Kafkaesque Regulation

Where overregulation bias harms society


Disclaimer: As founder and autodidact in love with the notion of ‘positive liberty’ — after Isaiah Berlin — I exhibit a libertarian bias throughout the course of this essay. This essay is intended to float some ideas I had about regulation, not to claim thorough expertise in the mentioned areas.


Kafka brought us a dystopian vision of the individual caught and lost in bureaucracy. This dystopian vision seems to creep closer and closer towards the realm of reality.

Once in a while, legislators should step back and ask: Does the law still serve the people or are people enslaved by the law?

Throughout the course of this essay, I present a variety of candidates where the negative effects of regulation seem to outweigh its benefits for society.


1. Big Brother programs (a.k.a. security dwarfs liberty)

Even more visible than the realization of a kafkaesque dystopia, Edward Snowden showed us that George Orwell’s dystopian vision has already come closer to reality than many of us wanted to believe. As an overreaction to the 9/11 terrorist attacks, the National Security Agency (NSA) of the United States started a mass surveillance program not only to spy on political friends like German Chancellor Merkel but even the very people its agents have sworn to protect — all in the name of “security”.

The program’s defendants argue that nobody will look at your data unless you are a suspect.

While that may be true, the act of looking at personal data is not the point where we lose our my personal freedom — we already lose it at the very moment the mere potential to look at my data emerges.

As soon as I become aware of that possibility, I begin to question and constrain my actions: Should I really publish this essay? Shouldn’t I delete this paragraph? Will that interfere with my plans to visit the United States? Already at that point, I’ve lost my freedom of speech.

Experiencing this kind of self-censorship was the common denominator of the two totalitarian regimes the German people had to suffer under throughout the last century. It is a depressing thought that none other than the United States — the world’s loudest voice for liberty, and the very force liberating Germany from totalitarianism — is now responsible for bringing back self-censorship.

Let’s swing the pendulum back from excessive security obsession towards protecting the liberty of the people. After all, the unalienable rights are not “life, security, and the pursuit of happiness” if I remember correctly.


2. Innovation brakes (a.k.a. consumer protection dwarfs invention)

Constraining ourselves to merely avoid dystopian scenarios seems to be a rather pessimistic outlook in itself though. We can do better!

The possibilities of innovation paint a futuristic picture quite the opposite of dystopia (unless you are an ultraconservative technophobe of course): a vision of abundance, longevity, and unlimited creation. Ray Kurzweil points to the Singularity as artificial intelligence, synthetic biology and nanotechnology begin to merge.

However, while Marc Andreessen claims that “software is eating the world”, Peter Thiel’s Founders Fund observes that tangible technological innovation is slowing down at the same time. The single best explanation for it (Occam’s razor) is that regulatory barriers (from which software remains largely untouched) stifle technological innovation beyond any justifiable degree.

Interesting examples for this can be found in the Founders Fund manifesto “What happened to the future?” (hereafter, FF) and Balaji Srinivasan’s lecture notes on “Regulation, Disruption and Technologies of 2013" for Stanford’s “Startup Engineering” class on Coursera (hereafter, SE):

The most alarming of the examples brings us the FDA: The cost of approving a drug has exceeded $3 billion (FF).

While the leading pharmaceutical corporations may easily deal with such figures, large corporations are usually not the place where true breakthroughs emerge (they are good at incremental optimization not disruptive paradigm shifts).

True innovation comes from entrepreneurs with bold ideas. But most entrepreneurs fail — and venture capitalists usually pay for it. Now, which VC can afford to invest a couple of billion (vs. the usual million) dollars in a single startup whose most likely outcome still is failure? It seems more appealing to pour one’s money into capital-efficient (“ramen-profitable”) software companies with similar probabilities of becoming billion dollar “unicorns”. Opportunity cost are simply too high.

