Government as Useful Irritant and Rules of Innovation: What Libertarians and Other Economists Miss

Hayek, Keynes, Milton Friedman and Paul Samuelson disagreed about many things but shared one important belief: Their ignorance about innovation didn’t matter. Countless economics textbooks, which say nothing of interest about innovation, agree with them: ignorance about innovation doesn’t matter. This belief freed Hayek et al. and textbook writers to make sweeping policy statements. Had they realized that innovation matters, not just productivity — and, especially, that innovation and productivity are sometimes at odds — it would have been far less clear what policies are best. 

If you ask how will this affect innovation? about any economic proposal everything changes, especially your certainty that it is right or wrong. I will give just one example. Libertarians — I hope I am describing Tyler Cowen’s “smart” libertarians — believe that government interference by and large makes things worse. People function best when given freedom, and so on. A smart libertarian recognizes the value of speed limits, and so on. An example of smart libertarianism, I assume, is Tyler’s recent view that a local increase of the minimum wage is “expressive voting at the expense of good economic policy.”

Libertarians and other economists neglect the possibility that government serves as a useful irritant. Government regulations are truly an impediment. No doubt about it. No doubt they make life harder for people with some power. The usual argument is they protect the weak from the powerful. Without them, the powerful would exploit the weak. Sure. They would. But that’s not all. What goes unsaid and apparently unnoticed is irritating the powerful makes them think. Pain produces thought — about how to avoid the pain. And thought increases innovation.

As a professor at Berkeley, I hated the government-mandated institutional review boards — the human subjects approval committee and the animal research approval committee. They didn’t just make research far more difficult due to paperwork requirements, they did horrible things to people based on misunderstandings and mistakes. And there was no appeal. How awful, right? Well, it was certainly painful. That pain is one thing that pushed me toward personal science, where I could be free of them. Pain pushed me to try new things — such as long-term non-trivial self-experimentation. The less I could do professional research (my Ph.D. is in animal learning), the more time I had for personal science. And I brought to my personal science the skill set of a professional scientist (an understanding of experimental design and data analysis, subject-matter knowledge, and so on). Innovation always comes from exploration. The more exploration, the more innovation. Pushing powerful people (such as a Berkeley professor) to explore is a seriously good thing.

Planet Money recently did a series on T-shirts. Planet Money reporters travelled the world — the Planet Money men’s T-shirt is made in Bangladesh — and encountered several things not in economics textbooks. One was the story of how clothing factories came to Bangladesh. That you could put a clothing factory in such places and make a profit was a discovery with great consequences, especially for Bangladesh. In the 1970s, American clothing companies felt endangered by imported clothes — from South Korea, for example. They pressed government for trade protection. This led to the passage of the Multi Fibre Arrangement (MFA) which regulated clothing imports. The agreement, however, said nothing about Bangladesh, which at the time did not make clothes. When South Korea reached its limit under the MFA, a Bangladeshi businessman approached Daewoo, a giant South Korean clothing maker, suggesting that they duplicate their factory in Bangladesh. The head of Daewoo — a powerful man pained by government regulations — was open to their suggestion. Daewoo helped open the first clothing factory in Bangladesh. There are now more than 4000.

When it comes to productivity, there is one set of rules, which economists have worked on since Adam Smith. Innovation has a different set of rules. Most economists seem barely aware that the two sets of rules often clash — what is good for productivity is bad for innovation. Let me sketch a few of the innovation rules. Innovation needs freedom, of course, and the ability to profit from your invention, which I’ll call benefit. It is also called self-interest. The importance of benefit/self-interest for innovation is the main point of Why Nations Fail by Acemoglu and Robinson. Innovation is also increased by resources, such as skills, knowledge, space, and equipment. After discussing this with Bryan Caplan, I believe many economists are well aware these three factors (freedom, benefit, resources) affect innovation. All three also increase productivity — for example, more resources, more productivity. Far fewer economists realize that two other things, which act against productivity, are also very helpful for innovation:

1. Pain. Not a lot — not debilitating or all-consuming pain — but enough to make you think hard. Necessity is the mother of invention is the aphorism, which isn’t quite right. Pain, not necessity. Government is useful here, as I said. So is war. Many innovations came from wars. A famous example is the greenback, which came from the Civil War.

