Academic policy debates about how to regulate disruptive innovations (if at all) have become all too real. We now have daily reminders of the problem: violent protests by French taxicab drivers over popular ride-hailing applications like Uber; IBM’s Watson technology performing medical diagnosis that beats the experts; a partisan Federal Communications Commission (FCC) hell-bent on displacing engineering-based governance of the Internet with regulations born in the days of rotary phones.
While none of the individual blowups may have been expected, the sudden epidemic of collisions at the intersection of technology and the law is entirely predictable. It is the natural consequence of a revolution in computing technology that continues to spread across the world, deconstructing traditional industries as it expands its reach.
This year marks the fiftieth anniversary of Moore’s Law, Intel co-founder Gordon Moore’s prophetic forecast that computers would continue to grow faster, cheaper, and smaller, doubling performance roughly every two years. After five decades of exponential growth, computers have long since broken free of their B-movie stereotype as inscrutable, fragile machines housed in sterile rooms, tended by emotionless human operators. We now have nearly two billion smart mobile devices worldwide, and soon will have a trillion (yes, trillion!) other connected things.
Information technology, intentionally and otherwise, long ago unleashed a persistent hurricane of creative destruction on the industries closest to it—communications, consumer electronics, and entertainment. And now, with a few more turns of Moore’s Law, it’s ready to disrupt all the others.
That is, assuming old rules and regulations, some going back to the Industrial Revolution, don’t get in the way. In economic sectors as different as agriculture, financial services, manufacturing, education, and health care, new disruptors are coming into conflict with policies that haven’t been seriously reformed for generations—and with regulators who have, until now, been spared the disruptive aftershocks of digital technology.
Even as incumbent businesses align with their longtime regulators to erect quixotic obstacles in front of the disruptors, a tidal wave of new technologies, products, and services is massing at the borders of the industrial economy. In the next few decades, new inventions will radically improve every aspect of our lives. But along the way, they will continue to create chaos for policy-makers still fighting last century’s political battles.
If traditional governments want to remain relevant in the information revolution, they’ll need to embrace the tools of the disruptors, relentlessly questioning and experimenting with the best techniques and technologies to serve efficiently the public interests they were created to protect. Instead of force-fitting new technologies into obsolete categories, we need to reverse engineer public policy back to first principles. What problems are we trying to solve? Do they still exist? And, if so, which institutions are best suited to confront them with the least risk of collateral damage?
Last Refuge of the Incumbents
As Moore’s Law enters its second half-century, digital innovation has entered a new stage of sudden transformation, which my co-author Paul Nunes and I have coined “big bang disruption.” Industries that were left largely unaffected by the first waves of disruptors are now having their Internet moments. In some cases—think health care, energy, manufacturing, government services—historically low investment in core IT has left these sectors even more vulnerable to deconstruction and more resistant to change. When the innovators finally break through regulatory and other barriers, there’s often chaos.
Industries and their regulators are now confronted with an old paradox: What happens when an unstoppable force meets an immovable object? The answer, so far, hasn’t been pretty—or, more to the point, economically productive. Right now, for example, the Federal Aviation Administration (FAA) is years behind a congressional mandate to finalize rules for commercial drone aircraft to operate in U.S. airspace. The agency seems paralyzed by a fatal combination of aviation industry capture, bureaucratic foot-dragging, and a lack of technical expertise.
In the meantime, the FAA recently began granting special exemptions, more or less randomly, based on individual applications. E-commerce giant Amazon, which plans to test the potential of drone-based local delivery as both a cost and environmental breakthrough, was granted an exemption in March, nearly a year after asking for it.
Lightning fast for federal regulators, a year is a lifetime for those conducting business under the jurisdiction of Moore’s Law. By the time the exemption was granted, the devices the FAA approved for testing were already obsolete. “We’ve moved on to more advanced designs that we already are testing abroad,” Amazon’s vice president for global public policy told Congress, with the last word intentionally suggesting an ominous threat to U.S. competitive advantage.
The Amazon drone story is more the rule than the exception. And as Moore’s Law continues its exponential acceleration, the gap between innovation reality and regulatory drag will certainly get worse.
So if we are to realize the full social, economic, and democratic potential of disruptive technologies as different as 3-D printing, 5G mobile broadband, autonomous vehicles, smart infrastructure, and the decoding of the human genome, we need to find a new way for old laws and new tech to work together, or at least to stay out of each other’s way. Otherwise, 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.
