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Stifling and stimulating process and product development

Jim says:

On 24 July 1959, Soviet Premier Nikita Khrushchev and U.S. Vice President Richard Nixon met at the American National Exhibit in Moscow, in the kitchen of a model American home on display there. As reported in the New York Times the following day, portions of the conversation went like this:

“Mr. Khrushchev shifted the talk back to washing machines.

“Nixon: ‘We have many different manufacturers and many different kinds of washing machines so that the housewives have a choice.’”

As reported in other sources, Khrushchev, at this debate and elsewhere often argued that competition is wasteful. Yet, he was still troubled by superior U.S. productivity. In fact, a short two months later (23 September 1959), Khrushchev was on the farm of Roswell Garst in Coon Rapids, Iowa, trying to figure out why Garst and his sons could out-produce (by many times over) Russian collective farms with their hundreds of employees..

These matters puzzled Khrushchev — how could a free and loose system of organizing labor be superior to a centrally organized one? How could allowing multiple brands of washing machines to be manufactured and compete with each other be superior to central planning?

In the early part of the last century, Henry Ford started making Model Ts. Their resemblance to modern automobiles is very basic and limited (four wheels, engine, steering wheel, and seats). Mr. Ford kept making Model Ts until competition forced him to change. If it had not been for competition, we would probably still be driving Model Ts today.

Today, developing a new process or product has become extremely restrictive. In my opinion, this is because of government regulatory intervention coupled with the ever-present tort lawyers. Creativity and competition are stifled by the myriad hoops that one must jump through to bring a product to market. In the past, as we can all agree, some mistakes were made, largely through ignorance (although some were executed through greed by ignoring obvious safety issues to continue a profitable endeavor).

When the burden of regulation is immediately imposed on ideas, those ideas can never see the light of day. Yes, we want our citizens to be safe and yes, we want to minimize any harm to the planet. But often it seems today, we impose unnecessary conditions on nescient enterprises. We have put a “Chicken Little” safety fear ahead of fertilization of seeds of new ideas.

And we have let an out-of-control litigation industry punish manufacturing posthumously. Asbestos litigation is a good example. I have no problem with tort cases punishing asbestos manufacturers and users for activities that occurred after the harm of asbestos was discovered. But to punish them for activities done in genuine ignorance and good faith? It causes many a budding entrepreneur to place their money and their efforts in far safer places. And it is inconsistent with how we treat individual citizens — we are always giving citizens as individuals an excuse for their poor and destructive behaviors.

A place where we need innovation, for instance, is in pulp production. The Tomlinson boiler (or recovery boiler) is generally conceded to be old technology. Yet no one has taken the risk to successfully build its successor. Why? I think part of it is the perceived regulatory scrutiny that one could encounter bringing Serial No. 1 of a better way to market. It is risky enough to try to develop and market such new technology. I suspect it would cost well in excess of USD 100 million. It places prohibitive barriers on such developments to pre-market and saddles them with regulatory burdens that may cost as much as the development of the idea itself.

Consortium development, with government aid, is not much better, for such an effort would develop only one successor to the Tomlinson boiler, and it may not be the best one. We need an environment where multiple entrepreneurial enterprises feel comfortable taking the risks to build the best solutions for the 21st century, not just a solution.

Hence, we see entrepreneurs take risks developing simple things, like entertainment trinkets (such as the iPod), rather than complex processes that can really move things forward for the good of all humankind. They are a less risky way to earn a return. We may not have quite reached the stage of a centrally planned economy just yet, but we seem to have gathered all the negatives such as system has to offer.

Travis says:

When it comes to “Regulation,” the devil is in the details. Are there (specific) existing regulations that stifle innovation and need to be loosened? Absolutely. Are there gaps in (specific) regulations that need to be filled with additional rules? Absolutely.

Let’s get down to brass tacks with a specific example.

On 03 November 2008, the U.S. Supreme Court heard arguments in the case of Wyeth v. Levine. Here are the facts:

Diana Levine, a musician from Vermont, sought medical treatment for nausea stemming from a migraine headache. The doctors treating her attempted to administer a drug, Phenergan (promethazine), through a method called “IV push.” In so doing, they missed the vein and hit her artery; Ms. Levine developed gangrene; and doctors eventually had to amputate her arm below the elbow. 

Because she lives in a democratic country, Ms. Levine had the opportunity to seek redress in the courts. After settling with the health care providers, she went after the real deep pockets – the drug maker Wyeth. Wyeth knew that the IV push technique was risky, but the Food and Drug Administration (FDA) approved a drug label that did not warn doctors about the IV push procedure specifically or encourage a more innocuous method of delivery.

Levine’s attorneys argued that Wyeth should have included a stronger warning label than the FDA required, and a jury of her peers and the Vermont Supreme Court agreed, awarding her USD 6.7 million. In its 4-1 decision, the Vermont Supreme Court essentially decided that the FDA-approved label was a floor rather than a ceiling.

Wyeth appealed to the U.S. Supreme Court, arguing that federal law – that is the FDA regulation with which they complied – preempts state law.

The irony that this case demonstrates is that good regulation can be good for business. If the FDA had done its due diligence, it would have required a stronger label. Because there are many other ways to administer Phenergan, Wyeth likely would still have had a popular, profitable product.

Industry is right to complain about capricious, politically partisan, or corrupt regulation. Unfortunately, there is such ill will towards regulation as a totem that we lose perspective on the content of specific regulation. I fear that industry associations and corporate lobbyists reflexively reject the idea of regulation, rather than the merits or shortcomings of particular rules.

More fundamentally, regulation will never replace judgment. Johnson and Johnson’s famous credo begins “We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers and all others who use our products and services.” If companies would all pledge to similarly look after their customers’ interests – and back it up with action – I would be perfectly comfortable with fewer regulations.

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