Converting Permissionless Innovation into Public Policy: 3 Reforms
Technological innovation is the single most important determinant of long-term economic growth and improvements in living standards. This is the consensus opinion among economists, political scientists, and economic historians. By continuously providing new and better ways of doing things with fewer resources and at less cost, technological change dramatically expands the potential for human flourishing.
This is why it is so essential that a nation get innovation policy right. By establishing a regulatory environment conducive to entrepreneurial activities, policymakers can unlock growth opportunities and radically improve the human condition over time. Fostering a culture of “permissionless innovation” — i.e., a policy vision that embraces risk-taking and ongoing trial-and-error experimentation with new technologies or business models — is the key to making that happen.
The Importance of Humility and Forbearance
If policymakers want to incorporate permissionless innovation into public policy and make the world safe for innovation, how might they go about doing so? Generally speaking, the answer comes down to forbearance, or “hands-off” policy pronouncements which encourage government agencies and officials to give innovation the benefit of the doubt within some generally-accepted legal boundaries.
This is what the Clinton Administration did in 1997 when it released its Framework for Global Electronic Commerce, which outlined its approach toward the Internet and the then-emerging digital economy. The Framework was a succinct, market-oriented vision for the new economy that stressed how “governments should encourage industry self-regulation and private sector leadership where possible” and “avoid undue restrictions on electronic commerce.” Instead of imposing preemptive restraints on new innovations in this arena, the Framework recommended reliance upon civil society, contractual negotiations, voluntary agreements, and ongoing marketplace experiments to solve information age problems.
The forbearance approach enshrined in the Clinton Framework worked marvelously for the Internet and helped the U.S. take a commanding lead in the global digital economy. America’s information technology companies are now well-known across the globe thanks to this policy model.
The same forbearance approach can serve as a model for many other technology sectors that are essentially “born free,” i.e., those which do not face an existing regulatory regime or set of technocratic agencies. These include diverse sectors such as robotics, artificial intelligence, virtual reality, 3D printing, blockchain technologies, and others.
Reform #1: “The Innovator’s Presumption”
But what about technologies or sectors that have instead been “raised in captivity,” or saddled with decades of stifling bureaucracy and regulations? Forbearance can still be the answer here, but policymakers will need to be more creative about implementing reforms where mountains of red tape already exist.
One solution to freeing technologies and sectors raised in captivity can be found in an obscure existing provision of the Federal Communications Commission’s (FCC) code. Section 7 of the Communications Act (47 USC 157) was put in place in 1983 to encourage the more rapid adoption of “New Technologies and Services.” The language of this provision could be applied to many other emerging technology sectors, however.
The first part of this FCC provision reverses the burden of proof regarding the need for regulation and then the second provision puts a timetable on action. The full language of the provision reads as follows:
(a) It shall be the policy of the United States to encourage the provision of new technologies and services to the public. Any person or party (other than the Commission) who opposes a new technology or service proposed to be permitted under this chapter shall have the burden to demonstrate that such proposal is inconsistent with the public interest.
(b) The Commission shall determine whether any new technology or service proposed in a petition or application is in the public interest within one year after such petition or application is filed. If the Commission initiates its own proceeding for a new technology or service, such proceeding shall be completed within 12 months after it is initiated.
My Mercatus Center colleague Brent Skorup refers to this provision as the “Innovator’s Presumption,” because it insists that entrepreneurs and their innovations be treated as innocent until proven guilty.
Section (a) of the provision puts the burden on opponents of change to make the case for preserving the regulatory status quo. This is important because most regulations are framed in such a way that nothing is allowed until some agency or official formally blesses that change. This provision instead makes it clear that the opposite is the case and that the advocates of control must be able to make a compelling case that the benefits of intervention clearly outweigh the costs of ongoing experimentation. Until they can do so, permissionless innovation deserves the benefit of the doubt. In essence, innovation should be innocent until proven guilty.
Section (b) of the provision is equally important because it imposes a stopwatch on the process such that regulators can’t drag their feet and draw out the forbearance process forever.
The problem with this provision is that it unfortunately puts the burden of proof only on outside parties to make the case against freedom to experiment, but it fails to impose the same requirement on the FCC itself. The “presumption” should be expanded to impose the same demand on regulators. They, too, should bear the burden on proving why new innovations should be disallowed by default.
If this was done, this provision could serve as a model for how to make permissionless innovation a legal standard. To simplify matters and make the concept more widely applicable, we can generalize the Innovator’s Presumption as follows:
Any person or party (including regulatory bodies) who opposes a new technology or service shall have the burden to demonstrate that such proposal is inconsistent with the public interest.
