Regulation and Innovation

We often talk about the direct costs of regulation, but in the long run perhaps the most worrying problem is a cost that is impossible to measure -- its effect on innovation.  From a labor regulation paper I am writing:

Labor regulations are written in consideration of existing, well established business models, and are not written for business models that might someday exist.  Often my employees ask me why labor law will not allow practices that would make a lot of sense in our business, both for employer and employee.  I tell them to imagine a worker in a Pittsburg factory, punching a timeclock from 9 to 5 Monday through Friday, working within sight of their supervisor, taking their breaks in the employee lunch room.  This is the labor model regulators and legislators had in mind when writing the bulk of labor law.  Any other labor model – seasonal work, part-time work, working out of the home, telecommuting, working away from a corporate office or one’s supervisor, the gig economy – become square pegs to be jammed in the round hole of labor law.

When someone does try to stick an innovative square peg in the round hole of existing regulation, there tend to be concerted efforts by regulators to kill the new model.  Just look at Uber and the efforts to force it out of its labor model and into a more traditional one.  Most of us see innovation as good and value-creating.  Regulators - by training, by their incentives, by the culture - see innovation as threatening.  They see innovations as viruses trying to bypass the immune systems they have spent years constructing.

Here is an example from pharmaceuticals that really struck me.  Alex Tabarrok is writing on promising anti-aging and cancer reduction drugs:

The assembled scientists and academics focused on one obstacle above all: the Food and Drug Administration. The agency does not recognize aging as a medical condition, meaning a drug cannot be approved to treat it. And even if the FDA were to acknowledge that aging is a condition worthy of targeting, there would still be the question of how to demonstrate that aging had, in fact, been slowed—a particularly difficult question considering that there are no universally agreed-on markers.



  1. james:

    The Precautionary Principle, nuch loved by Greens and the EU, drives me mad. Doing nothing is a decision with consequences.
    Imagine getting approval for the plough, domestic pets, chicken farms, etc through today's labyrinth.
    Railways trasporting people at more than 40 m p h were expected to fry the passengers' brains. Fortunately we didn't have regulators back then.

  2. randian:

    FDA has worse incentives than that: people who suffer or die because of a lack of treatment options are not counted by them, so they have no incentive not to make the approval as time-consuming and expensive as possible. If people are dying during the 5+ years of the approval process it's nothing to them.

    Their safety requirements don't seem to have any relation to the condition being treated. Would FDA approve a cancer treatment that has a significant chance of killing the patient? I don't think they would, even though some cancers (like pancreatic) are pretty much guaranteed death sentences. If I had a cancer like that, would I accept, for example, a 75% chance of dying from the treatment itself? If I am rationally indifferent to how I die, I would, because the chance of dying from the disease using currently available treatments is 95%.

  3. joe:

    There was the fear that people would not be able to breath (lack of oxygen) when automobiles speed exceed 25mph. Of course this was circa 1890/1900.

  4. cc:

    Regulators are by nature conservative (not in the political sense). The only thing they can see is adverse consequences. Risk is simply horrifying to them. They are like the child who won't try new foods or the woman who screams at the slightest startle or bug.
    By a simple risk assessment, cars would never have been approved because tens of thousands of people a year are killed by them. But the benefits are beyond measure.
    For drugs, during trials every possible side effect has to be noted. Since during any multi-month trial period some people will feel faint, get a rash, get a fever, or feel nauseous, all of those symptoms are ascribed to the drug. No attempt is made to report frequency of those symptoms compared to the control population. Thus every drug has a list of "side effects" that are probably bogus and unnecessarily frightening. I would want to know about swelling of the tongue but please don't tell me the drug might cause stomach upset. Some people get stomach upset on a daily basis and they are the ones who added this "risk" to the report.

  5. Jeff Nelson:

    I think the FDA is right in this instance. How would you tell if an anti-aging drug is actually working? We don't even really know how to measure aging in any physiological way (there are at least 3 major competing theories right now). The only practical and real way at this time is to measure how long people live, and due to the variability and the duration of such a clinical trial, it would be an enormous and expensive undertaking to prove this. The alternative is to approve a bunch of anti-aging medications with no evidence of efficacy... this is called the nutraceutical market.

    @cc below; yes there is not only an attempt, but a requirement to report frequency of AEs versus control. You can see the comparative rates in Section 6 and/or Section 14 of virtually every approved drug label. The only exceptions are long term uncontrolled follow-up studies. There does end up being a long list of contraindications and warnings in Section 5, which are then put in advertising, but this is mostly welcomed by the industry as it serves as a civil liability shield.

    @randian below; yes the FDA does approve drugs which have significant chances of killing patients, so long as the aggregate benefit is real and statistically positive. See high dose cytarabine in AML, where induction toxicity leading to death can reach ~20% of some low fitness patient populations. Drug is still approved because of aggregate benefit.

  6. mlhouse:

    I am at the brutal end of a wage and hour dispute that is going to cost me hundred of thousands of dollars. It does not matter that the rules of the FLSA really do not apply to my industry as you described above. THe people on the legal end of the analysis do not care about profitability or that I would have never let the employee work overtime that they BEGGED and BEGGED nad BEGGED me to allow at the "standard" pay rate (I am regulated by the state and can only charge a fixed rate and cannot adjust for OT). MY margins are tiny to begin with so paying them OT rates meant I lost significant money.

