I'm from the government, and I'm here to help (stop progress)*

How regulators in league with crony capitalists stymie technological advancement.


Dept. of the Navy

Over at the journal Democracy, digital business guru Larry Downes as a terrific article, "Fewer, Faster, Smarter,"  outlining how government regulation is all too likely to stymie progress in seven disruptive wealth-creating technologies. He begins by citing the pitched battles of regulators in league with crony capitalists around the world trying to contain and control modern technologies such as the ride-hailing applications like Uber; medical diagnostics and devices like IBM's Watson; and the Federal Communications Commission's efforts to turn the Internet into the moral equivalent of Ma Bell.

What technologies are at risk of heavy-handed regulatory overreach? The seven areas of technological disruption that Downes identifies as being the cross-hairs of backwards regulation are sharing economy technologies (Uber & AirBnB); the Internet of Things (Google's Nest tech); robotics (Rethink Robotics); 3-D Printing (Stratasys); autonomous vehicles and drones (Google & Matternet); digital currency (Ripple Labs); and the quantified self (23andMe). Downes points out that all too often that regulators allied with industry incumbents seek to kill off competitor technologies and the result will be that …

…we'll continue to see violent, counterproductive clashes between the industrial and information economies. And no matter who wins which battles, the result will be the unforgiveable squandering of much of the vast consumer surplus our innovation revolution is creating, whether by endless litigation, inefficient lobbying, or other rent-seeking behavior.

That behavior, it is worth emphasizing, increasingly takes the form of mature businesses urging their longtime regulators to turn their attention to the entrepreneurs, many of whom haven't even hired their first legal counsel. For incumbents, the last line of defense against innovative startups and the venture investors who fund them remains the shoring up of barriers to entry created by decades of regulation. Industry regulators at the federal, state, and local levels now serve as gatekeepers for the disruptors—a role the incumbents are skilled at exploiting to help keep transformation at bay.

Downes' diagnosis is largely correct and could explain a good bit of why post-Great Recession economic growth is slower than were recoveries from earlier economic downturns. Downes is echoing to a great extent the the concerns voiced by economist Mancur Olson in his The Rise and Decline of Nations (1982). In my article, "Is U.S. Economic Growth Over?," I noted that…

…Olson argued that economic stagnation and even decline sets in when powerful special-interest lobbies—crony capitalists if you will—capture a country's regulatory system and use it to block competitors making the economy ever less efficient. Gordon's Northwestern University colleague, economic historian Joel Mokyr, expressed similar fears in his mesmerizing The Gifts of Athena: Historical Origins of the Knowledge Economy (2002). "Sooner or later in any society the progress of technology will grind to a halt because the forces that used to support innovation become vested interests," argued Mokyr. He concluded, "In a purely dialectical fashion, technological progress creates the very forces that eventually destroy it."

Downes does not deal with an even greater and more pernicious threat to innovation: the Precautionary Principle which is favored by all stripes of anti-progress activists and ideologues. In my new book, The End of Doom: Environmental Renewal in the Twenty-First Century, I summarize it thus: Never do anything for the first time.

Ultimately, Downes urges regulators to get out of the way:

Does the collective problem still exist, in other words, or can consumers now solve the problem collaboratively, perhaps with a technology platform provider or private institution managing the regulation more cheaply, or more flexibly, or both? Which model has the capacity to self-correct as market conditions evolve and with lower risk of regulatory capture and regulator corruption?

As the technology revolution proceeds, the concept of government may return to its pre-industrial roots, setting the most basic rules of the economy and standing by as regulator of last resort when markets fail for some or all consumers over an extended period of time (emphasis added).

A hopeful, but unlikely conclusion.

*The nine of most terrifying words in the English language.