How Red Tape Suffocates Economic Opportunity
Unfortunately, but perhaps unsurprisingly, the FCC hasn’t taken advantage of this language to advance new technological opportunities. Meanwhile, Congress has failed to either encourage the FCC to use this or other forbearance policies, and congressional lawmakers have failed to punish the agency for ignoring it. Essentially, there has been no meaningful congressional oversight holding the agency accountable for its refusal to obey the law.
Sadly, this is also true for many other administrative agencies. Congress has simply not lived up to its constitutional duty to impose serious checks and balances on the growth of the administrative state. In fact, all too often, Congress instead delegates broad, ambiguous authority to regulatory agencies allowing laws and regulations to accumulate without much constraint.
The accumulation of regulation has serious costs. “The problem is that as time goes on, these restrictions pile up,” notes Stony Brook University finance professor Noah Smith. The result is the “landscape that entrepreneurs have to navigate becomes ever more twisted and torturous. The eventual result is a reduction in both dynamism and the forward march of technology.” Consumers are also burdened by such regulatory restrictions because such rules limit choice, diminish quality, and raise prices.
When innovators and consumers face mountains of red tape it has implications for the innovative capacity of business and overall competitiveness of the entire economy and human welfare because it discourages innovative activities that benefit society. As Philip K. Howard, chair of Common Good and the author of The Rule of Nobody, has powerfully noted:
Too much law, however, can have similar effects as too little law. People slow down, they become defensive, they don’t initiate projects because they are surrounded by legal risks and bureaucratic hurdles. They tiptoe through the day looking over their shoulders rather than driving forward on the power of their instincts. Instead of trial and error, they focus on avoiding error.
Modern America is the land of too much law. Like sediment in a harbor, law has steadily accumulated, mainly since the 1960s, until most productive activity requires slogging through a legal swamp. It’s degenerative. Law is denser now than it was 10 years ago, and will be denser still in the next decade. This growing legal burden impedes economic growth.
Indeed, Mercatus Center research has shown that “[e]conomic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation.” This means that “the US economy would have been about 25 percent larger than it actually was as of 2012” if regulation had been held to roughly the same aggregate level it stood at in 1980. Many other economists have documented the negative implications of regulatory accumulation for economic growth.
Unfortunately, this problem is growing. Mercatus research has documented how, “between 1970 and 2008, the number of prescriptive words like ‘shall’ or ‘must’ in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year.” In essence, the regulatory state has become a giant bureaucratic octopus whose tentacles reach into nearly every facet of life and strangle economic opportunities.
This is why it is essential that red tape burdens are addressed through public policy reforms. “If a nation wishes to promote higher levels of domestic entrepreneurship in both the short and long run, top priority should be given to reducing barriers to entry for new firms and to improving overall institutional quality,” argue economists Dustin Chambers and Jonathan Munemo in another recent Mercatus Center study. As they note, economic studies uniformly conclude, “cutting entry-related red tape is generally associated with superior economic outcomes, such as higher per capita income, reduction in the size of the unofficial economy, less corruption, and improvement in productivity.”
Reform #2: “The Sunsetting Imperative”
There is no single silver-bullet solution to the problem of regulatory accumulation, but Patrick McLaughlin of the Mercatus Center has outlined several reforms that lawmakers could implement to begin tackling this serious problem. They include: legislative impact accounting, regulatory budgeting, regulatory review commissions, and hard caps on regulatory growth.
We can add to this toolkit the “Innovator’s Presumption” idea and “sunset” clauses more generally. Sunset provisions have been endorsed by a wide variety of scholars as useful tool to encourage lawmakers and regulators to consider a little periodic house-cleaning. As Sofia Ranchordas has argued:
Regulators can increase flexibility of regulations to accompany the pace of innovation both by including a sunset clause — which predetermines their expiry at the end of a certain period — or by experimenting with new rules. . . . Terminating regulations by employing sunset clauses or by experimenting on a small-scale can be useful to ensure that rules keep up with the changes in technology and society.
This is vital in a world where modern technology markets are evolving at the speed of “Moore’s Law.” That’s the principle named after Intel co-founder Gordon E. Moore who first observed that the processing power of computers doubles roughly every 18 months while prices remain fairly constant. Over the past few decades, Moore’s Law has been a relentless force in information technology markets, forcing firms to rethink their business models constantly to stay on the competitive edge.
If tech companies are expected to reinvent their business models every couple of years, it is reasonable to demand that the public policies governing those technologies adapt (or die) at a similar pace. In essence, we need a sort of “Moore’s Law for technology policy,” or what we might think of as “the Sunsetting Imperative.” It would demand the following:
Any existing or newly imposed technology regulation should include a provision sunsetting the law or regulation within two years.
