The End of Permissionless Innovation?

Time magazine recently declared 2020 “The Worst Year Ever.” By historical standards that may be a bit of hyperbole. For America’s digital technology sector, however, that headline rings true. After a remarkable 25-year run that saw an explosion of innovation and the rapid ascent of a group of U.S. companies that became household names across the globe, politicians and pundits in 2020 declared the party over.

“We now are on the cusp of a new era of tech policy, one in which the policy catches up with the technology,” says Darrell M. West of the Brookings Institution in a recent essay, “The End of Permissionless Innovation.” West cites the House Judiciary Antitrust Subcommittee’s October report on competition in digital markets—where it equates large tech firms with the “oil barons and railroad tycoons” of the Gilded Age—as the clearest sign that politicization of the internet and digital technology is accelerating.

It is hardly the only indication that America is set to abandon permissionless innovation and revisit the era of heavy-handed regulation for information and communication technology (ICT) markets. Equally significant is the growing bipartisan crusade against Section 230, the provision of the 1996 Telecommunications Act that shields “interactive computer services” from liability for information posted or published on their systems by users. No single policy has been more important to the flourishing of online speech or commerce than Sec. 230 because, without it, online platforms would be overwhelmed by regulation and lawsuits.

But now, long knives are coming out for the law, with plenty of politicians and academics calling for it to be gutted. Calls to reform or repeal Sec. 230 were once exclusively the province of left-leaning academics or policymakers, but this year it was conservatives in the White House, on Capitol Hill and at the Federal Communications Commission (FCC) who became the leading cheerleaders for scaling back or eliminating the law. President Trump railed against Sec. 230 repeatedly on Twitter, and most recently vetoed the annual National Defense Authorization Act in part because Congress did not include a repeal of the law in the measure.

Meanwhile, conservative lawmakers in Congress such as Sens. Josh Hawley and Ted Cruz have used subpoenas, angry letters and heated hearings to hammer digital tech executives about their content moderation practices. Allegations of anti-conservative bias have motivated many of these efforts. Even Supreme Court Justice Clarence Thomas questioned the law in a recent opinion.

Other proposed regulatory interventions include calls for new national privacy laws, an “Algorithmic Accountability Act” to regulate artificial intelligence technologies, and a growing variety of industrial policy measures that would open the door to widespread meddling with various tech sectors. Some officials in the Trump administration even pushed for a nationalized 5G communications network in the name of competing with China.

This growing “techlash” signals a bipartisan “Back to the Future” moment, with the possibility of the U.S. reviving a regulatory playbook that many believed had been discarded in history’s dustbin. Although plenty of politicians and pundits are taking victory laps and giving each other high-fives over the impending end of the permissionless innovation era, it is worth considering what America will be losing if we once again apply old top-down, permission slip-oriented policies to the technology sector.

Permissionless Innovation: The Basics

As an engineering principle, permissionless innovation represents the general freedom to tinker and develop new ideas and products in a relatively unconstrained fashion. As I noted in a recent book on the topic, permissionless innovation can also describe a governance disposition or regulatory default toward entrepreneurial activities. In this sense, permissionless innovation refers to the idea that experimentation with new technologies and innovations should generally be permitted by default and that prior restraints on creative activities should be avoided except in those cases where clear and immediate harm is evident.

There is an obvious relationship between the narrow and broad definitions of permissionless innovation. When governments lean toward permissionless innovation as a policy default, it is likely to encourage freewheeling experimentation more generally. But permissionless innovation can sometimes occur in the wild, even when public policy instead tends toward its antithesis—the precautionary principle. As I noted in my latest book, tinkerers and innovators sometimes behave evasively and act to make permissionless innovation a reality even when public policy discourages it through precautionary restraints.

To be clear, permissionless innovation as a policy default has not meant anarchy. Quite the opposite, in fact. In the United States, over the past 25 years, no major federal agencies that regulate technology or laws that do so were eliminated. Indeed, most agencies grew bigger. But in spite of this, entrepreneurs during this period got more green lights than red ones, and innovation was treated as innocent until proven guilty. This is how and why social media and the sharing economy developed and prospered here and not in other countries, where layers of permission slips prevented such innovations from ever getting off the drawing board.

The question now is, how will the shift to end permissionless innovation as a policy default in the U.S. affect innovative activity here more generally? Economic historians Deirdre McCloskey and Joel Mokyr teach us that societal and political attitudes toward growth, risk-taking and entrepreneurialism have a powerful connection with the competitive standing of nations and the possibility of long-term prosperity. If America’s innovation culture sours on the idea of permissionless-ness and moves toward a precautionary principle-based model, creative minds will find it harder to experiment with bold new ideas that could help enrich the nation and improve the well-being of the citizenry—which is exactly why America discarded its old top-down regulatory model in the first place.