2. Stability. To innovate, you need free time, which is different from freedom (ask any prisoner). Free time allows painless failure, very helpful for innovation. To have free time, you need a secure job. Government is useful here, too. So is tenure. Pain plus stability = peacetime military spending. The internet came from peacetime military spending. Professors were the first users. Stability also promotes innovation because it makes it easier to detect small improvements. The quieter it is, the better you can detect soft sounds.

My personal science had a good amount of all five factors. 1. Freedom. Studying myself, I could do whatever I wanted. 2. Benefit. At first, I benefited because my discoveries were very practical. If I discovered how to sleep better, I would sleep better. If I discovered how to lose weight, I would lose weight. Later I also benefited because others were interested (I like attention) and my discoveries helped others. 3. Resources. I knew a great deal about the relevant subjects (e.g., circadian rhythms, weight regulation) and how to do research. I could get whatever articles I wanted from the UC Berkeley libraries. And so on. 4. Pain. In addition to the pain caused by Berkeley IRBs, I wanted to sleep better and lose weight. My sleep was not awful nor was I especially fat — it was not intense pain. But it pushed me. I tried to improve my sleep for ten years before I started making progress. 5. Stability. My life was very stable. I rarely took long trips, for example. Failure in my personal science — a treatment that I hoped would improve my sleep didn’t work, for example — cost very little. Failure to publish cost nothing.

In contrast, professional scientists, who have plenty of resources, are generally low or at least lower on the other four factors (freedom, benefit, pain, stability). They lack freedom. They are constrained in many ways, which they don’t like to talk about. They lack benefit. A few papers that hardly anyone reads — the result of most research — provides little benefit. Almost all research has no practical use. Few scientists study problems that they themselves suffer from. A cancer researcher does not himself have cancer, for example. They lack pain. I cannot think of a single instance where professional research was motivated by the researcher’s pain or discomfort. If they don’t need a grant for their research and have tenure, they have stability; but if they do need a grant or don’t have tenure, they have less stability than I did. Most research grants are only three years long and renewal is rarely easy or assured.

I wrote about the same question — why was my personal science “unreasonably effective”? — here.

What does this say about economics and how to increase innovation? The importance of benefit and resources is already clear. But the remaining three factors — freedom, pain, and stability — are complicated. By and large they are corners of a triangle. The more freedom, the less pain and stability. The more pain, the less freedom and stability. The more stability, the less pain and freedom. You need all three — a point in the middle of the triangle — and where that point should be and how to put it there are exceedingly non-obvious. Once you realize this, your certainty about how to organize society, how run a government, and the best size of government should decrease. A problem with increasing inequality, which I have never seen pointed out (e.g., in a speech about why inequality is bad, Obama didn’t mention it), is that it makes the powerful (those at the top) more comfortable. When you make the powerful more comfortable, you reduce innovation.

22 Replies to “Government as Useful Irritant and Rules of Innovation: What Libertarians and Other Economists Miss”

  1. In a free market I wonder if people would have been doing the personal science anyways since market forces would push towards that which is normally most efficient and cost effective. So, if you didn’t have the government bureaucrats in your way to begin with maybe you would have been doing personal science for a much longer time. It’s hard to tell, the broken window fallacy, the seen and the unseen.

    The detrimental effects of government seem to outweigh any benefits. Just because we would live in a free society doesn’t mean that there wouldn’t be speed limits still, or something even better that works to keep people safe while driving (who knows, without the government we might be flying instead of driving).

    1. “In a free market I wonder if people would have been doing the personal science anyways since market forces would push towards that which is normally most efficient and cost effective.”

      Whereas I think the fact that people can find health specialists (doctors) pushes them away from studying their own health. They would rather leave it to the specialist — do what the specialist says. They fail to understand that the fact that the specialist needs to make money has a big effect on what he advises. They fail to understand how much they are losing. When I started to study my own sleep (to improve it), I had no idea how much better solutions I could find compared to what a doctor would tell me to do (take sleeping pills).

