– July 24, 2020
entrepreneur

Adam Thierer’s new book, Evasive Entrepreneurs and the Future of Governance is a welcome progression of his work on permissionless innovation. Picking up on earlier themes, Thierer discusses in more detail how permissionless innovation actually plays out in the real world. In this book, he examines that grey zone where existing laws and new technologies are out of step. This is where the evasive entrepreneurs work, pushing the boundaries of current laws with products and services that defy categorization by regulators. And as Thierer emphasizes, this is a good thing that advances freedom and allows society to flourish.

Evasive entrepreneurs do not “conform to social or legal norms.” Their activities are as political as they are economic. Unlike their rent-seeking counterparts, however, evasive entrepreneurs are not looking for political favors to keep their competitors at bay. More often than not, they are battling cronyism and existing laws that protect entrenched incumbents. The challenge for the evasive entrepreneur is to avoid the heavy hand of regulators while creating new goods and services and chipping away at the market share of incumbent firms. 

Much of the book flows from a “pacing problem,” where new technologies roll out at a rate that far exceeds the bureaucratic capacity of legislators and regulators to keep up, creating a nebulous region without clear rules or regulations. Importantly, new technologies are deployed to provide ways around the obstacles created by today’s regulatory policies. Evasive Entrepreneurs offers numerous examples of technologies that have challenged the status quo, from ride-sharing services upsetting local taxicab cartels, to 3-D printers that have the power to replicate heavily regulated products such as firearms or medical devices, to cryptocurrencies that defy models of financial regulation. 

New technologies create governance issues from the local level all the way up to the federal level, something Thierer emphasizes in the second half of the book’s title, the Future of Governance. He suggests that evasive entrepreneurs have an important impact on policymakers; specifically, they confront regulators and legislators with new technologies that require changes to current laws. 

The fact that new technologies are driving better outcomes forces regulators to rethink old rules and ideally come up with a better set of solutions more conducive to economic growth. This is the obverse side of the pacing problem. With the rise of the administrative state and its ability to regulate virtually everything, evasive entrepreneurs play a critical role in challenging outdated laws and using the political arena to make them more conducive to innovation and economic growth. Thierer praises the regulatory entrepreneur who seizes opportunities by either forcing changes in the law or identifying loopholes that can be used to reshape markets. The political battles fought by the ride-sharing service Uber as it expanded to cities across the country and throughout the world provides a good example of this strategy.

With traditional oversight unable to cope, Thierer turns to the question of how technology is actually regulated. What he terms “soft law” can be a more useful form of governance for many new technologies. Rather than the traditional rulemaking process of administrative law, more flexible and adaptive regulatory proceedings may be better suited for the governance of rapidly changing technologies. This can include performance-based regulations, negotiated rulemakings, and the use of regulatory sandboxes. In addition, soft law also incorporates private entities that help formulate practices and codes of conduct for various industries and technologies. What they have in common is the ability to quickly establish a governance framework for emerging technologies. Thierer suggests “an adaptive multistakeholder framework performs better than codified laws when harms are amorphous, speculative or subjective.” 

While the author may be correct that more adaptable models are required for regulating new technologies, even soft law can be gamed by rent seekers. Regulatory outcomes have been mixed with respect to disruptive technologies. Ridesharing services have fundamentally restructured the transportation-for-hire industry, and short-term rental services such as Airbnb are transforming the hospitality industry. Elsewhere, disrupters have met stiff opposition from incumbents as well as regulators. Drones, for example, have faced significant regulatory roadblocks from the FAA; so much so that innovators have shifted their operations to friendlier climates in countries such as the UK and Canada. And the Food and Drug Administration continues to wield a heavy hand when it comes to regulating medical devices. So, governance remains problematic, even with soft law, and its success may be more accurately evaluated at the sectoral level.

Thierer goes on to make an even more important point: evasive entrepreneurialism is actually a form of dissent, and new technologies offer exit strategies from heavily regulated markets and the ossified status quo. In this sense, innovation is a political as well as an economic force that provides avenues for economic growth as well as opportunities to challenge abusive and inefficient government practices. 

Evasive entrepreneurs and the technological disobedience they can generate are an important check on government power that facilitates economic growth and innovation. And as technologies provide more mobility, evasive entrepreneurs gain even more leverage. By voting with their feet, they elude the heavy hand of government regulators. Consider, for example, Elon Musk’s threat to abandon California in favor of more hospitable states such as Texas or Nevada, or the shift in driverless car innovation to states with more favorable regulatory climates. 

