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Innovation & Regulation

By 19 January 2011 No Comment

Several seemingly disparate reports of the past couple of days actually meld into one.

PwC released a report on Medical Innovation Scorecard: The race for global leadership.  It notes that the U.S. has long been the leader in medical innovation, but that: “The innovation ecosystem for medical device technology . . . is moving offshore. Increasingly, medical technology innovators are going outside the United States to seek clinical data, new-product registration, and first revenue.”

A significant factor is growing sclerosis of the regulatory system, which is raising costs, stretching approval times, and periodically destroying reasonable expectations.

Other news concerned the release of an Executive Order on Improving Regulation and Regulatory Review, the latest in a long series of proclamations – I count at least five, going back over 30 years – by various Presidents asserting the proposition that regulations should be reasonable and justified. The repetition tells you who is winning this battle – as blogger TigerHawk said:

Yesterday, President Obama signed an executive order making it the “operating principle of our government” that regulation ‘strike the right balance” between its protective function and stifling economic activity, immediately inviting the question: “Why does the federal government need to be ordered to do that?“

At the American, Alex Pollock opines gloomily on financial reform, asking Can Our Last International Advantage Withstand the Dodd-Frank Act? His thesis is that one of this nation’s great strengths in the arena of international competition, especially for financial services, has been its “social infrastructure,” the stable and rational legal/regulatory/political order that encourages investment and economic activity:

But no competitive advantage, including this one, is automatic or incapable of being lost. The dead weight cost and bureaucrats rampant unleashed by Congress will help dissipate America’s last international competitive advantage. (So will the plaintiffs lawyers and the Byzantine accounting rules invented by the Financial Accounting Standards Board.)

By making America less competitive, these new laws undermine our ability to maintain high relative wages or a high relative standard of living. The ability to pay more than other countries for the same work with the same level of education depends upon having an advantageous position in one or more of the other fundamental factors of production. We are down to one—social infrastructure—and need to protect it.

The strongest competitive advantage, with however great a history, cannot support an indefinite amount of political, bureaucratic, and legal economic parasitism.

We here at Digital Society would add a reference to the dead hand of the FCC and net neutrality regulation.

There is a problem here. Innovation is about risk taking and experimentation. Regulation is about avoiding risk, especially if the damage from an event, however remote its probability a priori, could be pinned on the regulators. Innovation is about a few visionaries seeing things that others do not (viz, the requirement for patents that the invention be non-obvious, which means that most Persons Having Ordinary Skill in the Art don’t see it).  Regulation is about control, and layers of hierarchy and review; innovation requires the absence of these. Regulation is about special interests capturing particular areas of policy and turning them to advantage – the destruction of one’s opponents is not a cost but a benefit.

There is a malaise here, but it will not cured by another Executive Order, or by seeking yet more comments on how to fine tune the regulatory system, or by adding another layer of legal review.

It can be addressed only by letting the innovative innovate, by accepting that some mistakes will be made, and by maximizing the speed of response of error correction, not by trying to foresee every possible issue, or – worse – control everything so as to avoid any possible blame.

How about an Executive Order based on real and complex ideas, not the mummified remains of 1960s Program Budgeting — some Collective Action and Prisoner’s Dilemma; a little Public Choice; something about OODA Loops; perhaps The Machine that Changed the World, and some good news from Julian Simon?

As the saying goes, insanity is repeating the same action  and expecting a different result, and after 40 years of repeating the same complaints about the regulatory system it is time to move to a new asylum.

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