  2. Are you afraid to say you are just different from other people?

    The assets wasted by government far outweigh any value the pain it brings might have in forcing people to be innovative. The global resources dumped on the climatology researchers, for instance. Then there is the flip side of the waste. How much science is actually happening any more? When I first read Celia Green I thought she might be a bit crazy, but there’s enough crap research coming out for me to realize I could do a better job- and if it weren’t largely a political rent-seeking operation now, I would be. Even my fellow students could tell I was different- they mainly wanted to know how I could remember all the stuff, and I finally realized it was mainly because I was more interested in it than they were.

    But pain comes from poor sleep, acne, etc… Pain would also come from half a dozen other things, and there is no way to qualify how much pain is actually necessary. Suppose I actually got stability, and more resources than I knew what to do with. I’d experiment more, and my experiments would just get bigger. They wouldn’t necessarily be based on pain. Indeed, your own ideas about hobbies and gifts would suggest pain isn’t crucial to the innovative process, especially not the pain of government.

  3. To encourage innovation by academics, I recommend that a large proportion of research funds be distributed by drawing lots. (i) Then instead of devoting time to preparing untruthful grant applications they can devote time to their work, or to productive leisure. (ii) With smaller grants, they will be obliged to be more ingenious in their work.

    Seth: Yes, I agree. The Canadian system is similar, lots of small grants.

  4. There was no government pain in 1947 when hydraulic fracturing (fracking) was invented. I would say just the opposite. Now that it is economically beneficial to employ it, and it is wildly successful, there is going to be a whole lot of government pain brought to bare in the form of regulations and restrictions on its use.

    So the question is, will this new government pain bring about innovation (which will then be regulated and restricted) or less energy.

  5. I’m not too concerned that increased inequality will led to the elite and powerful being less innovative. How much innovation actually comes from the elite and powerful anyway? Elite and powerful tech companies seem to release new innovations on a daily basis, however, when you look closely most of these innovations were purchased or licensed from non-elite and far less powerful individuals or companies.

    1. “How much innovation actually comes from the elite and powerful anyway?”

      Okay, tell me one major innovation that didn’t come from the elite and powerful? Darwin: inherited wealth, didn’t have to work. Mendel: rich religious order. Pasteur: powerful chemist. Bell Labs: rich, AT&T very powerful.

  6. Nature puts more than enough pain and irritants in human life paths; no need for artificial (government) obstacles to increase that vast natural burden.

    The natural state of human beings on this planet is abject poverty, suffering and death. The only economic system ever known to raise large masses of population from poverty– is free market capitalism; collectivism in all its various forms (e.g., coercive economic regulation & central planning) has consistently failed to so in all of history.

    The post was obviously intended as a mild slam against libertarians and free markets. Note that “innovation” is a central principle of free market economics — it’s an absurd assertion to proclaim otherwise.

    1. “Collectivism in all its various forms (e.g., coercive economic regulation & central planning) has consistently failed to so in all of history.”

      You don’t realize that all governments have collectivist (= coercive) elements? You think that the Internet and greenbacks — not to mention Darwin’s theory of evolution — arose because of “free markets”?

  7. I see a central planning fallacy here. Who knows what the right amount of innovation is?

    It also boils down to a moral question. People should be free to do what they want so long as it does not harm others or interfere in the others’ freedom to do what they want — this is liberty. Government’s pain violates liberty.

    Is violating liberty justified because it might increase innovation?

    Seth: Long ago, at the very dawn of governments, everyone had a choice: live under a government (coercive but also protective) or not (no coercion, no protection). Apparently the government system was the more popular choice, since that’s what we have now. Now there is no longer much of a choice. Governments provide both loss of freedom (coercion) and protection. It seems to me not to be a “moral” question but an economic one: is the cost (coercion) worth the benefit (protection)? The innovation is a kind of unanticipated bonus, that the original choosers (between government and no government) didn’t think about. Curiously governments, by producing pain, caused better governments to be invented. That’s where democracy came from — government-induced pain.

  8. Shumpeter and Kondratieff were the economists of innovation. The pain of the economic collapses of the 1870’s and 1930’s fostered innovation, hence the term ‘creative destruction.’

    The whold focus of modern democratic government is to prevent the pain of another economic depression.

