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Thursday, March 10, 2016

Government Targets the App Economy

Regulators Fight Back with Luddite Intensity

The sharing economy promises such radical change that economist Klaus Schwab is calling it The Fourth Industrial Revolution. But unlike the previous revolutions, its intransigent opponents are supported by sclerotic government rules. This has to change for the world to enjoy a new era of innovation and prosperity.

Most people know the story of the Luddites and their resistance to the Industrial Revolution in Britain. Citing a (perhaps fictional) Ned Ludd or King Ludd as their leader, organized gangs ran riot, breaking new textile-working machines introduced in the early 1800s, proclaiming them to be in breach of regulations and price agreements. The British government, then at war with Napoleon, reacted harshly, battling the militant workers and promoting the death penalty, deportation, and other severe punishments for breaking machines. Luddism abated, and the first industrial revolution took hold, benefiting all mankind — including former Luddites and their descendants.

This pattern has repeated itself through the ages. Since the 19th century, two more industrial revolutions have bestowed their gifts on us — the revolutions of mass production and information technology. Each time, Luddites warned of the economic hardship that would result, and each time government embraced the change, cementing it. What happened to the swathes of telephone operators and typists laid off by the IT revolution? For the most part, they found other, better paying employment. Both those categories were dominated by younger women, whose prospects have gotten better since the revolution started.

We are now facing another industrial revolution, one potentially more disruptive than its predecessors. The difference this time is that the Luddites enjoy the support of government, which is far bigger now than it was at the dawn of the IT revolution. As I have noted in “Depression-Era Laws Threaten the Sharing Economy” and “How the State Keeps You Working Long Hours,” governments around the world are working overtime to blunt the advances of the sharing economy, the spearhead of this revolution.

This should not be a surprise. As Duke University economist Michael Munger notes, many will oppose an economy of lowered transaction costs. “Unsurprisingly, the counterrevolutionary fervour of those who wish to protect existing power structures of both firms and unions will call for attempts to control the sale of transaction cost reductions,” he says (“Coase and the ‘Sharing Economy’,” in Forever Contemporary: The Economics of Ronald Coase). In other words, middlemen will always resist being cut out.

The new revolution goes much further than platform apps. It is also occurring in financial technology (“fintech”), where some new European firms now have bigger capitalizations than Deutsche Bank. It is already possible to see similar disruptions happening in areas like 3-D printing, the “Internet of things,” and biotechnology.

Regulators are fighting back with Luddite intensity. The disruptive human resources firm Zenefits recently came under severe regulatory attack over rules relating to training for its associates, leading to the resignation of its CEO.

All across the economy, government regulators are using laws and rules designed for previous eras to stop disruptive innovation. The threats are manifold:

Some European countries are embracing at least some aspects of the revolution, such as the United Kingdom with distributed ledger technology. But sadly, those are exceptions. Across the developed world, regulators have mainly looked at how to control new technologies rather than liberate them for popular use.

Congress can play a role in ensuring the “permissionless innovation” that has made the revolution possible continues. As Adam Thierer proposes in his book of the same name, Congress should sunset any new law relating to technology after two years (at most) to allow the law a chance to change, and it should comprehensively review existing law and regulations to reassess them in the light of changing technology. One way to do the latter would be by instituting a regulatory reduction commission, as suggested by the Competitive Enterprise Institute.

If steps like this are not taken, this could be the first industrial revolution suppressed by government rather than embraced by it. That would be a tragedy for America and the world.

  • Iain Murray is the Competitive Enterprise Institute's vice president of strategy. For the past decade with the Institute, he has concentrated on financial regulation, employment and immigration regulation and free market environmentalism.

    Murray has published several acclaimed books, including Stealing You Blind: How Government Fatcats Are Getting Rich Off of You and The Really Inconvenient Truths: Seven Environmental Catastrophes Liberals Won’t Tell You About – Because They Helped Cause Them. His op-eds have appeared in The National Review, The Providence Journal and Fox News. He has appeared on Fox News, CNN Headline News, the BBC and Al-Jazeera, among other broadcast networks.

    In addition to his work at CEI, Murray is the visiting fellow at the Adam Smith Institute and board members of the Cherish Freedom Trust and American Friends of the Taxpayers Alliance and advisory board members of Global Britain and Young Britons Foundation.

    Prior to coming to CEI in 2003, Murray was the Director of Research for the Statistical Assessment Service and an Executive Officer in HM Department of Transport. He received his MBA from the University of London and his MA from the University of Oxford.