schumpeter society presentation - montreal, july 2016
TRANSCRIPT
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Organic vs. Imposed Regulation:Impact on Innovation and
EntrepreneurshipInternational Schumpeter Society
7 July 2016
John ChisholmCEO, John Chisholm Ventures
Trustee, MIT & Santa Fe Institute
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What Law & Regulation Best Promote Entrepreneurship & Innovation?
• Not merely a Goldilocks optimization
• Rather, a challenge of finding the regulatoryregime(s) that best:– Facilitate entrepreneurship and innovation
– Accommodate the evolution of technology and society
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Economies & Societies are Regulated Organically
Organic regulation
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Economies & Societies are Regulated Organically
Organic regulation Customs Markets Common law
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Organic regulation Customs Markets Common law
How they emerge and evolve
Economies & Societies are Regulated Organically
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Organic regulation Customs Markets Common law
How they emerge and evolve
From myriad social interactions
From buyers and sellers seeking, finding, and
exchanging (self-‐organizing)
Variation (by thousands of judges) and
selection (by higher courts)
Economies & Societies are Regulated Organically
Open-‐ended; emergent; inescapable
Many decision-‐makers make system more robust; harder to corrupt overall
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Imposed Regulations Rest on Top of Organic Regulation
Imposed regulation
Organic regulation Customs Markets Common law
How they emerge and evolve
From myriad social interactions
From buyers and sellers seeking, finding, and
exchanging (self-‐organizing)
Variation (by thousands of judges) and
selection (by other judges and higher
courts)
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Imposed regulation Statutes Regulatory agencies Executive orders
Organic regulation Customs Markets Common law
How they emerge and evolve
From myriad social interactions
From buyers and sellers seeking, finding, and
exchanging (self-‐organizing)
Variation (by thousands of judges) and
selection (by other judges and higher
courts)
Imposed Regulations Rest on Top of Organic Regulation
A central decision-‐making body provides a single point of failure and vulnerability to corruption
Tend not to evolve; rather, they accumulate
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2 Regulatory Regimes:Organic vs. Imposed
Organic Imposed
Foundations-‐ Economics-‐ Customs-‐ Common law
Civil law
Sources of Law Judges & juries
-‐ Legislation-‐ Agencies-‐ Executive orders
CoreObjective Resolve disputes Implement policies
Mechanisms Bottom-‐up Top-‐down
Examples-‐ Supply & demand-‐ Word of mouth Wage & price controls Unleash
page 314
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Common Law CorrelatesRelative to Civil Law
• Better investor protection, financial development, access to finance, and higher ownership dispersion
• Lighter government ownership and regulation, less corruption, better functioning labor markets, and smaller unofficial economies
• Less formalized and more independent judicial systems, more secure property rights, and better contract enforcement
Source: Rafael La Porta, Florencio Lopez-‐de-‐Silanes, and Andrei Shleifer, “Economic Consequences of Legal Origins,” NBER Working Paper 13608, 11/2007
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Imposed Regulation invitesPublic Choice/Agency Concerns
• Protect politically favored businesses and lobbies from competition
• Generate agency revenue through licenses, penalties, and exemptions
• Insulate bureaucracies from risk
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Examples from the US• Can’t buy or sell beer in 64-‐oz reusable containers (FL)
• Anyone with 1099 income must pay $300 for a “business privilege” license (Philadelphia)
• License required to teach how to apply makeup (NV)
• Computer repair technicians must get private investigator’s license (TX)
• Online ride-‐sharing (Uber, Lyft) widely prohibited
• FDA approves AIDS drugs only after public outcry
• License required to braid hair (over half of 50 states)
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Imposed Regulations Deter Entrepreneurship in 3 Ways
• Getting started– E.g., Licenses
• Innovating– R&D budgets applied to circumventing regulation– E.g. Restaurant and commercial kitchen ventilation
• Expanding– Zoning and building codes– Tax, ACA, and other provisions that apply when company reaches 50 or 100 employees
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Regulation Regulation
Allowed DisallowedDisallowed
Ten Years AgoUnleashpage 321
Imposed Regulations Tend Not to Evolve
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Regulation Regulation
Allowed DisallowedDisallowed
Today Unleashpage 321
Imposed Regulations Tend not to Evolve
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Regulation Regulation
Allowed DisallowedDisallowed
Imposed Regulations become ever-more Irregular Surfaces that take Time and Money to Explore
…Advantaging the Well-‐Funded & Connected & Influential
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Unleashpage 306
Primary Regulatory DeterrentsVary By Geography and Industry
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Unleashpage 323
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Case Study: Autonomous Aerial Vehicles (Drones)
Applications• Delivery of pharmaceuticals, spare parts, electrical
components…• Disaster assessment & survivor location (fires, floods,
earthquakes)• Farming water and pesticide optimization• Filmmaking• Construction • Extreme sports
Risks• Falling• Collision • Privacy
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Imposed Regulation of DronesImposed Regulations (FAA)• Well away from airports• Up to 400 feet in altitude• Within visual sight of their operators• During daylight hours• For noncommercial purposes
Innovation Disincentived• Recognizing airborne objects (birds, kites, other drones)• Extrapolating the positions of objects and avoid them• Communicating with other drones/objects to avoid collision
Outcome• Top worldwide manufacturer of non-‐military drones today:
DJI Technology Company (Shenzhen, China)
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Organic Regulation of Drones
Dangerous Animal Laws• Owners responsible for controlling or restraining dangerous animals to protect life and property
Peeping Tom laws• Illegal to secretly peep into a room occupied by another person, or to secretly photograph or video that person or room
Liability for negligence and willful misconduct, and strict liability for defects, foster industry-‐wide advances in the intelligence, safety, and usefulness of drones
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Imposed Regulations: Design Guidelines
Focus on objectives, not specificationsE.g., “Drones will operate safely” (vs. “Drones will operate within visual sight of their operators during daylight hours only”)
Start general, evolve to to reflect (organic) court case outcomes1) “Drones will not harm people or property” (encourages
development of sensing and avoidance) 2) Later: “Drones will be able to sense and avoid other objects”
Provide large spaces for social learningE.g., “Drones may freely operate between 20-‐400 feet staying at least 10 feet away from other objects” (enables experimentation)
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Imposed Regulations:7 General Recommendations
1. Bound regulations’ applicability2. Limit # of words and pages 3. Create regulation-‐free zones (SEZs)4. Require Innovation Impact Assessments 5. Test first on a small scale for unintended
consequences6. Include sunset clauses 7. Use organic regulation Unleash
Appendix E