There is an interesting article in NY Times on letting scientists off the leash so that they can work on interesting problems. The author argues that professors require to get funding in order to survive because the salaries of the faculty are paid from these grants. Therefore, the author argues that faculty essentially do incremental research and that science and innovation are being stifled.
Contrary to what the author of the article thinks, I think NIH and NSF do fund interesting science. It is ultimately a peer review system which would recognize and differentiate between good and bad science. Of course, as in many funding organizations, senior faculty normally get much better grants than young scientists. Considering that many top institutions require at least two R01 grants to get tenure, it is not surprising that the majority of young investigators spend enormous time writing grants. I think this should be fixed rather than changing to a model wherein the institutions will pay the salaries of the faculty in the hope that will do interesting science. In India, for example, the salaries of the faculty as well as the graduate students are entirely borne by the government, but I do not see great ideas emerging !