Regulations stifle innovation

[UptonStellington]

I'm looking to make the case that regulations tend to stifle innovation. I made this point in a class once and got a lot of flak for it, before I had a chance to explain myself.

What would some of you say the reasons for the fact that government regulations stifle innovation are, and what concrete examples can you give?

I'll give mine: Most simply, regulations interfere with a free market. They allocate wealth and resources not to their most efficient setting, but to where the government decides they ought to be. For an example of how this stifles innovation, consider a man who runs a business. Running a business means constantly striving to make things run more efficiently. The EPA tells him he needs to regulate certain aspects of his business, say, CO2 emissions need to be reduced. The man has to put money towards that goal, or lose money doing it, and this is not of economic benefit to the man (as some have tried to argue), because if the EPA mandates really made things run more efficiently, the man would have put his time and resources into doing it in the first place -- there would be no need for the EPA to tell him to do so. Now, instead of having $50,000 to invest into new business approaches, in new innovations, the man has to spend that money tailoring his business to be in line with government mandates.

A more extreme concrete example was brought up in John Stossel's Healthcare report. Consider the government-regulated phone industry several decades back. All the phones were black hunks of plastic and rotary-dials, there was no incentive to improve them. Once the industry was opened up to competition, we got results like the iPhone.

The common argument I hear in praise of government regulations is something along the lines of, "Look at hybrid and alternative-fuel powered cars. We'd never have them today if it weren't for the government regulating gas prices back in the 70's, driving them up so high that people decided to look for other methods of power."

[LaszloWalrus]

The common argument I hear in praise of government regulations is something along the lines of, "Look at hybrid and alternative-fuel powered cars. We'd never have them today if it weren't for the government regulating gas prices back in the 70's, driving them up so high that people decided to look for other methods of power."

Isn't this another version of the broken window fallacy? The government destroyed wealth by regulating gas prices (driving up the costs of goods and services generally). Out of this regulation comes (supposedly) the hybrid car. What about all of the wealth that was destroyed? What about all of the other goods and services we don't have because of the regulation?

[UptonStellington]

Yes, it is the broken window fallacy put into real terms. All that wealth that was misappropriated, that is, destroyed, could have been used for bigger and better things -- but people only see the immediate effect that comes out of the regulations -- a push to develop the hybrid car.

Of course, trying to argue this point with environmentalists is almost futile. Their point is generally that the hybrid car HAD to be developed so we could save our environment. Otherwise, we'd be COMPLETELY screwed today... And that point brings me to realize essentially what environmentalists (or, at least the ones I have dealt with) are saying: That the market NEEDS to be DIRECTED towards a goal, that is, producing environmentally friendly products, and that that goal is not going to come without government regulations telling people to head that way -- which probably has a kernel of truth to it: the fastest way to get someone to do something is to put a gun at their head.

Anyways, what other examples of government regulations are there out there that have stifled innovation, or what other examples are there of innovation coming as a clear-cut result of there being no government regulations?

An obvious one are the cars produced by the Soviet Union.

[DavidV]

It's interesting to note that despite decades of regulations and federally-subsidized research by American auto-makers, the first commercially viable hybrids were developed by the Japanese, who did in response to native economic conditions. A non-hybrid Honda Civic is more efficient than most American-designed hybrids.

The reverse happened as well, when American companies pioneered personal computers as the the Japanese government wasted billions of Yen on their politically-mandated vision of computer technology.

[UptonStellington]

Good call, GC.

Cars bring to mind another question. I know laws like the speed limit have been talked about here before, but what about regulations from a government agency such as the FAA? Are they necessary?

I have been following the development of the Moller SkyCar on and off for about seven years now, and the last time I checked, it was having problems getting approved by the FAA.

Maybe this is jumping the gun a bit, but I have this nagging feeling that if the FAA was not regulating the air ways, I would have been flying my car a while ago.

[Capitalism Forever]

What would some of you say the reasons for the fact that government regulations stifle innovation are

Innovations are achieved by individuals who think independently--who think of things others haven't thought of before--but the nature of government regulations is to override the independent judgment of individuals and replace them with the bureaucrats' judgment.

and what concrete examples can you give?

Suppose there had been safety regulations in the 1870s regarding lights, mandating that all illumination must be done using federally approved blends of gases. Lamps must have no electric components (after all, everybody knows that electric sparks can ignite the gases!). Thomas Edison might have submitted a petition requesting the government to allow electric-only lighting--but how long do you think it would have taken for the bureaucrats to consider his proposal? Would they even have been able to understand it properly? Would they have had the judgment to say that it's safe, or would mindless "caution" have won out? They would have had nothing to gain from approving the design (not anything they were aware of--don't expect them to be able to project the ways electric lighting would benefit their lives), but they would be certain to lose their jobs if any design they approved turned out to be unsafe. Given a bureaucrat unable to tell whether Edison's light bulbs are safe, dreading the consequences of them not being safe, and not in any way motivated to pronounce them safe, can you predict what the response to Edison's petition would have been?

[UptonStellington]

I'm a bit ignorant on this issue, but I'm going to throw it out here anyways: what about the space program, starting back in the 60's -- the moon race?

The space program, as far as I am aware, was (and to a large extent still is) a government funded/mandated program. An enormous wealth of technology and things we use today came out of it (unless you believe Transformers -- then ignore this whole comment), like plastics, more development of computers, etc.