Thierer contends that disruptive and evasive entrepreneurship is inherent in human nature and should be applauded rather than regulated. But not everyone extols the virtue of evasive entrepreneurs. Thierer takes to task the anti-growth mentality and the political movements against innovation and growth, highlighting the long tradition of hostility toward innovation, from the early 19th-century Luddites up through today’s technophobes advocating restrictions on new technologies such as artificial intelligence. Much of this is driven by the precautionary principle, which Thierer views as an inappropriate guide for regulators. The precautionary principle is a highly risk-averse standard that provides regulators an excuse to stifle innovation for the slightest perceived hazard. Instead, Thierer proposes an “innovator’s presumption,” allowing innovators to innovate while opting for ex post remedies rather than ex ante prohibitions should issues arise. By tying innovation to individual well-being and human flourishing, Thierer makes a strong case against the precautionary principle and suggests that “opening up new innovation opportunities should be a major public policy priority.” (italics original.)

Adam Thierer has created a thoughtful and surprisingly timely book examining the interplay between entrepreneurs, innovation, and regulators. Thoughtful because he tackles tough questions of innovation and governance in a dynamic market. Timely because the coronavirus pandemic has forced policymakers to seriously reconsider the cumulative regulatory burden and how it may impede the economic recovery. Whether it’s V-shaped or a slower, longer recovery, decades worth of regulatory underbrush has taken its toll on economic activity while providing few, if any, benefits.

Overall, Evasive Entrepreneurs is a great addition to the study of innovation and economic growth. However, I do have one quibble, and that is the lack of any discussion of intellectual property. While I can see the expediency in avoiding the topic—which could easily double the length of the book—the efficacy of intellectual property laws is inextricably tied to innovation, for better or worse. While not all innovation is attributable to intellectual property laws, how intellectual property laws are enforced will impact entrepreneurial activity, especially with respect to technological innovation. For example, the pandemic spawned a burgeoning new open source movement for 3-D printed ventilators and personal protection equipment that fills an urgently needed demand but also risks running afoul of intellectual property laws. Thierer has addressed intellectual property in the past and his thoughts on these issues would have been a welcome addition to this book, especially with respect to questions of governance. 

Some of the most disruptive innovation has occurred in the shadow of intellectual property laws that still struggle to keep pace with the rate of technological change. The internet proved to be a significant disruptor with respect to content industries such as film and music, where entire business models need to be retooled for the digital age. The rise of Napster and peer-to-peer file sharing—perhaps one of the boldest acts of evasive entrepreneurship—precipitated a fundamental shift in how listeners chose to consume music. While Napster was ultimately shut down for facilitating infringing uses of copyrighted material, it paved the way towards today’s legal streaming services that have supplanted physical music sales and now dominate the industry. At the same time, the internet unleashed an entirely new creative class that connects directly to their audience without the traditional intermediaries that dominate the content industry, and it is not obvious that these creators are served well by laws designed around an outdated business model.

Similarly, patents—government granted monopolies provided to inventors for a fixed duration of time—have a strong influence on innovation. Historically, patents have been used as an incentive for innovators, but patent enforcement faces the difficult task of striking the appropriate balance between creating incentives and simply protecting monopoly rents. As with other components of the administrative state, the patent system is susceptible to rent-seeking and other practices that may generate suboptimal results, deterring rather than promoting innovation.

Patents can be either good or bad in terms of quality and should be evaluated carefully to assess their impact on innovation. An increase in the number of questionable patents is indicative of the impediments to innovation posed by imperfect patent policies. The level of enforcement, therefore, has a substantial impact on innovation. The problem of low-quality business method patents that accompanied the digital transformation of commerce is widely acknowledged. Additionally, pharmaceutical companies deploy patent thickets to raise costs and limit entry, which reduces competition and impedes innovation rather than promoting progress. And a thriving industry has emerged with non-practicing entities acquiring patents not for innovation, but for extracting royalties and licensing fees from those who are trying to innovate. A discussion of these issues would be a valuable addition to this book. 

But, overall, Evasive Entrepreneurs is a welcome contribution that provides great insights into the regulatory process and the need to protect permissionless innovation. Thierer’s message should not be ignored. For Thierer, innovation matters because it feeds the engine of economic growth and plays a key role in expanding liberty. But, as he concludes, “we will only attain that goal by vociferously defending the freedom to innovate and the entrepreneurial spirit that propels the progress of our civilization.”

Wayne T. Brough, PhD

Wayne T. Brough

Wayne T. Brough is the President at Innovation Defense Foundation. He has a strong background in economics and public policy, focusing on regulatory policy in a number of fields, including technology, energy, insurance, and transportation.

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