Innovation, Politicians and Regulation: A Perfect Cocktail?

We tend to think of innovation as closely related to original invention or fits of genius. However, as Matt Ridley in How Innovation Works, innovation is not the same as invention, although invention and technology are often part of it. Incredible technical inventions are one thing, but what innovators specifically do is find useful applications for these inventions and drive prices down. In fact, it is the lowering of prices that matters for the innovation to spread and be widely adopted.

Letting innovation flourish allows everyone to have access to things that were originally considered luxuries for the richest one percent of society. Thanks to the innovator, yesterday’s utopias become today’s realities. Moreover, and this is of vital importance, it is through innovation that people take charge of problem-solving. Innovation empowers the individual and civil society.

Thus, thanks to the breakthroughs that have come about through innovation, it is not surprising that innovation is universally praised and recognized as a force for progress. In fact, with the exception of North Korea, no government in the world has an official policy to ban innovation or harass innovators.

Unfortunately, this almost universal praise for innovation is in many cases little more than lip service. In the real world, disruptive innovators face a much more hostile environment. As Bradley Tusk explains in The Fixer, an unholy alliance of politicians, regulators, and established interests is not usually grateful for disruptive innovation. Quite the contrary, it strikes back, hitting very hard.

There is abundant (and rather dubious) literature on “market failures.” But in spite of that, when it comes to regulatory matters we should focus on something much less esoteric: state failures.

Regarding regulations, there are three state failures that we can easily identify: 1) Innovation, almost by definition, can never be addressed by existing regulation. Regulation always comes later. Our legislators, unfortunately, seem to ignore the fact that their regulations cannot foresee the novelty of innovation. If they could, they would be innovating in the private sector instead. 2) This is why our authorities often make the foolish mistake of trying to impose the existing regulation on a product or service they never foresaw, similar to applying the telegraph regulation to Starlink, Elon Musk’s satellite internet company. 3) Regulatory excesses can very easily become an attack on the future. As Adam Thierer puts in Permisionless Innovation puts it: “Trying to preemptively plan for every hypothetical worst-case scenario means that many best-case scenarios will never come about.”

Is there any role left for politicians regarding innovation then? Absolutely. In fact, it is a very important role. Politicians must defend a culture of innovation and risk-taking in both their actions and their words. Adam Thierer, Stephen Ezell and Philipp Marxgut emphasize that what politicians publicly say and do is key in setting the tone for a country’s innovation climate.

And is there any role for regulation? Problem-solving should be left to imaginative responses rather than regulations and prohibitions that hinder and stifle entrepreneurship. However, perhaps regulation is needed for a minimum safeguard for the population. If this is the case, we must bear in mind that regulation can never play the leading role in the innovation process. According to Jeff Stier’s analogy, if we were preparing a cocktail, the recipe would be nine parts innovation and one part regulation. The opposite would be another kind of cocktail: a Molotov cocktail.