This isn't specifically a government regulation, but it's an instance of the government taking people's money and putting it towards something they would not have normally put it towards. But in doing so, some would argue that it spurred this whole technological revolution we experience today.

I suppose the argument against this would be that the amount of money the government took from people came at an enormous opportunity cost, and that the technologies that money would have otherwise gave way to cannot even be guessed at.

[D'kian]

The space program, as far as I am aware, was (and to a large extent still is) a government funded/mandated program. An enormous wealth of technology and things we use today came out of it (unless you believe Transformers -- then ignore this whole comment), like plastics, more development of computers, etc.

It's more a mixed economy kind of deal. From the start it was private firms (Boeing, Douglas, Lockheed, Rocketdyne, Rockwell and others) who built launchers and spacecraft to NASA's specs. These days a fair deal of satellite launches are handled by the big aerospace firms jointly with NASA.

This isn't specifically a government regulation, but it's an instance of the government taking people's money and putting it towards something they would not have normally put it towards. But in doing so, some would argue that it spurred this whole technological revolution we experience today.

A proper government would have developed a military space program. In fact that's more or less the way it began. The Army and the Navy ran competing programs. Navy's first attempted launh, the vanguard satellite, blew up on the launch pad (look up the video, it's spectacular). Then the Soviets launched Sputnik I and II, then the Army, who had cornered von Braun, launched the Explorer One on a Jupiter rocket. This series of developments culminated in NASA taking over both military programs.

NASA has done a lot of good, I won't deny it. But it has done a lot of harm, too. Consider Apollo. As marvelous an achievement as it was, it ended up little more than a political sideshow to the late 60s -early70s phase of the Cold War. The moneys invested, an amount comaprable to the Manhattan Project, were good for 17 Moon shots, six of them successful, and half a dozen people walking on the Moon. And then nothing.

Larry Niven put it best with a paradox. After Apollo he said "We can put a man on the Moon, but we can't put a man on the Moon."

Instead we got the Space Shuttle, which isn't exactly a dismal failure, but it's far from a success. For starters the necessary short-term focus of any government caused developers to lower development costs at the expense of raising operating costs.

gotta go. more later.

[stellavision]

I'll add my experience from the pharmaceutical industry, which is often criticized for churning out "me-too" drugs (that do the same things as drugs already on the market) rather than truly groundbreaking therapies. The critics who say this are usually the same ones who think the pharma industry needs MORE regulation (and drugs are already regulated more than any other consumer product).

Where did all the "me-too" drugs come from? They came from the enormous costs of developing a drug in this country. Because of the FDA, a drug needs to go through years of clinical trials, requiring thousands of patients and the resources of many doctors and hospitals IN ADDITION to the company's own researchers who developed the drug in the lab. Then even more money is spent on bureaucratic paperwork submitting the results of these trials to the FDA -- a New Drug Application can literally be hundreds of pages long. Not to mention, the company is being robbed of its patent protection all the while -- a patent protects a drug for 20 years from registration, but as much as half of that time is worthless because the company can't sell the drug until the FDA approves it, but the patent clock is ticking the whole time. The entire process of drug development has been estimated at about $800 million dollars per drug.

$800 million! Is it any wonder that pharma companies, rather than risk that much on an innovative, which is by definition untried, therapy, instead plow their money into variations on drugs that are known to work? So instead of a cure for cancer, we get umpteen different brands of birth control pills, cholesterol medications, and such.

Not to mention a drug company's ability to sell its product is severely limited by the FDA even after it has been approved. Even if the company has data showing that the drug works in a different disease than the one for which it was originally approved, it cannot promote the drug for that use without conducting additional studies and spending more money on FDA paperwork to get that additional use approved. That's another way in which regulation stifles innovation -- by limiting the potential market for a groundbreaking idea.

[Scott_Connery]

The firearms industry is a great example of this. Machine guns were nearly outlawed in 1934, and since then, only one machine gun of note, the M16, has been developed in the US. The M16 is a 1950s design.

This lack of innovation does not effect only fully-automatic weapons. The M16 still qualifies as a new design by gun industry standards. Almost any other gun, whether owned by civilians or the military is an older design, or a slight evolution of an older design.

[Thomas M. Miovas Jr.]

Governmental interference in the economy, from regulations to interest rates to anything else, basically comes down to force being used against the innovators -- which stifles innovation like pointing a gun at John Galt.

Do you remember how quickly things were improving on the Internet back before Greenspan "popped the bubble"? Seemed like every other week to every other month major innovations where cropping up with "killer aps" for the Internet. Now that the stocks have collapsed down, the innovations are coming at a much slower rate. And if anyone had a great idea and wanted to form a business around it, the dot com government legacy will be there to discourage anyone from investing in it. "Everyone" wanted to put money into the Internet as a beginning industry -- and make money on those stocks -- but those millions won't be flowing there now.

The computer industry is one of the least regulated of all the industries, and personal computer capabilities continue to expand at a very fast rate. The whole economy could be like that if the government would keep their grubby paws out of it.

The automobile industry is one of the most regulated, and the innovations there are slow in coming. Likewise for pharmaceuticals. And commercial applications for genetically altered crops are also highly regulated, which is why we don't have many innovations there.

We don't have manned spaceflights to the Moon or Mars because of that Space Treaty that says there will be no private property in outer space. No private property means no profit which means no development.