus. At MIT, for example, where corporate-sponsored research totaled $38 million last year, professors complain that Japanese companies often are better at developing relationships with researchers than American companies are. Says associate provost Kenneth Smith: ''The Japanese company usually sends one of its staff members here as a visiting scientist. The person will be absolutely first rate and makes a real contribution to the project. Normally the U.S. company doesn't send anyone. It just waits for the report.'' Although President Reagan and Congress are both committed to increased support for basic research, nobody in Washington can agree on what the priorities should be. This year Congress will be looking at a full plate of multibillion-dollar megaprojects; in addition to the superconducting supercollider and the proposal for deciphering the human genetic code, they include a $2 billion plan to study changes in the global environment. Moreover, the President favors a number of other big-ticket proposals -- among them a $13 billion manned space station, a $3 billion-plus hypersonic Orient Express space plane -- and, of course, the Strategic Defense Initiative. Reagan ''has never met a big high-tech project he didn't like,'' says Greenberg of Science & Government Report. UNFORTUNATELY, the flood of new proposals comes at a time when America's scientific work force faces serious shortages. The number of U.S. undergraduates taking degrees in the so-called hard sciences -- mainly physics, chemistry, and mathematics -- is steadily dropping. Equally distressing: Fewer straight-A high school students are opting for science and engineering. Says David Packard, co-founder of Hewlett-Packard and a former deputy secretary of defense: ''This is the most serious problem facing basic research. If we are going to be competitive, both commercially and militarily, we have to educate enough scientists and engineers to meet future needs of the country.'' The disappearance of American graduate students from advanced technical fields shocks university administrators. About 55% of the Ph.D.s in engineering granted in the U.S. go to foreigners, as do close to 40% in physics. In 1970, U.S. universities awarded 1,200 doctorates in mathematics; last year the total was 730, and barely half went to Americans. Says the NSF's Bloch: ''While Americans take degrees in law and business, foreigners are taking their place at the Ph.D. level in science. We're lucky to have them. A significant number remain in the U.S., or go to work for American companies abroad. But as opportunities overseas increase, we may find that the number of foreign students coming to our universities declines.'' At the NIH's world-famous Bethesda, Maryland, campus, about a third of the postdoctoral researchers come from foreign countries; about one-third of those are Japanese. Says Joram Piatigorsky, who heads a lab at the National Eye Institute: ''They're very good, hard-working scientists. They come over here and work 60 hours a week and think they are on vacation. I've heard it said that if you really want to get something done, hire a Japanese researcher. They just sit there and work and work and work.'' Many educators find it incredible that so few American students are attracted to science, especially with employment beckoning everywhere. Jobs in U.S. science and technology are increasing three times faster than the GNP and twice as fast as total professional employment. The demand for people with scientific skills can only rise further as the modern, knowledge-based economy continues to develop. For one small example, listen to Charles Hollister, dean at the Woods Hole Oceanographic Institution: ''There is just an enormous number of good jobs available. We go to major meetings with a butterfly net. Last year ten American oceanographic institutes were competing for a dozen qualified applicants. Each of us could have easily hired five of them.'' FASCINATING new areas of research at the fringes of existing disciplines are creating additional job opportunities. Computer scientists are working in physics, chemists are helping resolve problems in molecular biology, materials experts are revolutionizing semiconductor design. Says Joseph E. Rall, a deputy director of the NIH: ''Don't kids realize that doing science is fun? I can't imagine a bright kid not wanting to get into it.'' Adds Woods Hole's Hollister: ''Even if you don't make a lot of money in basic research, you have a lot of fun following your curiosity. What do really rich people do? They go out and buy a yacht and stick gadgets onto it. But you would have to be a billionaire to afford the gadgets we have at our disposal. When Bob Ballard found the Titanic, he was using more than $500 million worth of toys.'' Some scientific fields are hampered by prosaic problems. In biology, low pay is a major issue. At the NIH, for example, Ph.D.s start at only $18,000 a year. Inadequate university research facilities are common. Academics who abandon basic research for applied jobs in industry often cite substandard / equipment as a major reason for leaving. Says Roland Schmitt, for years chief scientist at General Electric: ''While great discoveries may still result from using simple paper and pencil, we cannot do microelectronics research without clean rooms with air 100,000 times as pure as a normal room, and with floors virtually free from vibration. We cannot do chemistry and biology without special ventilation and waste disposal facilities. We cannot do large-scale computation without computer rooms that have carefully controlled environments.'' The situation in high schools is even worse. Many school districts lack not only adequate facilities but adequate -- much less capable -- science teachers. Says David Goodstein, vice provost of Caltech: ''The training of high school physics teachers is abysmal. Out of about 25,000 high schools in the country, only about 2,000 have qualified teachers.'' (For a view of how U.S. education can be improved, see Special Report.) Remedying these problems will require big money. One logical source, says Packard, is the Pentagon, which he believes should devote more of its huge R&D budget to universities, where basic research and training new scientists come together. Says Packard: ''This Administration pushed for a big buildup in defense expenditures, and today the Pentagon is utilizing a large proportion of the scientific and engineering talent in this country. But it is not paying its fair share of the cost of those scientists. This is not only shortsighted, it is very stupid.'' Although defense allocations account for more than 70% of the federal research budget, only 2.5% of that money goes to basic research. Twenty years ago twice that proportion did. Packard thinks that another $2 billion to $3 billion a year from the Pentagon for basic research at universities would restore the right balance. For decades, defense research won civilian support in part because of the fallout it produced for the rest of the economy. Now, says the NSF's Bloch, ''we should be asking ourselves how much fallout there is from civilian basic research to the defense sector. There's a hell of a lot more in that direction. That wasn't true 20 to 30 years ago, but it is today.'' The government is beginning to devote more funds to science education. When Congress finally passed this year's budget in December, it included $139.2 million for science and engineering education -- an increase of 40.6%, and $24.2 million more than the NSF requested. Another $85 million was appropriated for the Pentagon's University Research Initiative, a new program designed to foster basic interdisciplinary research. BUT AT A TIME when cutting the budget is a top priority in Washington, Congress should take a harder look at big science proposals such as building the superconducting supercollider and deciphering the human genetic code. Says Bloch: ''It's all right to have big goals. I'm for the supercollider, but the question today is one of priorities. Can we afford everything we want to do? We need to internationalize some of these projects because other countries can't afford them either. Providing funds for education may be a less visible goal than building an atom smasher or a space plane, but it is just as real.'' Can basic research be planned to fit national economic priorities? More than 30 years ago, the launch of a 184-pound satellite touched off an explosion of government support for science education in America. Today worldwide competition in science and high technology is forcing the U.S. to face the same issues again. This time the race will not end with a triumphant walk on the moon, as it did in 1969. But it could lead to something less glamorous and more enduring: a strong and sustained improvement in U.S. industrial competitiveness.

