Dialogue with David Leonhardt

It's about how to spur innovation, read it here.  Here is one excerpt:

I would also like to see more of our elite institutions of higher education take the explicitly meritocratic and indeed arguably anti-egalitarian approaches of Caltech and also University of Chicago. Those two institutions are big successes – M.I.T. too – yet they are not always so easy to copy. We should be trying harder. In terms of respect for intelligence, achievement, and science, we should be more like Singapore.

The question did not come up, but I also favor reduced liability standards for major new innovations.  Take the various plans for robot-driven cars.  They will kill some people, as do human-driven cars.  We run the risk of having the status quo so locked into place, so grandfathered, and so implicitly favored by the realities of regulation and lawsuits, that such an idea might never get off the ground.  That in turn affects the incentives of innovators ex ante.

Comments

"I also favor reduced liability standards for major new innovations."

This would, in essence, change all product liability from strict liability to a lesser standard and would have exceedingly large negative externalities as companies modified product lines to take advantage of the new legal protections offered. You'd have to define this very carefully, and then prevent it from being captured during the regulatory process for it to pose any potential benefit.

From a legal standpoint, it's simply not a good idea.

Tyler, the main challenge most countries face is to control stupidity rather than to spur innovation. I mean this sort of stupidity http://www.nationalreview.com/articles/258491/spi...

that among other things has been aggravated by a cultural change in who the heroes are http://www.nationalreview.com/articles/257805/new...

Footnote: very few economists can claim expertise in tort law and almost all economists know nothing about it. Thus, I surprised that you make suggestions that --as anonymoose says-- may have serious unintended consequences.

How about looser pays, I assume that it is much better but is there strong evidence that it does?

"to the consumer it doesn't matter if he is injured by a new or an old product."

That is exactly his logic. The same damages spread over a smaller number of early adopters is more likely to bankrupt a startup. However, covering the cost by shifting it to the early adopters may be a wash.

>“Clean energy” is a very important issue, for reasons of climate change

And that's where you lost me.

The thing is, I don't even think that YOU believe this. If you did, you'd be hyping nuclear power.

"I also favor reduced liability standards for major new innovations."

This does seem like a bad idea to me. Major new innovations are the kind of thing that can be easily tweaked to be made safer. Add some noise so that the electric car can be heard by pedestrians. It is old products that are hard to make safer.

Some of the comments seem to miss that product liability regulation is not uniform, and that in some cases it looks suspiciously like the result of regulatory capture and an attempt to exclude competitors.

Aerospace, for example, is rife with this. If you can't make a passenger jet like Boeing, you pretty much aren't allowed to make a passenger jet. It is by no means clear that Boeing has a monopoly on how to do it safely or that present safety standards are sensible, in fact there is good reason to believe this is not so, but many at the FAA in charge of implementing regulation are former Boeing employees and they know one good way of doing it: Boeing's way. It works out conveniently for Boeing that this also raises huge barriers to entry for competitors.

We saw similar attempts at exclusion in space launch, although there is some evidence that the FAA is trying to deal with this, as the start-up push has just gotten too strong to resist. But it's a toss-up whether it's harder to design a cheap reusable space launch vehicle, or to get permission to test it. After all, Boeing and Lockmart are making plenty of money doing the old-fashioned way, with a safety record that would be considered criminal negligence in any other field, so they have plenty of reason to exclude others. Witness the regulations NASA, as opposed to the FAA, throws in the way of SpaceX, like man-rating requirements its own contractor-built vehicles don't meet.

I think Tyler's hunch is right.

I suppose I agree in spirit with Tyler's sentiment, but the awkward wording is irksome. Perhaps he could expound on what he envisions when it comes to lowering liability standards. I find it difficult to read that and not immediately point to the advantaged position corporations already receive in regards to liability.

In general, I believe a net reduction in litigation would go a long way in attaining not only a streamlined growing economy but also civil society; however, I don’t think privileging institutions is the way to go about reducing litigation. Anyone interested in equity or egalitarianism would probably be looking to file suite immediately based on the equal protections clause, where such a thing to be passed. What makes more sense is more liberal and advanced use of the discovery process and stricter criteria for cause of action, in general. Of course, this will never happen because lawyers are very much entrenched in the political process, and aren’t likely to turn off their own money spigot.

