Legalizing Health Innovation
Why Balaji Srinivasan should lead the FDA in the new Trump administration
There is a lot of excitement in Silicon Valley about Balaji S. Srinivasan being the leading candidate to run the FDA. Unlike most of Trump’s other nominations, Balaji is undeniably qualified for the position.
In a recent episode of the TwentyMinuteVC, Balaji talked about how regulatory risk posed the biggest challenge for companies like Uber and Airbnb, while overly conservative (and outdated) regulations threaten the progress of emerging industries like drones, genomics, and self-driving cars.
Balaji has not spoken publicly about his potential role as head of the FDA, but this interview (from November) is quite revealing as to how he would go about running a federal agency.
Here’s a concept that Balaji has been thinking a lot about and strongly believes:
As tech companies start to operate more in the physical world, the main barrier is often not the technology — the primary risk is regulatory risk.
Uber and Airbnb: $100 Billion Dollar Regulatory Restrictions
In 2009 it would have been a remarkable thing to say that “$100 billion in equity value is being held back by outdates taxi and hotel regulations.” Today Uber and Airbnb’s combined $100 billion valuation is a small fraction of the overall value the two companies create for society.
Time saved looking for parking, reduction in drunk driving, millions of jobs for people all across the country — to think that the next big thing was being held back by regulations that were 70–80 years old, regulations could have very well put companies like Uber and Airbnb out of business, is quite a remarkable thing. It’s very difficult to show people the value that is unseen.
The Unseen
A philosopher by the name of Frederic Bastiat has a parable called “what is seen and what is unseen”. The basic premise is that, it requires more empathy and more imagination to think about the value that isn’t seen. You can see a skyscraper, but what you can’t see what would have been built if building regulations allowed skyscrapers to be built in two weeks rather than two years.
This is not a theoretical example. In China they work 24 hours a day, prefabricate all the material, put it all together on site, and in 2–3 weeks a skyscraper is built.
In China skyscrapers are built 100x faster than they’re built here. Balaji argues that the reason this kind of thing is important is that it’s unseen the kind of innovation that you would have if the regulation in the United States wasn’t as restrictive.
But… what’s happening now is also super interesting. We’re starting to see more and more global diversification of regulatory regimes. This means that you can now see the unseen — if you look oversees. If you look at other jurisdictions you can see what we would have had if these obsolete rules had not been in place.
Recent Example: Elon Musk’s Hyperloop might not debut in the U.S. — and that’s a good thing
The Value of the Unseen
What was unseen in 2009 was Uber and Airbnb, and that was just taxi and hotel regulation — which isn’t as critical as say, FDA regulation is. So that leads to a an interesting follow up question: if these state level regulations on taxis and hotels were holding back $100 billion in value that can be directly linked to two companies, what’s the value that’s being held back if you look at regulation that applies to the whole country?
To quote Balaji on the TwentyMinuteVC: (emphasis mine)
Then things really get interesting. If you say that was just taxi and hotel regulations, what is the FDA holding back? What’s the FAA holding back? What’s the SEC holding back? These regulators are well intentioned, but the laws are literally often written 100 years ago.
The FDA’s ancestor was started in 1906, the SEC got much of it’s power after The Great Depression. We’re talking about 2–3 generations ago. That’s several technology generations. It’s quite possible that you could achieve many of the objectives of these regulatory agencies with new technology in a better way.
Regulating in a better way: The Star Rating System ⭐️ ⭐️ ⭐️ ⭐️ ⭐️
If you look at the star rating system that’s used by Uber, Lyft, Postmates, Airbnb, and just about the entire on-demand industry, you’re talking about real-time star ratings, real-time reviews of both the buyer and the seller that are updated on a per ride or per stay basis.
That’s much more responsive as a regulatory system than every six-month or every year evaluation of a taxi medallion or a hotel license. You just don’t have the same level of digital precise feedback between buyer and seller.
Balaji makes the point that technology companies are accomplishing the roles of regulatory bodies, and doing it better, in real-time, with more accountability on both sides of the marketplace. If you’re a bad actor you get banned from the system. If you don’t like the platform, there are alternatives…
Unbundling Regulatory Regimes
Another really important component that Balaji points out is the customers’ choice between different regulatory regimes. That is to say, they can hit a button and choose Uber or they can hit a button and choose Lyft. The reason that choice is important is because right now, in order to choose between different taxi regulatory regimes you actually have to physically migrate between two different jurisdictions.
It’s a bundle deal where you have a bundle of regulations that are given XY location, and unbundling regulatory regimes is going to be just as important as the unbundling of television channels where you can choose à la carte.