Policymakers can always reenact the rule if they believe it is still sensible. And following the example of the FCC Section 7 language above, a similar provision should be put in place for older restrictions on existing technologies.
This sort of “fresh look” requirement will help stem the tide of regulatory accumulation and ensure that only those policies that serve a pressing need remain on the books. Coupled with the Innovator’s Presumption, the sort of periodic house-cleaning required by the Sunsetting Imperative will help ensure that technology policy doesn’t shackle opportunities for entrepreneurial experimentation and economic growth.
Reform #3: “The Parity Principle”
Here’s a final idea that could come in handy when dealing with the problem of regulatory accumulation as well as the thorny problems created when new “born free” technologies collide with “born in captivity” sectors.
When new tech invades old sectors, “level playing field” problems are inevitable because the defenders of traditional regulatory regimes — which can include not only policymakers but also the industry incumbents long covered by those rules — have an interest in propping up long-entrenched bureaucracies and permitting/licensing schemes. Those interests will argue that when “evasive entrepreneurs” invade their turf, it represents “unfair” competition because they might not face the same regulatory constraints.
Calls to “level the playing field” in the direction of added red tape for the new players are misguided. Two wrongs don’t make a right, and there is no reason we need to double-down on the inefficient and ineffective regulatory regimes of the past in the name of leveling the proverbial playing field.
The better way to solve this problem and work toward parity is to borrow a page from trade law by adopting the equivalent of a “Most Favored Nation” (MFN) clause for technology policy. MFN has been crucial to the success of free trade agreements for many decades because it demands that nations accord equal, non-discriminatory treatment to similar goods imported from other countries who are part of such treaties.
Importantly, this equal treatment is accorded in the direction of greater freedom, not more restrictions. The World Trade Organization defines MFN treatment as follows: “If a country improves the benefits that it gives to one trading partner, it has to give the same ‘best’ treatment to all the other WTO members.” In other words, it levels the trade playing field by demanding reciprocal, non-discriminatory treatment of all players included in a treaty. In recent years, this has come to be more commonly known as “permanent normal trade relations.”
A similar MFN or normal trade relations clause could be adopted for technology policy to remedy the problems created by regulatory asymmetries. Such a regulatory “parity principle” would state that:
Any operator offering a similarly situated product or service should be regulated no more stringently than its least regulated competitor.
Such a MFN for tech would ensure that regulatory parity is ensured as the lines between existing technologies and industry sectors continue to blur.
Although it will often be difficult to achieve perfect regulatory parity in practice, the aspirational goal of placing all players and technologies on the same liberalized level playing field should be at the heart of information technology policy to ensure non-discriminatory regulatory treatment of competing providers and technologies. As Chris Koopman, Matt Mitchell, and I pointed out in a law review article about how this can be applied to the Sharing Economy:
[T]he solution is not to punish new innovations by simply rolling old regulatory regimes onto new technologies and sectors. The better alternative is to level the playing field by “deregulating down” to put everyone on equal footing, not by “regulating up” to achieve parity. Policymakers should relax old rules on incumbents as new entrants and new technologies challenge the status quo. By extension, new entrants should only face minimal regulatory requirements as more onerous and unnecessary restrictions on incumbents are relaxed.
Some critics will claim that achieving parity in this fashion could lead to a “race to the bottom” in certain instances by disallowing state action and the application of local laws and norms. But deregulatory parity is not synonymous with anarchy. As the experience with the sharing economy proves, laws can be reformed with an eye toward achieving parity but still advance various policy objectives. The key is to do so in such a way that consumer welfare is being improved by expanding choice, competition, and the potential for permissionless innovation.
Summary: Three Reforms to Help Protect Permissionless Innovation
In summary, to maximize the potential for ongoing, positive change and create a policy environment conducive to permissionless innovation, policymakers should pursue policy reforms based on these three ideas:
1) The Innovator’s Presumption: Any person or party (including a regulatory authority) who opposes a new technology or service shall have the burden to demonstrate that such proposal is inconsistent with the public interest.
2) The Sunsetting Imperative: Any existing or newly imposed technology regulation should include a provision sunsetting the law or regulation within two years.
3) The Parity Provision: Any operator offering a similarly situated product or service should be regulated no more stringently than its least regulated competitor.
These reforms can help break the regulatory logjams that entrepreneurs face and open the door to new forms of life-enriching innovation that can catalyze economic growth and enrich human flourishing more generally.
_____________________
This essay is condensed from portions of various chapters in a forthcoming book, Evasive Entrepreneurs.