> The confusion is in the use of the word liability, which is about
> post-production, not pre-production. By all means less stringent
> pre-production orders are fine, but rewards for shoddy production, in the
> form of limited liability is a terrible idea.

In R&D, pre-production can give rise to liability. This is obvious in launch vehicles, where a failed test can potentially harm the uninvolved public.

And sometimes the post-production standards are also absurd, and clearly tuned to the preservation of status-quo market shares. I gave the example of passenger aircraft, but one could equally well talk about automobiles or pharmaceuticals or any other heavily regulated field.

MIT, at least, isn't egalitarian. Their goal is to graduate the most qualified class possible, rather than admitting the most qualified class possible. The latter is only equal to the former if the school increases everyone's qualifications linearly.

One could argue that the reason we've stopped growing is the media fear. Nuclear power is super safe, but Three Mile Island stopped it cold. Fear -- and the fact that my nitwit generation (the Boomers) are anti-technology.
Yup, it's the Boomer's fault we're not driving electric cars, with 'electricity too cheap to meter' - the Boomers and the ridiculous 'No Nukes!" movie starring James Taylor and a host of trust fund twits...

Not to jump on the bandwagon, but I also don't think that potential tort liability is the primary roadblock to innovation. I'd be willing to bet that in most industries, relaxing regulations and leaving the potential for liability in place would be far more useful for spurring innovation.

True, but only because the innovators would be thinly capitalized, which puts the risk back on the public anyway (through bankruptcy of the inventions that turn out unsafe).

Maybe the difference could be split by having government subsidize (or outright provide) liability insurance to innovative products. Victims still get compensated, but the innovator is not bankrupted (either by defending the suit or by a judgment). Of course there would be some drain on the public purse, but if the public benefit of the innovation (net the waste from supporting failed attempts at innovation) is large enough, it would be a net public good.

Keeping out rent-seekers that aren't genuinely usefully innovative but want the government to cover their asses would be a problem, though.

In my experience, "Copy the University of Chicago approach" is an excellent rule of thumb to guide you in virtually every situation.

... maybe not for building an NCAA football program however.

Oops, should read "there is not reason that the innovator who stood to profit from the rocket SHOULD NOT pay for the costs he has imposed on others."

Regulation is a big part in determining liability because it sets forth standards with-respect-to-which liability will be measured. If those standards are unreasonable, the resultant measures of liability will be unreasonable. Admittedly, I could have been more clear. Thank you for pointing that out.

I do think your definition of "post-production" means that it's okay for me to draw a picture of something, but as soon as I bend metal I'm on the hook for liability regardless of whether I'm selling anything.

I disagree Rahul. Medical malpractice already has some pretty gnarly limitations on liability, the real constraint in terms of medical practice at this point seems to be the barriers to entry created by the AMA and FDA. Same goes with Pharma. I don't thinke there are any companies out there that are holding FDA approved drugs off the market due to liability fears. There are definitely plenty of potential drugs that are not being explored or developed at all due to the FDA approval costs that must be incurred before the drug can be brought to the market at all.

The word "meritocratic" should be examined in more detail. I think you're one of the best qualified thinkers to do so.

In general, the regulations for new drugs and pesticides are more stringent than the ones to keep old ones. This means that we are stuck with less efficient products that do more damage.

Why not decide that all income (ordinary or capital gains) from the sale of innovative goods and services will not be taxed for the next ten years? The problem of definition is not greater than in any other discussion of "innovation" and at least the IRS, as compared to editors and writers, is highly skilled in fine definition. BTW, in declaring e-commerce essentially free of taxation in the mid 90s we did the same thing for innovation in retail over the Internet. It worked out rather dramatically well for some, and I would argue for almost all. Reed Hundt

Interesting dialogue between Finch and Doug here. I suppose I wasn't thinking in terms of the test intensive sort of industries, like aerospace, that Finch brought up. In which case, testing is a determinant in establishing liability.

Very enlightening stuff guys.

That innovation is real profit sharing. If we properly reward all workers with a slightly bigger piece of the pie, our economy would take off dramatically. Alex - forex trainer.

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