BOX: WORKING ON, IN, AND UNDER THE SEAS

This box and those on the following pages describe leading examples of the three main types of nonprofit U.S. research institutions -- independent, university, and government-owned.

In the 19th century, the seafaring town of Falmouth, Massachusetts, was home port for dozens of Yankee whaling ships. Today the research vessels of the Woods Hole Oceanographic Institution tie up in the same snug harbor when they are not roaming the world's oceans. Instead of whale oil, they return loaded with core samples of the sea floor and reams of computer data on phenomena like the seismic characteristics of the earth's crust and the movement of deep ocean currents. With a budget of some $50 million, world-renowned Woods Hole is one of the largest independent nonprofit institutions in the U.S. devoted to basic research. Some 80% of its operating funds come from government agencies, including the National Science Foundation, the Office of Naval Research, and the National Oceanic and Atmospheric Administration. Woods Hole's 450 scientists study everything from photochemistry to geophysics. Oceanography thrives on the collection of data, and Woods Hole is a world leader in developing sophisticated new equipment to explore the mysteries of the marine environment. The institution's most famous creations are deep- diving submarines, which Charles Hollister, dean of graduate studies, calls ''spacecraft for inner space.'' Using these vessels, scientists have made some of the most unexpected discoveries in modern science. In 1977, for example, the tiny sub Alvin was exploring hydrothermal vents 8,000 feet deep off the coast of Ecuador when it chanced upon huge beds of giant red-tipped worms -- a previously unknown life form that thrives on sulfurous jets that spurt up through cracks in the sea floor. Some researchers believe that bacteria found in these creatures could digest many industrial pollutants. Woods Hole scientists became media stars in 1985, when Argo, an experimental underwater surveying robot built by marine geologist Robert D. Ballard, came across the wreck of the Titanic lying 12,500 feet under the Atlantic. A year later, Ballard returned to the site with Jason Jr., a remote- controlled robot that roamed the liner's decks, snapping pictures like a tourist at the Parthenon. Along with remote-controlled devices, Woods Hole has developed a fantastic array of other electronic equipment, including automatic sensor buoys that can dive to any depth, collect data, and transmit the information hundreds of miles by acoustic signals to undersea listening stations. They will be deployed on the latest research initiative: a multimillion-dollar proposal to develop a model of ocean currents so changes that affect climate can be recognized and monitored. Says Hollister: ''We're getting away from the Cousteau syndrome, which gives the impression that oceanography means sitting on the deck of Calypso drinking Beaujolais. We want to encourage the Ballard syndrome, which says that oceanography means high-tech research, using the latest in robotics and remote-sensing equipment. It is the risk takers in science who achieve the greatest breakthroughs.''

