Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
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What’s the difference between theory and reality?

In theory, nothing…

Unfortunately, in the real world, what start out as great ideas in theory often end up being implemented in ways that lead to not-so-great outcomes in practice.

I remember sitting in a grad school class, The Economics of Regulation, when I was introduced to this truism. We would consider a situation, say, manufacturers who pollute the air in the process of making their outputs. We would determine the first-best solution for the situation. Then we would consider “next-best” alternatives. So often, after all the politicking is done and the details are finally settled upon, the regulations that end up being legislated bear no resemblance to any solution on the “best” list. In fact, many solutions end up exacerbating the initial problem it was supposed to fix! It was then that I realized the often stark differences between theory and reality.

Take rent control as an example. The idea behind rent control is fantastic –help ensure affordable housing is available for lower income residents. What’s not to love?!? The problem is that what rent control actually achieves – fewer affordable housing units become available for low-income residents – is generally the exact opposite of what it intends. People who are fortunate enough to be renting from landlords at the time rent controls are imposed end up paying lower rents than they would have otherwise. However, because rents are “too low,” landlords have no incentive to maintain the housing. So existing affordable housing – the units in existence when controls were imposed – end up deteriorating over time. These renters pay lower rents, but get shabbier housing. As for new units, when you cap the rents landlords can charge, you make it unattractive for potential new builders to construct new housing. With caps on rents, landlords won’t be able earn as much as they could by building housing in areas with no rent control. So builders build elsewhere, and no new housing gets constructed in the low-income zones. You end up with precisely the opposite of what was intended: a few shabby units remain for some people already in the system, but no new housing becomes available for people who so desperately need it.

Take labeling laws as another example. Consumers want to know where the products they’re buying come from. What’s not to love about requiring manufacturers to put country-of-origin labels on their products?!? Information is always a good thing, isn’t it? If all manufacturers are uniformly required to label their products, and if labeling isn’t too costly to achieve, then, yes, labeling laws should be a good thing. In practice, however, this doesn’t happen. Labeling laws are often not uniformly imposed – certain manufacturers get exempted from the law for political reasons. This creates an uneven playing field – the manufacturers who are required to pay to label their products are now at both a cost and information disadvantage relative to the exempt manufacturers. Furthermore, package labeling can be very costly for manufacturers to implement. In this case, even if laws are uniformly applied, low-margin manufacturers might get pushed out of the industry because they can’t afford the new regulations. In that case, consumers no longer have the choice of buying from those manufacturers who have been pushed out of the industry. Another problem with labeling laws is there are often nuances that make labeling much more difficult than initially anticipated. At one point, beef suppliers were threatened with having to impose country-of-origin labeling laws. As it turns out, that might be more difficult than anticipated. What if you have cows that are born in the states, grazed in Canada, but slaughtered and packaged in Mexico? What is the country-of-origin of those cows? In the end, labeling laws often end up imposing large costs on some suppliers, causing some suppliers to exit the market, while imposing no cost on others. The results are less choice, higher costs, and potentially incomplete information for consumers. Not the ideal it started out being.

Another reason that practice often ends up differing from theory has to do with the way our laws are enacted. Generally speaking, politicians wrangle over proposals, come to agreement, then enact the agreed-upon laws. However, the laws that are enacted are only broad guidelines. It is unelected bureaucrats – workers who are completely unaccountable to We The People – who determine the actual details of how the guidelines are implemented. As laws and regulations have become more complex over time, more power and responsibility end up going to the bureaucrats who draft the details than to the politicians who enacted the guidelines.

In “As The Bureaucracy Rises, Our Liberties Fall,” Edward White presents an eye-opening example of how this has worked out with ObamaCare.

Let’s take ObamaCare for example. The law when passed was around 1,000 pages long…

… In ObamaCare, there are hundreds of directives to federal agencies, including the Department of Health and Human Services (HHS), through which Congress gave broad discretion to unelected bureaucrats to figure out how best to implement provisions of a law that most members of Congress had not read in the first place.

Soon after the passage of ObamaCare, the bureaucrats in these federal agencies got busy writing the regulations that would put the law into operation. There are around 11,000 pages of regulations with regard to ObamaCare and more pages are likely to follow.

In this case unaccountable bureaucrats are responsible for drafting 10 times the number of decisions as people actually elected to make those decisions!

White goes on to provide a specific example of the impact of bureaucrats on the legislative process:

One of the regulatory schemes that was imposed at the discretion of the unelected bureaucrats was the HHS Mandate. ObamaCare required that health plans cover, without cost sharing, “preventive care” for women. The law left it to the discretion of the HHS Secretary to determine what constitutes “preventive care.” The Secretary’s determination would be handed down with the force of law.

Then-HHS Secretary, Kathleen Sebelius, a long-time supporter of abortion rights, determined that the requirement to cover “preventive care” included the requirement that many employers arrange and pay for employee health insurance that covers abortion-inducing drugs, contraceptives, and sterilization, regardless of whether the employers sincerely believed that it would be immoral for them to take such actions. If the employers failed to comply, they would be punished with severe annual fines.

HHS issued this abortion-pill mandate contrary to the dissenting voices of religious leaders from different denominations and faiths and in direct contravention of the will of the American people.

Whether or not you agree with the HHS Secretary’s definition of what constitutes “preventative care,” should it have been her decision to make, or should Congress have assumed that responsibility?

Reality is definitely not the same as theory.

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