How Bad Decision Making Could Undermine Good Innovation
Randolfo Rasberry
Policies based on the precautionary principle almost always stand in the way of innovations that can help the public, and this report identifies 11 policies that would limit the benefits of AI. The remainder of this report provides an overview of AI, lists policies based on the precautionary principle that threaten AI, and analyzes ten detrimental impacts of such policies. To close, it discusses what governments should do to reduce and rectify cases where AI use could be harmful.
AI is a field of computer science devoted to creating computer systems that perform operations characteristic of human intelligence, such as learning and decision making. The term does not imply human-level intelligence and the level of intelligence in any implementation of AI can vary greatly. For example, the intelligence level needed for Roomba vacuum cleaners is significantly lower than what is needed for autonomous vehicles.[24] Regardless, the development of better hardware, including faster processors and more abundant storage, large data sets, and more capable algorithms in the last decade have helped AI make significant advancements and unlocked new applications.[25]
Such a right undermines the purpose of automating tasks, which is to perform a task faster, cheaper, and easier than a human could.[93] Requiring manual review also disregards the many laws that already exist that guarantee a right to an explanation for certain high-impact decisions, such as why a company fired an employee, whether the firm used AI or not.[94] But there are other significant decisions made by humans, such as refusing a loan, where firms only have to tell applicants what their decisions are based on but not the logic of their reasoning.[95] Requiring AI systems to explain the reasoning for all their decisions creates an artificial and unnecessary hurdle to using AI.
Adoption of the proposal would also encourage politicized oversight and favor state-owned or subsidized firms in the countries that implement regulations, instituting top-down calculation or limitation of FRAND royalty rates for SEP licenses. Importantly, rival jurisdictions to the European Union, such as China, may resort to similar reforms that impose binding rather than nonbinding royalty rates for European SEPs, thus undermining European innovation and property rights to an even greater degree while raising the relative competitive position of state-backed foreign firms. This would undermine the existing geopolitical and trade policy objectives of the European Union.
As the USITC is undertaking this fact-finding investigation to inform decisions on whether to extend flexibilities under the WTO TRIPS Agreement to Covid-19 diagnostics and therapeutics, it should note that TRIPS waivers can undermine the U.S. pharmaceutical industry by degrading the intellectual property (IP) protections that are essential to the pharmaceutical innovation ecosystem. Less innovation in the pharmaceutical industry means fewer vaccines and drugs in the future, leaving the United States and other nations less prepared for future pandemics and other health emergencies.
As of May 5, 2023, the World Health Organization (WHO) has declared the end of Covid-19 as a global health emergency. In addition to the necessity of a TRIPS waiver consequently being questionable now that Covid-19 as a global pandemic is in the rearview mirror, it is also quite clear that vaccine access and distribution in the United States and across the globe was not hamstrung by IP rights, but rather by factors as varied as manufacturing limitations, poor infrastructure, divisive politics, and even social pressures. It is now clear that the requirements for a prompt response to a future pandemic are supply chain resiliency, acceleration of advanced production methods, availability to conduct remote oversight of Good Manufacturing Practice production, and assurance that incentives remain for both small and large pharmaceutical firms to collaborate with each other, as well as with academia and the public sector. Therefore, given manufacturing limitations, an IP waiver would not actually increase access to vaccines. In fact, it could negatively impact the response to the next crisis because of the way it would disincentivize innovation. In this way, it seems to be a solution seeking a problem.
Currently, the supply of treatments for Covid-19 far outstrips demand as well. This is largely because secure IP rights have incentivized drug inventors to enter into over 140 partnerships with local manufacturers worldwide, boosting supply while also transferring technology and tacit knowledge to these foreign firms. Enforceable IP rights assure companies that their inventions will not be stolen in the short term, thereby making them more willing to reveal their secrets and participate in these productive manufacturing partnerships in the face of a global pandemic. Expanding the TRIPS waiver to therapeutics could counterproductively reduce access by discouraging pharmaceutical innovators from disclosing production and distribution know-how and providing qualified personnel to deliver a safe and effective vaccine on a mass scale.