BOX: THE BIG LITTLE HIGH-TECH IDEA FACTORY

With low-rise stucco buildings and lushly landscaped lawns, the Pasadena grounds of the California Institute of Technology hark back to an earlier era, before glass and concrete architecture changed the look of American universities. But this old-fashioned jewel of a campus is a hotbed of high tech. Although Caltech has only 265 professors and fewer than 2,000 students, as a center for leading-edge research -- in molecular biology, geology, astronomy, and space exploration, among other fields -- it plays a giant role in American science. Last year Caltech's research budget topped $61 million. Some 85% came from federal agencies such as the National Science Foundation and the National Institutes of Health; corporations, private foundations, individual donors, and endowment income contributed the rest. The university also runs NASA's $850-million-a-year Jet Propulsion Lab, which leads the world in scouting the solar system with unmanned spacecraft. By staying small and selective, Caltech encourages a healthy intimacy among its faculty and students. Professors lecture in jeans and sneakers, and the cultivated informality breeds the profusion of high-tech student pranks that the school is famous for. Outstanding example: the rigging of the 1984 Rose Bowl scoreboard to show a victory by Caltech's ineffectual football team over rival MIT. More important, the easy give-and-take helps induce both students and faculty to study problems that cross the traditional boundaries of scientific disciplines. A notable case is Caltech's effort to build a totally new type of computer with circuits that are patterned after the neural networks of animals. Under the direction of biophysicist John Hopfield, the project draws on neurobiologists, computer scientists, engineers, integrated circuit specialists, physicists, and mathematicians. Says Hopfield: ''Modern digital computers are latecomers to the world of computation. Biological computers -- the brain and nervous system of animals and human beings -- have existed for millions of years, and they are marvelously effective in processing sensory information. This suggests that it may be possible to attain similar capabilities in artificial devices.'' Caltech chemists, engineers, and computer programmers have also teamed with biologist Leroy Hood to design and build a machine that decodes the structure of DNA molecules -- a crucial step in analyzing the function of genes. With a $50 million gift from the Arnold and Mabel Beckman Foundation, Caltech is building an institute devoted to multidisciplinary research in biology and chemistry. Says director Harry Gray: ''It will allow us to undertake important projects that don't fit neatly in traditional academic research groups.'' Both aspiring and established scientists find it hard to resist the combination of a palm-bordered campus and a certain bratty precociousness, so Caltech usually gets its pick of professors and students. Faculty and alumni have bagged 21 Nobel Prizes. An astounding two-thirds of the undergraduates score a perfect 800 on the math section of their SATs. It's not surprising that a higher percentage of Caltech graduates go on to earn Ph.D.s in science and engineering than at any other university in the U.S.

BOX: SUPERBOMBS AND SUPERCONDUCTORS

The birthplace of the atomic bomb, Los Alamos National Laboratory, perches atop a barren mile-high mesa in the New Mexico desert northwest of Santa Fe. The lab was conceived as a top-secret military installation early in World War II, and it still has as its primary mission the design and assembly of nuclear weapons. It employs about 8,000 people; the scientific staff numbers 3,100, half of them Ph.D.s. Los Alamos is operated by the University of California for the Department of Energy, which supervises all U.S. nuclear research. Last year the government spent $845 million to keep the place running. Scientists who work on projects ''outside the fence'' -- as nonclassified research is called there -- study such thoroughly civilian subjects as fusion power, superconductivity, astrophysics, molecular chemistry, and theoretical biophysics. Los Alamos is a world center for the new science of chaos, a growing collection of interdisciplinary studies that look for order in natural phenomena -- turbulent weather patterns, for instance -- that until recently seemed random or erratic. What links many of these fields is the need for high-powered computers, where Los Alamos is second to none. In 1976, the lab took delivery of the first Cray supercomputer. Today, with nine supercomputers, Los Alamos has the world's largest scientific computer system. The multimillion-dollar machines' original job was to simulate thermonuclear explosions, but now they help solve problems in every area of basic science that the lab is engaged in. Says Karl- Heinz Winkler, a Los Alamos physicist who uses supercomputers in his studies of fluid dynamics: ''It is now possible to simulate and visualize the complex evolution of fluid flow by doing computer experiments. They have emerged as a third method for investigating nature, complementing traditional experimental and theoretical work.'' The other common scientific theme at Los Alamos is energy research. Here director Siegfried S. Hecker believes the lab can make an important contribution to economic competitiveness. In the fast-moving field of superconductivity, the discovery of a new class of materials that work near ordinary temperatures has set off an international race to develop commercial applications. Even before the latest breakthroughs, the lab's staff published more than 150 scientific papers in the field. Los Alamos also has a wealth of experience with conventional supercold superconductors. One example: It designed the superconducting magnetic energy storage system for a demonstration of electric power transmission in Bonneville, Washington. Says Hecker: ''Since the Manhattan Project, the tradition of this lab has been to get the best minds in the country to think about the most important problems. The race for commercialization is on. It will not wait for a better fundamental understanding of superconductivity theory or for new materials. We want to be where the action is.'' Los Alamos scientists also hope to form new relationships with industry to distribute the results of their superconductivity research. ''We're used to big development projects,'' Hecker adds. ''For years the military has been our biggest customer. Working with private companies is the next step.''

CHART: TEXT NOT AVAILABLE CREDIT: NO CREDIT CAPTION: U.S. R&D SPENDING KEEPS RISING . . . BUT U.S. SHARE OF WORLD R&D DECLINES DESCRIPTION: Spending on research and development by United States, Japan, West Germany, Great Britain and France, 1965-1985; percent of total research and development being done by United States, Japan, West Germany, Great Britain and France, 1965-1985.