Is regulation really the enemy of innovation?

Sometimes regulation and state action are aids to innovation

Back in July, I wrote about how the doctrine of ‘permissionless innovation’ underpinned much of the Silicon Valley Tech ‘Broligarchy’ (© Carole Cadwalladr). The phrase has popped up here in the UK in the context of some cryptocurrency lobbyists spinning their case to the new government.

Thankfully, former Bank of England Governor Mark Carney spelled out in 2019 the need for global rules on crypto just at the timne Facebook was thinking of launching a crypto-currency. His words are still relevant:

unlike in social media, for which standards and regulations are only now being developed after the technologies have been adopted by billions of users, the terms of engagement for any new systemic private payments system must be in force well in advance of any launch.

Tech Bros and others have promoted the idea that regulation is inimical to innovation. By implication, they extend that to cover other state activity, often glossing over the opportunities that state investment have brought their own firms.

So what’s the truth? Is regulation and state activity always the enemy of innovation?

No, far from it. In the past, for example, anti-trust regulation has helped create space for new markets to develop.

The 1984 Anti-Trust action against AT&T, owners of the Bell System, led to a significant expansion of innovation in the United States.

The 2001 Anti-Trust action against Microsoft freed up the Internet browser market and led to widespread innovations in that and other markets.

The current Google Anti-Trust cases could have similar dynamics.

Apple recently launched a new generation of Airpods which could benefit millions with hearing difficulties at lower costs (in the US), as a result largely of the hearing aid market being cracked by Anti-Trust action as Matt Stoller pointed out.

And state activity has aided innovation as well. As Mariana Mazzucato pointed out in her book The Entrepreneurial State:

Nearly every state-of-the-art technology found in the iPod, iPhone and iPad is an often overlooked and ignored achievement of the research efforts and funding support of the government and military.

The UK has begun to put more funding into blue sky research, partly thanks, it has to be admitted, to Dominic Cummings. The UK’s Advanced Research and Innovation Agency (ARIA) is getting attention worldwide for its initiatives, and has been set up on a. start-up model unlike most government science interventions.

There are, of course, plenty of other ways that state action helps innovation:

Again, some of these tend to be glossed over by the Tech Broligarchy.

We need a new way to talk about innovation. As Jack Stilgoe writes in his book Who’s Driving Innovation?:

The way we talk about innovation is chronically lopsided. The positive effects of  technology are often seen as ‘intended’, while the negative consequences are ‘unintended’.

We privatise the profits and socialise the downsides of innovation, in other words.

Much of what is claimed as innovation is actually ‘innovation-speak’, says a recent book:

Unlike actual innovation, which is tangible, measurable, and much less common, innovation-speak is a sales pitch about a future that doesn’t yet exist.

Like Microsoft and AT&T before them, Big Tech monopolists have been in a position to stifle innovation by others, buying up competitors early, launching copycat products, granting preferential access to platforms, and leveraging their data assets to dominate new markets. If you want an in-depth read, then have a look at these two books:

The Financial Times columnist Gillian Tett pointed out recently that the US actually had an innovation problem, echoing the arguments of these books:

Economists used to assume that R&D would be used by upstart companies to challenge incumbents. However, today, incumbents more often use R&D to entrench their dominance. So while 48 per cent of all inventors worked for big companies in 2000, by 2015 this had risen to 58 per cent. The research suggests that inventors became less innovative at the R&D departments of those incumbents.

She concludes:

Whenever a tech luminary like Elon Musk jumps into political debates on X, investors should ponder what type of innovation story he represents. Is his a tale of plucky entrepreneurship by an outsider? Or is it a symbol of the rising concentration of political and corporate power and its threat to future innovation? The answer matters enormously, particularly as the AI race heats up.

Much of current ‘innovation-speak’ offers a compelling tale about a brighter future. The novelist Tom McCarthy put it well in his book Satin Island about life in a marketing agency:

Each brief the Company worked on, every pitch we made, involved an invocation of, a genuflection to, the Future….the Future is the biggest shaggy-dog story of all.

Beware the shaggy dogs in Silicon Valley.