A weakening of the patent system upsets this risk diversification strategy, resulting in a chilling effect on private investment, and thus, less innovation and fewer new drugs in the future. Even if the federal government could shoulder some of the R&D investment burden currently borne by the private sector, there is no credible case that a government agency has the resources or capacities to undertake the costly and complex sequence of testing, production, and distribution activities that are necessary to convert R&D into a safe and viable product.
The focus of this paper, however, is more narrow, and we consider the influence of institutions on the efficiency of innovation production. In the context of technological change, institutions ensuring appropriation of rewards (through patents, for example), mitigating uncertainty, etc., would be important. On the other hand, weak institutions can create distortions that can undermine incentives for innovation and can even be counterproductive. With regard to technological change, institutions are tied to national/regional systems of innovation that crucially impact the inputs and outputs of the research process (Nelson, 1993). The importance of the topic studied, and the need for further research in the area have been highlighted in a recent review of the related literature (Zeng et al., 2021).
As an indicator of weak institutional quality (see Knack & Keefer, 1995), corruption can also undermine the appropriability of innovation rewards. The appropriability of rewards is also accounted for directly in the analysis via (i) regulatory quality; and (ii) state fragility.Footnote 4 While greater regulatory quality would enhance appropriability by ensuring a due process for inventors to reap the rewards of their actions (and allocate resources in the production of innovation accordingly), greater state fragility, on the other hand, would undermine incentives to allocate resources.
Along another related dimension, uncertainties of various kinds are associated with the innovation process. Some of these are pre-innovation, related to success in invention and sufficient incentive effort, while others are post-invention, related to diffusion and regulation (see Goel, 2003, 2007). The extant literature has considered the impact of uncertainty on research and innovation, both theoretically (Kamien & Schwartz, 1982; Reinganum, 1989), and empirically (Goel & Nelson, 2021; Goel & Ram, 2001). Given the aggregate nature of our data, we are able to empirically capture macroeconomic uncertainty, whereas firm- or inventor-specific uncertainties could be equally, if not more, significant. However, micro-level uncertainties are nearly impossible to measure empirically.
Relatively speaking, of the three institutional aspects considered, state fragility, encompassing coups and government overthrows, might be more exogenous. State fragility can also be viewed as capturing political uncertainty, and, together with inflation variability, our results can show a comparison of political and economic uncertainties as they impact innovation production efficiencies.Footnote 9 Whereas one might envision scenarios where greater uncertainties undermine the innovative effort, innovative activity might also increase in the face of uncertainty when innovation enables inventors to hedge against uncertainty (see Goel & Nelson, 2021). Furthermore, regulatory quality is largely fixed in the short term, while corruption levels and state fragility can change rather quickly (and unexpectedly).
The estimated coefficients attached to GDP per capita and inflation variability (uncertainty) are negative but not statistically insignificant. Since innovations are forward-looking, the insignificance of the current GDP is not too surprising. The negative effect of uncertainty is in line with intuition (for a related theory, see Kamien & Schwartz, 1982) and some empirical evidence (e.g., Goel & Ram, 2001). The insignificance of the related coefficient could imply that inventor- and technology-specific uncertainties may be more relevant.Footnote 19
Of the different institutional aspects considered (i.e., regulatory quality, corruption, state fragility, government size, patent protection), we find that all of them impact innovation production efficiency to some degree, depending upon the model/sample employed. The economically significant influences of the different institutions on innovation production efficiency seem to be not widely recognized in policymaking.
Some participants felt strongly that the Code should change very little or not at all. They argued that the more detailed and specific the Code becomes on issues of ethics and tech, the more quickly further advances in technology will render the Code outdated. They raised the concern that making the Code more specific could undermine global adoption and implementation by spurring jurisdictions to carve out exceptions for themselves.
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