    But they can then retroactively go back and force these losses on me AND EVEN MORE SIGNIFICANT, double them because of "liquidated damages".

    It is a crime, the power of government.

  7. james:

    25 mph?

    You could get that on a penny farthing on a downhill slope. On a horse, for several hundred years.

  8. Ken Nielsen:

    For new products, I believe the regulatory approach should be light touch, until problems are identified. My impression (from a distance) is that this was taken in some cities with food trucks. Of course many vested interests work to prevent this.
    I am surprised that Uber has become established without too many obstacles. Perhaps the regulators in many cities realized the restricted taxi medalion system was bad, though they did not have the courage to fix it.

  9. Not Sure:

    "Perhaps the regulators in many cities realized the restricted taxi medalion system was bad, though they did not have the courage to fix it."

    More likely, Uber got big faster than anyone (read: the regulators) might have expected and smothering it in the crib with noone the wiser wasn't a viable option.

  10. cc:

    It is true that employers can be cruel and stupid. They can make people work absurd hours, ignore that workers are injured or ill, etc. But such employers have high turnover because workers are free to leave or not accept a job there. It can ruin a company to allow bad management. Trying to make rules to prevent all possible bad behavior is simply not possible and strangles the business world. Also ignored is that for many workers the flexibility of a job is a benefit, not a burden. They might want to work 3 12 hour days so they can go to the beach for 3 days or 4. They might be happy to eat lunch in ten minutes so they can go home early. Taking flexibility away does not help people. If you don't want odd hours, don't go into retail.
    Also missing in so many Obama era labor regs is recognition that workers can be lazy, steal, yell at customers, threaten other employees, stalk. A company must be able to fire people without so much threat of lawsuits based on lies.

  11. Zachriel:

    james: You could get that on a penny farthing on a downhill slope. On a horse, for several hundred years.

    An athlete on a penny farthing could go a mile in a bit over two minutes, or about 27 mph (William W. Windle in 1890). That was considered the upper limit for various reasons.

  12. Estoy Listo:

    I think a lot of people intuitively understand that reguations are a drag. What many of us miss is that they prohibit what is yet to be. Your explanation and examples are nicely drawn. I hope they get a wide audience.

  13. Peabody:

    Indeed. Not only did it get big fast, it is popular with many liberals, so support to kill it amongst the left base was not very widespread.

  14. GoneWithTheWind:

    The problem is simply: Lawyers. If the FDA approves a drug that later causes deaths or negative effects there will be a lawsuit. However if the FDA creates regulations to be so careful approving drugs that it takes decades there will never be a lawsuit for all the people who died waiting for that drug that would have saved them. Simple as that. I worked in main frame computers all my life and there was an old saying that "no one ever got fired for buying IBM" If you bought the competitor and it proved inadequate or projects weren't finished on time then clearly you should have bought the leader; IBM. But if you bought IBM and it proved inadequate or projects didn't get finished on time clearly you had done everythiing you possibly could have.

  15. J K Brown:

    The article below is very good for understanding marginal utility. We can then see how regulation alters the marginal utility calculation for innovators. It is not just the inspiration to create something new, but whether fighting "city hall" is how you want to spend your life. Creative people are not good rules followers and they really rebel against stupid, bureaucratic rules that deny the current realities.

    All mankind’s progress has been achieved as a result of the initiative of a small minority that began to deviate from the ideas and customs of the majority until their example finally moved the others to accept the innovation themselves. To give the majority the right to dictate to the minority what it is to think, to read, and to do is to put a stop to progress once and for all.

    Mises, Ludwig von (1927). Liberalism (p. 54)

    Deviating from the ideas and customs of the majority is the very definition of running headlong into the bureaucratic wall or avoiding regulated areas.

  16. Craig:

    Millennials love Uber and food trucks (as do celebrities), and big city mayors love these groups, so they welcome Uber and food trucks.

  17. marque2:

    Uber has some anti -trust issues there. First you have a bunch of rich people funding a company that subsidizes 1/3 of the cost of every car ride. This model doesn't really reflect the new innovation. Yes it is nice to have an app, but when I undercut my competition through massive subsidies, it really doesn't prove the model. It is much like Elon Musk's miracle cars that seem to work on government subsidies. Having rich people band together to kill or corner an industry is illegal.

    Secondly, they aren't paying for many of the fees that Taxi's pay, which should be paid, for instance airport fees. Now you may think these fees are a big money grab by the airport, and to some extent they are, but the airport has to provide services to the Taxi / Uber services. At San Diego airport were I depart frequently, there are people on the curb directing taxi - and Uber rides to various spots, so they don't clog up the road. They direct the passenger's as well, so passengers can efficiently catch their rides. They have set up Uber and Taxi zones to make it easier for pickups as well. The taxi's pay for these people's salaries, and for the service zones while the Uber's and Lift's get this service for free from the airport authority. There is a certain unfairness here, where Uber and Lift are leaching off government services (or my airline ticket) and the taxi's are not. I tend to get my own ride from the airport, why is my ticket / the taxi's subsidizing Uber?

  18. Mike Powers:

    yeah; I hate how everyone looks at Uber like they've invented some brave amazing new method, when in fact all they're doing is finding a loophole in the existing regulations.

    And, y'know, you can say "but look how great everything would be if we didn't have those regulations!" And you're right! It would be great! TAXI COMPANIES WOULD ALREADY WORK LIKE THAT IF WE LET THEM.