Often, when we observe that something does not work correctly (that is, according to consumer demand and the likely opportunity cost of production), we discover that a restraining regulation is the culprit. Consider hearing aids. Why are they so expensive, typically thousands of dollars? Until two years ago, a Food and Drug Administration regulation forbade their sale over the counter and required an audiologist’s prescription (Dominique Mosbergen and Julie Jargon, “FDA Clears Hearing Aids for Over-the-Counter Sale,” Wall Street Journal, August 16, 2022).
Whether we model the prescription obligation as a government restriction on supply or as an excise tax on consumers, the effect was higher prices, a reduction in the size of the market, and less incentive for innovation. Who knew what consumers were missing?
We got part of the answer when Apple announced that it will soon offer a software update for its $250 AirPods Pro 2 that will give them a hearing-aid function for low-to-medium hearing loss (FDA restriction will remain in place for more severe cases). The conspicuous shape of the AirPods has the drawback of advertising that one is hard of hearing, but some old people may think that wearing them looks cool (see Ben Cohen, “Apple Has a Hot New Product. It’s a Hearing Aid,” September 13, 2014). This new competition from outside the previously regulated market will likely cause a fall in the prices of more conventional hearing-aid devices.
How many months earlier would people with hearing problems have been able to use the new device if it had not been regulated out? It is true that a technological innovation or the adaptation of existing technology was necessary, but technology depends on research and research depends on the expectation that its products can be profitable.
We still have to wait to see how well the AirPods will work as hearing aids, but we know that this innovation and many others are less likely to happen if they are legally impeded. The story illustrates a more general argument for individual liberty, well formulated by Friedrich Hayek (see Volume 1 of his Law, Legislation, and Liberty, originally published in 1973):
Since the value of freedom rests on the opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom. … And so, when we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction.
On the market, you don’t have to “vote” with your single ballot to get what you want or to hope that entrepreneurs and innovators will offer you goods or services you would want if only you knew they existed. The only requirement is that enough consumers, but not necessarily a majority or some politically vocal minority, will be probabilistically willing to pay for it.
Contrast this with the ideal government of Rexford Guy Tugwell (1891-1979), a believer in government planning and close collaborator of Franklin D. Roosevelt. In a 1932 American Economic Review article, he wrote:
New industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for, to seem probably desirable features of the whole economy before they can be entered upon.
(See also my Regulation review of his 1933 book Industrial Discipline and the Governmental Arts; also available in pdf format, pp. 71 ff.)
On the political “market,” could you have effectively voted for iPhones or AirPods that can be used as hearing aids? Lobbying politicians or regulators is costly, especially for what only exists in entrepreneurs’ or innovators’ minds. How do we know what we are missing with the 188,346 pages of federal regulations, not counting state and local regulations? The question is relevant in all countries.
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READER COMMENTS
Monte
Sep 22 2024 at 6:24pm
Isn’t it also fair to ask what’s been gained through regulatory compliance? I agree it has become overburdensome*, but without it consumers would certainly have sustained significant losses in both their health and wealth. The benefits-to-cost ratio of many regulations were found to be at least 2:1 (OSHA, Clean Water Act, Endangered Species Act, Consumer Product Safety, etc.), with some estimated to be as high as 10:1 (FDA, Clean Air Act of 1970).
*One common metric used to assess the quantity of regulation in the U.S. code [in addition to the # of pages added to the federal register in recent years] tracks the number of prescriptive words, such as “shall” and “must”, which shows that such restrictive verbiage has grown from 400k words in the 1970s to over 1.1 million today (Kenan Institute of Private Enterprise).
Pierre Lemieux
Sep 22 2024 at 11:21pm
Monte: Simple issues first. Your second paragraph is useful. I have reproduced these data from their sources and, a few times, produced instructive graphs.
Your first paragraph raises more complicated questions and would require a conversation that would eat up all the electrons of this blog. Let me just say that most regulations (if not all) protect some people at the cost of hurging others. The regulations we are talking about are not just information, they are mandates and prohibitions. A good example is indeed the control of medical devices and drugs. Some are protected from risky stuff, no doubt, but those who pay the cost include those who die because the medication that could have saved them is approved too late. The short piece by Cato’s Jeffrey Miron “Rethinking the FDA” raises many of the right questions. Much research has been done about that, as you can probably find on the Cato website.
And if you are in a skeptical and radical mood, note that it is meaningless to try to scientifically balance the benefits of those who are forced to make the good decision against the cost of those who are forbidden to make the good one for them (to have access to a drug that would have saved them, for example). As Anthony de Jasay wrote:
Richard W. Fulmer
Sep 23 2024 at 2:26am
The available data suggest that on-the-job deaths have been steadily decreasing since at least 1900. The rate of decline didn’t change when OSHA was created in 1970: https://www.cdc.gov/mmwr/preview/mmwrhtml/mm4822a1.htm
Safety is largely a function of wealth and innovation. Currently, regulation costs the economy nearly $2 trillion annually. In addition, regulations that specify means rather than goals tend to retard innovation. To the extent, then, that regulation reduces wealth and discourages innovation, it’s reasonable to ask whether the regulatory state – taken as a whole – has saved or cost lives.
Monte
Sep 23 2024 at 11:34am
Thanks, Richard. This, from the very article you linked to, which seems to contradict your claim (somewhat, as this addresses injuries rather than deaths) that the rate of decline didn’t change with OSHA’s creation:
Further, several sources (BLS, DoL, OSHA, Journal of Public Health) provide data that appear to show a direct correlation between the creation of OSHA and improved workplace safety (including a decline in workplace deaths). See, for instance:
Based on these studies, OSHA’s impact on workplace safety and in reducing workplace fatalities seems quite compelling.
Mactoul
Sep 22 2024 at 9:05pm
There are no FDA regulations in Africa, and not much regulations in general. How much innovation has occurred in its place?
Pierre Lemieux
Sep 22 2024 at 10:44pm
Mactoul: The answer to this question is relatively simple. There is one thing worse than regulation under some rule of law, it is arbitrary government under no rule except for the rulers’ whims. Africa is a good example of that. Go and download the whole volume of Economic Freedom of the World 2023. After you have gained some familiarity with the index, look at Table 4.1 (and 4.2) on p. 211, and you should understand the comment on p. 216 (about Africa):
This confirms what we know about economic history and the Great Enrichment.
Mactoul
Sep 23 2024 at 1:51am
I accept your point but curiously Stalinist Soviet Union was powerhouse of innovation, not only in military technology but in many fields of theoretical science, especially physics. It was not lagging in creative arts and literature.
Richard Fulmer
Sep 23 2024 at 2:59am
After the Revolution, Soviet art and literature promoted socialist ideals. Under Stalin, both were used as propaganda tools, depicting idealized scenes of Soviet life, heroic workers, and leaders like Lenin and Stalin. Consequently, Soviet-era works often leaned towards kitsch. There was more artistic freedom after Stalin’s death, but many of the truly great works, such as those by Aleksandr Solzhenitsyn, were circulated underground or as samizdat.
The USSR was at the forefront of analog computing for years, primarily because these systems were initially best suited for missile guidance. In contrast, the U.S. focused on digital computing, which was better suited for business and accounting. Eventually, digital computing speeds increased to the point that digital computers outperformed analog computers in most areas.
A significant amount of Soviet science and technology advances were acquired through espionage and theft from the West. Many Soviet era factories were designed or built by western companies such as Ford, Westinghouse, General Motors, General Electric, Austin Motor Company, and Metropolitan-Vickers.
Moscow’s first subway line was designed largely by British engineers.