“There’s only two ways I know of to make money — bundling, and unbundling” —Jim Barksdale
So how do you unlock the value that’s been held back by antiquated laws of more than a century? Unbundle the regulatory regimes.
Risk-Taking for Advancement of Technology
Harry Stebbings, host of the 20MinuteVC: To what extent do you agree with the archetypal notion of Silicon Valley marketplaces like Uber and Airbnb of “move fast and break things” — do you think that is the right approach?
For this section I’ll quote Balaji directly:
Yes. You don’t get plane flights, you don’t get aviation without test pilots. We have to have early adopters. If we allow people to do bungee jumping and skydiving, if we allow people to sign up for the military, there should also be room for people who take risks to advance technology.
If you go back and look at the CRC Handbook of chemistry and physics, it will have, for some of the really old compounds a smell and a taste there, and for the newer compounds it doesn’t have that. There was a time when chemists would actually smell and taste things, and from that library we have the compounds where you build all the flavors in what we eat. Today, you just don’t have the same level of risk tolerance, and because of that people want to have an extreme high level of safety on everything.
There is a point when having to much conservativeness on safety. Being too conservative on safety is actually just systematic risk (risk that you cannot get rid of). You stick with the current system, you don’t take a risk, and then what happens is that you don’t test out a new plane and because of that, you lose millions of man years of time — which is basically lives — due to having slower air travel. That’s just one example.
Another example that’s even more directly is related to new medicines. There’s got to be somebody who’s the first person to try a surgery or somebody who’s the first person to try a drug. That person is taking a risk, and if the risk pays off then they’re a hero and they should get awards and prizes. These are the kind of things we should be incentivizing. Without risk taking you don’t have hundreds of thousands of people who get the cure. So that’s the second really important thing.
Carving Out Risk-Taking Jurisdictions
Balaji points out two really important things to think about when it comes to regulation:
- What are these laws holding back?
- How can we carve out jurisdictions where you can actually have early adopters try new technologies?
It’s the same concept of early adopters on the internet, but applied to areas where there is some degree of physical risk. You know about the risk going in and that the person may suffer physical injury or even die, a heroic death, like many of the test pilots who built modern aviation have at the industry’s infancy.
The key is that everyone involved knows and accepts the risk going into it, and whatever happens, that person gets the same kind of social credit that we extend to people who serve our country in different ways, like oversees in the military. Taking a risk for the purpose of advancing technology is an honorable thing, and certainly more socially advantageous than going bungee jumping or skydiving.
A radical overhaul of the regulatory system is not needed.
Harry Stebbings: Do you really think the solution is carving out allocations for early adopters, or do you prefer the radical overhaul of the archaic regulatory system?
I’m definitely on the first one, and the reason I say that is that it’s hard to convince people of what is unseen. People will just hear “radical overhaul of the regulatory system” and they’re just gonna resist it.
Everything depends upon being able to opt out and build parallel systems where you know some of them will fail, but some of them are going to succeed. For the successes you make sure to capture them on video, you put them on YouTube, you broadcast them to the world to see and show people that it wasn’t so bad. That’s what gets you the political capital to start flipping other cities.
Let’s look at a concrete example: as of 2016 Austin Texas has chosen to take itself back into the past, into 2012, which was a pre-ridesharring era. On the other hand, Pittsburgh Pennsylvania has chosen to go into the future, into the year 2021, and allow self-driving cars to roam the streets.
Pittsburgh is running an experiment, and that experiment is going to be highly scrutinized, and there are a lot of people who have high stakes in making sure it’s a success. If it’s done right and it gets captured on video, and if folks can travel to that region and see for themselves that it’s not so bad — that it’s actually pretty good — well, now you’ve got this early adopter zone. You’ve got what I call a “special innovation zone” — and from that experiment other jurisdictions can adapt.
Legalize the Future, by Jurisdiction
You don’t try to force the change on the entire system at once. Instead, you focus all your energy on carving out one sufficiently large zone where you can prove it out. It can’t be a tiny town of ten people because then you won’t have the liquidity to see how it really operates with people. All you need is some specified zone where the future is legalized.
If you’ve managed to get a zone like that, and you’ve got a commitment to actually see through the experiment in that zone given that you know there might be some risks (for self-driving cars there might be some crashes, there might be some bugs…) and given that the folks there understand what they’re getting into.
Then that is knowledge that the rest of the world can use. If it succeeds, expect more and more places to start adapting these new kinds of regulatory regimes — the value will be seen.
I hope he gets it too.
