The Limits of Regulating Technology

No changes are permanent, but change is.

The United States has made great strides in its level of innovation online. The Internet is routinely characterized as the fountain from which much of that entrepreneurialism has sprung. Yet in the world of physical technologies we’ve seen real world deployment lag significantly behind development.

Steve Coast has a great blog post in which he offers a diagnosis for this state of affairs:

To paraphrase Peter Thiel, new technology is probably so fertile and productive simply because there are so few rules. It’s essentially illegal for you to build anything physical these days from a toothbrush (FDA regulates that) to a skyscraper, but there’s zero restriction on creating a website. Hence, that’s where all the value is today.

If we can measure economic value as a function of transactional volume (the velocity of money for example), which appears reasonable, then fewer rules will mean more volume, which means better economics for everyone. So it used to be very hard to create an airline, now it’s easy, we have more choice and more flights and so on.

Conversely, more rules are likely to mean less “volume,” and redirect capital investment from its highest valued use. If we take that logic one step further, investment and innovation — if encountering too much resistance domestically — will inevitably go elsewhere. Recalibrating course along the path of least resistance is easier in the digital age than ever before. Hostile regulatory regimes in one country will incentivize innovators to go elsewhere. Can’t test your commercial drones here in America? Come to Canada! They’re open for business.

And just as investment in commercial drone research and development has fled north of the border, the same capital flights seem to be readying for takeoff in autonomous vehicle testing. Just as the United States is quickly falling behind the global commercial drone revolution, it may yet have to struggle to emerge as the prime mover in autonomous vehicle technology. Singapore, for example, is quickly emerging as a leader in actually implementing automated transportation services. It’s true that a wave of recent headlines shows technology firms and automotive companies revealing pilot test plans for bringing driverless cars to American roadways in the near-term. Unfortunately, Singapore started pulling ahead of the curve in this space years ago. (And for a number of reasons, it seems as though the Asian city-state will be the prime mover in this technological revolution.)

So why in the country that brought the world the Internet, are we falling so far behind the curve in actualizing these new breed of real world emerging technologies? Why are commercial drones already operating in countries around the world, while the FAA continues debating appropriate rules? Why are autonomous vehicles getting a head start in Asia and not in the country that birthed Henry Ford? Why, in short, is America, despite having led the world in commercial technology development for so long, now on the cusp of being a second stringer?

Adam Thierer, in a recent post at The Technology Liberation Front, best encapsulates this phenomenon as “global innovation arbitrage.” The argument is thus:

Capital moves like quicksilver around the globe today as investors and entrepreneurs look for more hospitable tax and regulatory environments. The same is increasingly true for innovation. Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity.

As Coast previously pointed out, the areas most primed for innovation and growth are those in which rules are simple, limited, or nearly non-existent. The more rules, the more hassle; the more hassle, the less likely people are to devote time and resources to innovating. Societies are in a constant state of flux. As are the rules that govern, well, pretty much everything. That’s why it’s so important we recognize the limits of what rules and regulations can accomplish. Recognizing the necessity of regulatory forbearance and humility can go a long way towards revitalizing America’s lead in technological deployment.

Originally published at niskanencenter.org on August 24, 2016.