On top of Biotech, Transportation and Lodging seems to be the area with the most harmful regulatory action at the moment (SE):

  • AirBnB faces regulatory scrutiny in New York, Amsterdam and Quebec.
  • Drone startups have to comply with FAA rules for manned aircraft.
  • In North Carolina, the automotive lobby achieved a ban for Tesla’s direct-to-customer sales model.
  • The California Public Utilities Commission (CPUC) is the Sword of Damocles swinging above Lyft and Uber.
  • The National Highway Traffic Safety Administration (NTSA) wants each state to ban self-driving cars for now.

And then there is Finance and Payments of course, with the Patriot Act giving PayPal a hard time, Russia and China opposing Bitcoin, and the positive counterexample of AngelList’s Naval Ravikant changing the law to legalize crowdfunding through the JOBS act (SE).

Let’s get back to a state where regulation assists innovation instead of killing it. Healthy consumer protection favors the highest quality producers; The unhealthy form of consumer protection we see right now only protects established corporations, and thereby builds up tremendous opportunity cost (as seen in a lack of growth and stagnating median wages).


3. Protectionism (a.k.a. consumer protection dwarfs international trade)

Populists usually scream for more protectionism as it almost always sounds like a good idea on the surface.

Let’s block out international competitors to give domestic producers an unfair advantage in order to boost our own economy at the cost of others.

However, this will result in sanctions from international trade partners that usually outweigh the benefits (as, after Ricardo, economies should gain a net benefit from exporting goods they are specialized in and importing other goods).

Protectionism is among the major obstacles that threaten global food security. In years of food crises (bad crops), some economies tend to impose export quotas on nutrients in rare supply on international markets. This has two effects:

(1) Demand in crisis-ridden economies is not fully met by international supply, with the result of starvation.

(2) Domestic suppliers in protectionist economies cannot extract surplus profit from the increased demand for their goods on international markets.

It neither helps the people that are starving nor the suppliers in the protected economy. While consumers in the protected economy surely benefit from price stability, they could as well have benefitted from additional investments and job creation in their domestic economy (due to excess profits in the agricultural sector).

Let’s tear down — not build up — protectionist regulations on an international level. A possible — but questionable — protection of domestic consumers hardly justifies to slow down domestic producers and to accept international supply shortages that result in starvation.


4. Immigration stops (a.k.a. conservation of culture dwarfs human capital expansion)

If there is one thing ultraconservative populists like even more than protectionism, it is to restrict immigration.

Many people fear that immigrants bring with them (1) an erosion of culture, (2) crime, an (3) increase in social expenditures, and that they will (4) steal jobs from native citizens.

Let’s address the last point (4) first. Immigrants don’t steal jobs.

First, skilled immigrants compete for jobs, and — hey — if they are doing a better job than domestic workers, so be it — the economy will be more productive for it.

Second, unskilled immigrants often take on jobs the domestic workforce doesn’t even want to pursue.

Third, in technology, there is a huge talent gap that needs to be filled with skilled immigrant workers as domestic supply is hardly enough.

Fourth, mastering the demographic change most Western economies face requires human capital from abroad.

Fifth, highly skilled immigrant entrepreneurs will even create jobs: a third of the venture-backed companies going public within the last decade were founded by immigrants. We’re not talking about taking a piece out of the famous pie, we’re talking about expanding the pie.

The other three points (1 − 3) are not a problem of immigration but a problem of integration.

People usually don’t migrate with the intention of starting a criminal career or abusing welfare systems — they migrate with the hope to start better lives. Racist societies failing to show them the dignity they deserve, a bad education system not helping them to grow the skills they require, and sometimes even bureaucratic barriers that keep migrants from just taking on a regular job to earn money the legal way is what turns hopeful immigrants into depressed criminals.

Let’s liberate migration in order fill skills gaps, master demographic change, foster innovation, create — not lose — jobs, and most importantly truly allow people to follow their pursuit of happiness (regardless where they have been born).


5. Arbitrary legitimacy of states (a.k.a. sovereignty of legal entity dwarfs human rights)

The vast majority of Syrian emigrants right now are refugees trying to escape the terrors of the Syrian civil war (where the Syrian state is in the process of exterminating the very people it is supposed to represent).