But that strategy yields, at best, short-term postponement of the inevitable, as consumers ultimately subvert bad policy to get what they want—and what they want is always the better and cheaper products and services made possible by new technologies. Worse, incumbents and their trade associations, which push for delay and obfuscation by insisting on the application of square regulations to round innovations, often do so to the exclusion of other strategies, including learning to adapt the new technologies to their established supply chains.
So when the dam finally bursts and the regulators give way, incumbents are left without life preservers they had plenty of time to make. In doing so, moreover, they invariably take with them a dwindling but dedicated group of “legacy” customers who, for a variety of reasons, also failed to adopt the replacement technology.
We see examples of this scorched-earth strategy in a variety of industries now under siege. Consider transportation and health care. In the former, incumbent taxicab and limousine drivers, much like music labels a decade ago, simply can’t accept that their customers prefer digital alternatives, in this case mobile applications that simultaneously improve the cost, convenience, and environmental footprint of everything from dispatch and vehicle utilization to navigation, payment, and feedback in a single bundle of software.
Incumbents resist the inevitable through cynical misdirection, attacking the safety of Uber and Lyft drivers and their vehicles, or, as in France, by more candid admissions of their preference not to compete with the startups by improving their own ossified practices. They feel entitled, it seems, to practice business as usual, regardless of cost or what consumers prefer.
In health care, where concerns about safety and professional standards are more plausibly raised as barriers to technology-based alternatives, progress has been slower for startups. As medical costs spiral out of control and the majority of the world’s population can’t afford even basic access, medical professionals are resisting fundamental reforms through legal restrictions on the practice of medicine. Even fellow practitioners are prosecuted when they try to improve the economics and outcomes of health care by utilizing modest innovations such as telemedicine or offloading less demanding duties to nurse practitioners armed with digital assistants. As insurers and HMOs are busy deploying mobile applications to give patients more immediate access to doctors, for example, the powerful American Medical Association is euphemistically debating what it calls the “ethics” of virtual patient communications.
The real investments so far have been channeled into consumer-oriented health- and fitness-tracking devices and applications, which take advantage of increasingly low-cost sensor technologies and piggyback off the robust mobile broadband ecosystem. But as these devices improve and learn more about the health of an expanding user base, watch for their manufacturers to move sideways into more direct competition with traditional health care.
That’s when the fights with the health-care establishment will get ugly. If my Fitbit simply displays my blood pressure, then it’s just reporting information. But if a future version uses biofeedback to train me to optimize my heart rate through modifications of diet, exercise, and sleep, is it engaging in the practice of medicine? And when today’s wearable sensors are embedded in digestible nutritional supplements, will the FDA be called on to regulate them as devices or food? The answer should be neither, but if history is any guide, regulators will start by assuming both—and a few other categories.
If disruption is inevitable—and it is—then why should we worry about doomed efforts by industry incumbents to stay the sands of time? The answer is that regulatory capture in these and other industries is economically inefficient, protecting markets in ways that benefit the unproductive behavior of existing enterprises more than they do consumers. Indeed, by keeping better and cheaper innovations out of the hands of eager customers, regulations supposedly in place to protect consumers are being twisted to do just the opposite: to do consumers genuine harm.
As the incumbents sic the regulators on the disruptors, often through expensive and inefficient litigation, obsolete laws and old rules also skew the trajectory of innovation away from its natural course, whatever that might be. The potential for unintended negative consequences—the failure of ride-hailing to evolve into even more efficient shared autonomous vehicles, perhaps, or the disease that isn’t cured because regulators are pushed to ban low-cost genetic testing services that would reveal large-scale patterns in the data—accelerates with Moore’s Law.
After the Internet, the Flood
The self-interested application of laws that keep us from doing socially valuable things made possible by new technologies has reached crisis proportions. The blind transference of old regulations to emerging industries, particularly when done principally for the benefit of uncompetitive incumbents, is now the public policy crisis of the early twenty-first century. It is, quite simply, a recipe for consumer revolt, a potent force innovators have already proven adept at unleashing for better and for worse.
Warning signs of a public-policy showdown have been visible since the dawn of the Internet economy. In particular, the epic—though ultimately irrelevant—copyright litigation against music startups such as Napster, Grokster, and their users foreshadowed the contours of today’s overheated legal fights. Consumers used the same technology for sharing music to organize their resistance, flexing new collective muscle. And the industry’s single-minded focus on litigation inadvertently opened the door for Apple, YouTube, and other technology companies to redefine the legal creation and distribution of entertainment products, with minimal input from the labels.