    Some argue that the black plague of the 1340’s and the little ice age fostered the innovations that produced our world.

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  10. I don’t understand the point of your Bangladesh example. It just sounds like government causing a pecuniary shift from South Korea to Bangladesh rather than any innovation.

    Seth: It was more than a location shift. It was the discovery that you could get good output using a lower-quality location. In Bangladesh the workers were less well-educated than in Korea and there were many other differences. It was somewhat like discovering a new source of energy.

  11. Professor, please let the scales drop from your eyes! CNTRL + F “patents” yields NO hits on this blog post. NONE! Please quit being blinded by ideology and mention how a reformed patent system can increase innovation. How government–say by offering a prize as GMU’s Alex Taberrok has suggested, with the invention then becoming public domain–can increase innovation. Inventions *can* be ‘engineered’. It is a humanities major’s myth that inventions happen in a ‘flash of genius’ akin to a lightbulb going off. Please turn the corner and take your arguments to the next level–mention PATENTS. It’s amazing how economists think that because good Samaritan nerds who invent for free (yes, they not only exist, pretty much all Nobel Prize winners are in this category, and are responsible for much of human progress) are the only people out there. If inventions were better compensated by government, you would have more of them. It’s akin to a “public good”. Thank you!

    Seth: Blinded by what ideology? Care to offer some evidence that a reformed patent system will significantly increase innovation? Reforming the patent system might one of my five factors — how much an inventor benefits. Please notice there are four other factors. It is far from clear that lack of benefit is the big problem now.

  12. Seth says: “Blinded by what ideology? Care to offer some evidence that a reformed patent system will significantly increase innovation?”

    Yes, here is some historical evidence:

    The 1474 Venice patent act predates that city-state getting into manufacturing–coindence? Not.

    The 1624 English reform of patent monopolies predated England becoming a manufacturing powerhouse–coincidence? Not.

    The US Founding Fathers thought patents so important they put it into the US Constitution, and the rest is history–coincidence? Not.

    US Patent were reformed so as to abolish the need for a working model in 1880, and US industrialization took off after that change–coincidence? Not.

    U.S. Patent Act of 1952 clarified and simplified existing U.S. patent law and the US economy enjoyed a Golden Age thereafter–coincidence? Not.

    US Patent law was restricted by caselaw in the 1960s and 70s to make it harder to get a patent–and US productivity slowed down around the early 1970s–coincidence? Not.

    US patent law was again relaxed by R. Reagan’s administration with the creation of a special court to hear patent cases, and make patents stronger, in 1982; the US economy and stock market boomed–coincidence? Not.

    You may ignore the evidence, or you may say it is a coincidence, or you may say that the patent laws were concomitant or coincident with the events that followed–that’s your choice depending on your ideology.

    ” Reforming the patent system might one of my five factors — how much an inventor benefits. Please notice there are four other factors. It is far from clear that lack of benefit is the big problem now.” – if it’s “far from clear”, then I may possibly have a point, yes? I’m glad you have an open mind on this issue professor. Thanks for the soapbox.

    Seth: I don’t think the evidence you provide supports your position. It takes decades for a new invention to have a significant effect on the economy — to grow big enough. Yet you describe cases where the economic change followed the patent law change much soon than that. For example, your 1982 example. On the other hand, yes, you may have a point. I mentioned Why Nations Fail which makes roughly the same point as you are making.

  13. Seth, if you were appointed “Czar of Useful Irritants” do you believe you could increase the rate/degree of innovation in the United States?

    Seth: No I don’t think this theory of mine is ready to be used as the basis for public policy. Better to be used to guide research. For example, compare theory to practice, where innovations come from. To increase innovation in the United States, I would make life easier for small businesses. Some regulations are useful irritants, plenty of others serve to crush small businesses. I agree with that aspect of libertarianism.

  14. Seth says: “Okay, tell me one major innovation that didn’t come from the elite and powerful?”


    three-axis aircraft controller

    Seth: Skateboards are a major innovation? I disagree. Who invented the three-axis aircraft controller? Speaking of skateboards, I do know that the mountain bike came from the elite and powerful. It was invented by the brother of one of my classmates.

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