FTC’s Ohlhausen on Innovation, Prosperity, “Rational Optimism” & Wise Tech Policy

by on September 25, 2015 · 0 comments

commissioner-ohlhausenI wanted to draw your attention to yet another spectacular speech by Maureen K. Ohlhausen, a Commissioner with the Federal Trade Commission (FTC). I have written here before about Commissioner Ohlhausen’s outstanding speeches, but this latest one might be her best yet.

On Tuesday, Ohlhausen was speaking at U.S. Chamber of Commerce Foundation day-long event on “The Internet of Everything: Data, Networks and Opportunities.” The conference featured various keynote speakers and panels discussing, “the many ways that data and Internet connectiviting is changing the face of business and society.” (It was my honor to also be invited to deliver an address to the crowd that day.)

As with many of her other recent addresses, Commissioner Ohlhausen stressed why it is so important that policymakers “approach new technologies and new business models with regulatory humility.” Building on the work of the great Austrian economist F.A. Hayek, who won a Nobel prize in part for his work explaining the limits of our knowledge to plan societies and economies, Ohlhausen argues that:

regulators face a fundamental knowledge problem that limits the effective reach of regulation. A regulator must acquire knowledge about the present state and future trends of the industry being regulated. The more prescriptive the regulation, and the more complex the industry, the more detailed knowledge the regulator must collect. But, regulators simply cannot gather all the information relevant to every problem. Such information is widely distributed and therefore very expensive to collect. Even when a regulator manages to collect information, it quickly becomes out of date as a regulated industry continues to evolve. Obsolete data is a particular concern for regulators of fast-changing technological fields like the Internet of Things. This knowledge problem means that centralized problem solving cannot make full use of the available knowledge about a problem. Therefore, centralized regulation generally offers worse solutions when compared to distributed or emergent constraints such as social norms.

She continued on to explain the dangers of “precautionary principle” thinking as applied to new technologies, noting that, far too often, policymakers seek to impose preemptive, top-down controls on new sectors and technologies based on “concern over largely hypothetical future harms.” That’s a point I have stressed repeatedly in my own work on the importance of “permissionless innovation.” As I note in my book of the same title, living in constant fear of worst-case scenarios—and premising public policy upon them—means that best-case scenarios will never come about. When public policy is shaped by precautionary principle reasoning, it poses a serious threat to technological progress, economic entrepreneurialism, social adaptation, and long-run prosperity.

What’s the better alternative to precautionary controls to address potential risks? As Commissioner Ohlhausen noted in her speech to the Chamber of Commerce, regulators should “focus on identifying and addressing real, not speculative, consumer harm.” She explains how the FTC already has the tools to do so:

At the FTC, this focus is part of our statute. Congress charged us in Section 5 of the FTC Act with preventing deceptive or unfair acts and practices. Deceptive acts violate Section 5 only if they are material – that is, if they actually harm consumers. And practices are only unfair if there is a substantial harm that consumers cannot avoid and that outweighs any benefits to consumers or competition. In both cases, the law concerns itself with addressing actual consumer harms. Likewise the FTC carefully evaluates consumer welfare (or, its corollary, consumer harm) when it exercises its antitrust authority.

Importantly, she noted, the focus in this regard is on ex post enforcement, not highly prescriptive ex ante regulation. “This incremental approach, which we have been using for nearly 100 years, has significant benefits,” Ohlhausen argued, and it is “consistent with Hayek’s thesis about the knowledge problem.” Namely, regulators should not be acting based on limited knowledge to address hypothetical future threats. Doing so derails opportunities for innovation and leads to myriad unintended consequences.

But the best part of Commissioner Ohlhausen’s speech was her embrace of what author Matt Ridley calls “rational optimism”:

Over the past two centuries, humankind has proven its ability to transform innovation into widespread prosperity. Fueled by supportive social attitudes and free market institutions, businesses have been the engines of this prosperity. Regulators who don’t want to stall these engines of innovation should remember the long history of beneficial innovation, remain humble about what they can know and accomplish, focus on addressing real consumer harm, and apply tools appropriate to the harms that do arise.

Critics will protest that innovation can just be too darn disruptive and that we have to preemptively legislate or regulate to counter those effects. But Ohlhausen has a powerful response to those critics:

innovation can, and will, be unnerving or unsettling. By its very nature, innovation changes things. Change is uncomfortable. That is why, as long as there has been innovation, there have been detractors and doomsayers. William Petty, the economist and doctor, said, “When a new invention is first propounded, in the beginning every man objects and the poor inventor runs the gauntloop of all petulant wits.” And he was talking in 1679! Pessimism about innovation sells newspapers and books. It also has a surprising intellectual caché. “The man who despairs when others hope is admired by a large class of persons as a sage,” said John Stuart Mill. But if the past 200 years of innovation have any lesson, it is this: society has repeatedly and quickly integrated and greatly benefited from innovation. The somber doomsday “sages” – from the Luddites in 19th century England to critics of credit card technology in the 1970s – have been wrong about the general effects of innovation. The many benefits have far outweighed the few costs. I am quite optimistic that the disruption of the Internet of Everything will continue the trend and greatly promote our prosperity.

Preach it, sister! That is exactly right.

Anyway, make sure to read Commissioner Ohlhausen’s entire speech. It is absolutely spectacular. I wish every regulatory approached their jobs with the same degree of humility, patience, and “rational optimism” that Commissioner Ohlhausen does.

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