A little later, as credit card companies and banks fretted over the inability of their aging mainframe computing systems to effectively handle low-value, high-volume transactions generated by peer-to-peer e-commerce from platforms such as Amazon and eBay, unencumbered (and unlicensed) startups including PayPal innovated their way deep into the financial system before the incumbents or their regulators could stop them.
Now, as the chasm between Moore’s Law and traditional law expands, its shape is warping, evoking science fiction writer William Gibson’s famous observation: “The future is already here—it’s just not evenly distributed.” Today, the future is fighting a battle with the past on multiple fronts, with consumers often employed by both sides as human shields in what is, ultimately, a fight over the allocation of new economic value.
Consider several current examples, many of which involve the disruption of more than one industry.
The Sharing Economy. Technology that makes it economically efficient for consumers to share, lease, or co-own expensive fixed assets including vehicles, domiciles, and expertise is bringing to the surface long-buried compromises, inside deals, and outright corruption in the mostly local licensing, inspecting, and insuring of transportation companies, hotels, and professional services. Some of the largest cities in the United States haven’t expanded the number of licensed taxis for decades, for example, creating an artificially low supply of vehicles and the large-scale exploitation by medallion owners of a mostly immigrant pool of drivers.
The Internet of Things. Low-cost sensors offer the promise of connecting every one of more than a trillion items in commerce, including furniture, appliances, commercial buildings, and public infrastructure. The so-called Internet of Things will allow consumers to profoundly customize their lives, radically improve energy efficiency, and help seniors stay in their homes far longer, to name a few likely benefits. Regulators, notably the Federal Trade Commission (FTC), are already wrestling with the risk to consumer privacy of Internet-based communications among and between these devices, even as the economic value of widespread deployment is still impossible to estimate. What policies and enforcement mechanisms will minimize the costs while maximizing the benefits? Do we need better security technology or invasive government oversight? And what process ensures we make the right choices?
Advanced Robotics/Artificial Intelligence. Dramatic improvements in hardware and software are making possible a future in which computers will supplant even more human beings in a wide range of dangerous, repetitive, error-prone, or simply boring jobs. Sudden leaps in overall productivity are great for society, but the potential displacement of large categories of blue- and white-collar workers is raising anxiety levels and calling into question long-held principles of industrial policy, including the need for universal employment, the role of organized labor, and the meaning of “full-time.” Characterizing these developments as bad doesn’t help—and, frankly, doesn’t matter. They’re coming anyway.
3-D Printing. Rapid price deflation for industrial prototyping machinery has led venture investors to bet heavily on consumer-oriented 3-D printers that can make fully functional items—including, perhaps in the not-too-distant future, food, electronic circuitry, and human tissue—out of a variety of materials. Already, 3-D printers are being used to manufacture highly customized prosthetic devices and spare parts for expensive industrial equipment that would otherwise require vast warehouses and expensive, aging inventory. Dramatic improvements in production efficiency and on-demand fabrication, however, are already challenging our nearly broken copyright and patent systems, raising fundamental questions about both the need and optimal structure of protections for industrial designs and processes. What inventions are being protected too much and for too long? Which aren’t being protected enough?
Autonomous Vehicles and Drones. Self-driving cars and self-flying aircraft will revolutionize the design of cities and roads. They will vastly improve the efficiency of agriculture and public safety by providing new sources of real-time information at minimal cost and reduced human risk. And, by enabling low-cost deliveries, they will further the revolution in retailing that began with the first e-commerce sites on the Web. But how will we redesign the legal infrastructure that determines the rules of the road on land, sea, and air—an infrastructure that has grown around the assumption that humans are inconsistent, easily distractible operators? Once energy-efficient autonomous vehicles become better (and more easily monitored) drivers, what kind of police will we need? What kind of insurance? And how will we manage the transition from one transportation paradigm to the next, taking lessons from the introduction of “horseless” vehicles a century ago?
Digital Currency. Much of the financial system has already migrated to all-electronic formats, but the production of cash stubbornly remains a government monopoly in much of the world. Now, Bitcoin and other digital currencies are testing the possibility of financial exchanges based on new forms of trust. They’re also testing the limits of a legal system that has grown, intentionally and otherwise, to rely on money as a tool of control, whether for law enforcement, taxation, or foreign trade and debt. If digital currencies achieve the critical mass and security needed to become a more stable kind of money than scrip, it won’t just be the banking system that will have to adapt.
