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Regulation and Innovation

Posted by on | August 24, 2017 | Comments Off

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.

 

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 Regulation and Innovation

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