In the UN Security Council, China and Russia block an international intervention in Syria — whether it is a military or humanitarian one. They base their vetoes on the absurd construct of Syria’s sovereignty of state.

State governments have the sovereignty to deal with their own domestic affairs without the intervention from external parties. In the case of Syria, this effectively protects the Syrian government to butcher its own people. Denying help to living human beings in order to protect a mere legal entity is as kafkaesque as it could get.

In fact, the world has already recognized this issue. The Responsibility to Protect (R2P) doctrine claims that sovereignty is not a right but a responsibility, and the international community actually might answer a state failing his responsibility to protect with (military) intervention.

So, the real issue at hand here is not sovereignty of states but the problematic structure of the UN Security Council.

Let’s install a judicial mechanism that requests UN Security Council members to back vetoes with reasons grounded in supporting human rights (instead of accepting vetoes out of arbitrary reasons).

(As the situation in Syria is very complex and far from being black and white, I am not in a position to advice for or against military intervention. However, it definitely should not be the case that humanitarian intervention is blocked — with many people dying — solely due to an ineffective political system and harmful bureaucracy.)

It is even more telling that the root cause for most conflicts in today’s Middle East and Africa lies in the drawing of completely arbitrary borders by former colonial powers — another case of extremely harmful regulation.

The ongoing peace talks between Israel and Palestine signal a solution on how to deal with this particular issue (to avoid sectarian conflict): in this case, the creation of an independent Palestine nation state.

Let’s foster — not hinder — the creation of many more independent nation states.


6. Criminalization of the drug business (consumer protection dwarfs human rights)

Another area where harmful regulation destroys many lives is the drugs trade. (This section has been inspired by the debate “The Drugs Dilemma” at the 2014 World Economic Forum. )

On the demand side, criminalization hasn’t stopped people from accessing, buying and consuming hard drugs.

In the United States people go to jail for merely using drugs, stamping them as criminals and destroying their lives. It further stirs racial conflict as the number of blacks and latinos convicted by far exceeds the number of white convicts. Whether this regulation at least deters a substantial amount of people from using drugs is questionable.

On the supply side, the drug cartel actually benefits from the criminalization of drugs as it locks in their high margins — margins high enough to motivate people to kill for them.

Furthermore, the supply side currently behaves like a balloon: as soon as Colombia manages to deal with the cartel, the drug business just pops up in its neighboring states (etc).

Decriminalizing the drug business could result in a normalization of profits under the pressure of free market competition. Profit would not be high enough anymore to kill for it.

Decriminalization would also mean to gain true regulatory control and oversight. True consumer protection comes from educating consumers and limiting doses of otherwise lethal drugs - instead of pretending to be capable of banning the use of drugs completely.

Let’s decriminalize drugs (without claiming their use was socially acceptable, of course, or to allow romanticizing ads like the Marlboro cowboy).


In general, regulatory intervention tends to fragilize systems

Nassim N. Taleb broadened our vocabulary by opposing the term “fragile” (things that lose from disorder) not with “robust” (things that are indifferent to disorder) but with the term “antifragile” (things that gain from disorder).

We often impose regulation with the well-meant intent to limit observable risk, but by doing that we’re actually making systems more fragile — more vulnerable to unexpected risks (i.e. “black swans”).

Beyond the aforementioned list, financial regulation is a great example for this.

In reaction to the financial crisis, we tried hard to mitigate systemic risk in order to avoid future depressions. But how likely is it that we consider all the possible causes for future crises and mitigate them in advance? The answer is simple — it is impossible.

Since we cannot become immune to black swans, we should think about the potential to benefit from them instead of avoiding them. So, the antifragile response is probably to encourage frequent small boom-and-bust cycles instead of — by trying to avoid them — induce the large and dangerous ones.


Takeaway

Whether you agree on all the specifics, the takeaway of this essay should be quite clear: We need to oppose the bias that more regulation is necessarily a good thing. In many cases, even well-intended regulation does severe harm.


Thanks, Amédée d’Aboville for reading drafts of this!

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@mauricemauser