The Quantified Self. Telehealth and the Internet of Things are coming together in a new field of science that writers Gary Wolf and Kevin Kelly call “the quantified self.” As more and more devices inside and outside your body collect vast troves of information about you and your environment, analysis of that data will radically alter the way we eat, sleep, raise our children, and age with dignity. Even in its early stages, the quantified self raises fundamental and difficult problems of public policy. Health and safety rules are optimized for society as a whole, but what happens when they conflict with what is objectively best for you as an individual, or as a parent? And what moral or legal duty do you have to share that information—the ultimate application of “big data”—with researchers and others who rely on large samples to design treatments, measure outcomes, and cure diseases? What role can and should regulated insurers, health practitioners, and expert regulators play in both compelling disclosure and protecting personal autonomy?
Reverse Engineering Regulation
Each of these examples—by no means a complete list of current disruptions—raises difficult and fundamental policy problems. For many, it’s too soon even to suggest broad solutions. But we can and should establish some foundational principles, if only to reduce the chances of doing the wrong thing for the right reasons.
The most urgent question is whether our existing governmental institutions, fine-tuned over a century for the industrial economy, can and will adapt to the new world of information-driven industries these and other technological advances are busy creating. Can our current laws and regulators be reimagined for twenty-first-century problems? Or do we need to start with a blank slate?
Writing recently in these pages, Ron Klain argued that the Internet has failed to meet its promise as “the great equalizer,” and called for more of the interventionist programs (what he calls “progressive advocacy”) that have characterized the Obama Administration’s industrial policy. [See “Inequality and the Internet,” Issue #37.] Klain offers a “Progressive Agenda for Internet Policy,” a series of “Internet-related policies that seek to ensure that the benefits of the Internet are more broadly shared, its impact on our society more equitable, and its potential more widely accessible.” But overall, he assigns existing institutions, including civil society, the task of reforming the technology rather than the other way around.
We see it differently here in Silicon Valley. We believe our modern technological wonders have been created by entrepreneurs and engineers with no political agenda other than the invention of better and cheaper products and services for their users. Without apology, they are motivated in most cases by wealth creation but also by a fundamental belief in progress. If not progressives, we are all optimists.
Governments, even progressive ones, move slower all the time relative to Moore’s Law, with short-term partisan considerations quickly displacing high-minded principles of equity and accessibility. For us, more government and more regulation simply mean more opportunity for incumbents to continue beating our startups over the head with them.
And we see today’s regulatory institutions as hopelessly captured by incumbents of all kinds. Longtime Chicago Alderman Paddy Bauler famously said of his notoriously corrupt city that it “ain’t ready for reform.” That was 1939. It—and the rest of our all-too-human institutions—still ain’t ready. Which is not to suggest an alternative of a lawless frontier of digital robber barons serving only the digital “haves.” Following the best economic work of Adam Smith and Ronald Coase, fast-changing technology markets largely police themselves, and do so far more effectively than their industrial-age counterparts.
Even our emerging markets are, of course, imperfect, but the evidence suggests that traditional regulators are ill-suited to execute course corrections when needed. Instead, much of the best regulation of innovation comes from the technology itself. Today’s market dominator is tomorrow’s also-ran, and the shift is more often than not simply the side effect of a new generation of technology—another turn of Moore’s Law—rather than the blunt instrument of antitrust and anti-competition law.
Think of the engineering-driven, multi-stakeholder, egalitarian process by which the Internet’s core protocols and addressing and connection agreements have always been maintained. These are the true rules of the road for the information superhighway, which is constantly being rebuilt even as the traffic increases by orders of magnitude. Yet there have been so few collisions on that global infrastructure that nearly all disputes are resolved without the need for written contracts or formal dispute-resolution mechanisms, let alone agencies, courts, and lawyers.
As Internet pioneer and uber-investor Marc Andreessen puts it, Silicon Valley works as well as it does because its innovators and investors have historically had few “regulatory hurdles” to overcome. Less is more. Put another way, smart retail regulation is better than dumb wholesale regulation.
There’s still a role for traditional governments to play, of course. Governments are good at coordinating standards, providing tax and other incentives for basic research, and serving as arbitrators and enforcers of last resort when markets genuinely fail. But from our standpoint, the optimal solution to the kinds of regulatory challenges presented by the next generation of innovations is to make a fresh start. And we need to begin by reverse engineering the regulation of industries experiencing disruption, going all the way back to first principles.
As Andreessen put it in a 2014 essay in Politico, “Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.” What does that mean? At its core, law is the solution to collective action problems that, at the time, could only be solved through governments. So why not start by asking why we are regulating? What was the initial set of problems that could only be overcome by legislating the solutions consumers wanted? In a world of transformative technologies, do the problems still exist? And if they do, are existing institutions and processes the most effective and efficient source of solutions?
It isn’t just the incumbents who are being disrupted by technology, in other words. Lawmakers are also being exposed as resistant to innovation, relying on a monopoly on regulatory power to keep superior systems at bay. What, after all, is the regulator’s incentive to change, to reform, to reengineer? As we have seen most recently in corruption scandals in California, for example, public-utility commissions long ago lost touch with actual consumers (they call them “ratepayers”). After decades of too-close working relationships, they serve instead the utilities they are meant to regulate. Utilities find it easier to lobby the regulator than to compete, and a revolving door between agencies and industry encourages painfully slow decision-making that values compromises among the competing interests of the regulated companies over the interests of consumers. When actual constituents show up at public meetings, utilities and regulators freak out.
Even well-meaning regulators may not be adaptable to a rapidly changing future. Consider by contrast the progress digital innovators have made in developing self-policing systems for new electronic markets. One of the most important innovations to come from early platforms including eBay and Amazon was the creation of buyer and seller rating systems, which aligned incentives for both to abide by commercial best practices without the need for licensing, inspection, and full-fledged legal systems for conflict resolution.
In that sense, feedback and alternative dispute-resolution systems mimic the highly adaptable law merchant, an abbreviated commercial governance model that grew up around medieval market towns. As with their physical ancestor, technology-driven systems have proven easy (or easier) to change. When early versions of the digital law merchant proved too easy for buyers and sellers to game to their own advantage, engineers quickly revised them, limiting comments, for example, to verified transactions and later by prohibiting sellers from chilling speech by threatening buyers with groundless negative feedback.
Those systems have continued to evolve, and now play a crucial role in the sharing economy. Airbnb hosts rate guests and vice versa, producing critical information for the user community. Uber passenger ratings are used to weed out poor performers quickly; driver ratings of passengers, likewise, are used by other drivers to decide whether or not to accept a ride request. The system works because incentives are aligned to keep these limited forms of governance efficient, fair, accurate, and adaptable—far more than a random inspection by a bored (or, worse, corrupt) government employee.
A Return to First Principles
So, rather than asking which of our ancient regulations should apply to new entrants—whose raison d’etre is, after all, the reinvention of the activities being regulated—policy-makers should start by asking why they are still regulating in the first place. If taxicab commissions were created to ensure passenger protection, simplify pricing, and minimize traffic congestion, then commissioners should first consider whether the current regulatory environment is achieving those goals. (Hint: It is not.)
Next, consider ways in which startups and their products offer natural opportunities to achieve these and other progressive policy goals more effectively and more efficiently. 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. Even then, the solution may simply be to tweak the incentives to encourage better behavior, rather than more full-fledged—and usually ill-fated—micromanagement of fast-changing industries.
Timing is everything. As the disruptors appear, the best course of action is not to intervene, but to watch, wait, and collect actual data about how emerging markets are or are not working—what FTC Commissioner Maureen Ohlhausen calls “regulatory humility.” Then, rather than imposing large-scale rule-making and new overseers who lack both experience and technical expertise, policy-makers should adopt the philosophy of the lean startup, or what FCC Commissioner Jessica Rosenworcel calls “sandbox thinking.” Think small, iterative experiments and tight feedback loops. Given the ease of doing so, these tests should involve consumers, entrepreneurs, and incumbents as directly as technology makes possible. Which is pretty direct.
In applying these common-sense principles, finally, regulators suddenly experiencing their first baptisms-by-fire from disruptive innovations should heed the often painful lessons of colleagues caught unprepared during the first wave of digital change. The FCC, FTC, Department of Justice, and EU have long histories of policy experiments to study, some producing spectacular success and many generating dismal failure.
These are not just guidelines for regulating the disruptors. Both to remain relevant and to serve consumers, regulators must reengineer themselves using the same technologies their constituents are embracing wholeheartedly. And they must apply new best practices they innovate to the incumbents as well, as an incentive for the incumbents to increase the speed of their own transformation. Modern, minimal regulation for everyone is a far better way to encourage healthy competition than saddling new entrants with rules that long ago stopped working for incumbents.
Even straightforward principles like these may not translate easily inside the Beltway, for all the obvious reasons. But as with the incumbents, self-interested delaying tactics by the regulators are at best temporary solutions. While Washington dithers and debates, policy innovation will likely happen elsewhere, often invisible to incumbent regulators until it’s too late to suppress it.
So why not be truly progressive? Clean the slate and ask: How can we best serve the public? If nothing else, it’s a great place to start.