Why America Junked the Old Model

Perhaps the easiest way to put some rough bookends on the beginning and end of America’s permissionless innovation era is to date it to the birth and impending death of Sec. 230 itself. The enactment in 1996 of the Telecommunications Act was important, not only because it included Sec. 230, but also because the law created a sort of policy firewall between the old and new worlds of ICT regulation. The old ICT regime was rooted in a complex maze of federal, state and local regulatory permission slips. If you wanted to do anything truly innovative in the old days, you typically needed to get some regulator’s blessing first—sometimes multiple blessings.

The exception was the print sector, which enjoyed robust First Amendment protection from the time of the nation’s founding. Newspapers, magazines and book publishers were left largely free of prior restraints regarding what they published or how they innovated. The electronic media of the 20th century were not so lucky. Telephony, radio, television, cable, satellite and other technologies were quickly encumbered with a crazy quilt of federal and state regulations. Those restraints include price controls, entry restrictions, speech restrictions and endless agency threats.

ICT policy started turning the corner in the late 1980s after the old regulatory model failed to achieve its mission of more choice, higher quality and lower prices for media and communications. Almost everyone accepted that change was needed, and it came fast. The 1990s became a whirlwind of policy and technological change.

In the mid-1990s, the Clinton administration decided to allow open commercialization of the internet, which, until then, had mostly been a plaything for government agencies and university researchers. But it was the enactment of the 1996 telecommunications law that sealed the deal. Not only did the new law largely avoid regulating the internet like analog-era ICT, but, more importantly, it included Sec. 230, which helped ensure that future regulators or overzealous tort lawyers would not undermine this wonderful new resource.

A year later, the Clinton administration put a cherry on top with the release of its Framework for Global Electronic Commerce. This bold policy statement announced a clean break from the past, arguing that “the private sector should lead [and] the internet should develop as a market-driven arena, not a regulated industry.” Permissionless innovation had become the foundation of American tech policy.

The Results

Ideas have consequences, as they say, and that includes ramifications for domestic business formation and global competitiveness. While the U.S. was allowing the private sector to largely determine the shape of the internet, Europe was embarking on a very different policy path, one that would hobble its tech sector.

America’s more flexible policy ecosystem proved to be fertile ground for digital startups. Consider the rise of “unicorns,” shorthand for companies valued at $1+ billion. “In terms of the global distribution of startup success,” notes the State of the Venture Capital Industry in 2019, “the number of private unicorns has grown from an initial list of 82 in 2015 to 356 in Q2 2019,” and fully half of them are U.S.-based.

The United States is also home to the most innovative tech firms. Over the past decade, Strategy& (PricewaterhouseCooper’s strategy consulting business) has compiled a list of the world’s most innovative companies, based on R&D efforts and revenue. Each year that list is dominated by American tech companies. In 2013, 9 of the top 10 most innovative companies were based in the U.S., and most of them were involved in computing, software and digital technology. Global competition is intensifying, but in the most recent 2018 list, 15 of the top 25 companies are still U.S.-based giants, with Amazon, Google, Intel, Microsoft, Apple, Facebook, Oracle and Cisco leading the way.

Meanwhile, European digital tech companies cannot be found on any such list. While America’s tech companies are household names across the European continent, most people struggle to name a single digital innovator headquartered in the EU. Permissionless innovation crushed the precautionary principle in the trans-Atlantic policy wars.

European policymakers have responded to the continent’s digital stagnation by doubling down on their aggressive regulatory efforts. The EU closed out 2020 with two comprehensive new measures (the Digital Services Act and the Digital Markets Act), while the U.K. simultaneously pursued a new “online harms” law. Taken together, these proposals represent “the biggest potential expansion of global tech regulation in years,” according to The Wall Street Journal. The measures will greatly expand extraterritorial control over American tech companies.

Having decimated their domestic technology base and driven away innovators and investors, EU officials are now resorting to plugging budget shortfalls with future antitrust fines on U.S.-based tech companies. It has essentially been a lost quarter century for Europe on the information technology front, and now American companies are expected to pay for it.

Republicans Revive ‘Regulation-By-Raised-Eyebrow’

In light of the failure of Europe’s precautionary principle-based policy paradigm, and considering the threat now posed by the growing importance of various Chinese tech companies, one might think U.S. policymakers would be celebrating the competitive advantages created by a quarter century of American tech dominance and contemplating how to apply this winning vision to other sectors of the economy.

Alas, despite its amazing run, business and political leaders are now turning against permissionless innovation as America’s policy lodestar. What is most surprising is how this reversal is now being championed by conservative Republicans, who traditionally support deregulation.

President Trump also called for tightening the screws on Big Tech. For example, in a May 2020 Executive Order on “Preventing Online Censorship,” he accused online platforms of “selective censorship that is harming our national discourse” and suggested that “these platforms function in many ways as a 21st century equivalent of the public square.” Trump and his supporters put Google, Facebook, Twitter and Amazon in their crosshairs, accusing them of discriminating against conservative viewpoints or values.

The irony here is that no politician owes more to modern social media platforms than Donald Trump, who effectively used them to communicate his ideas directly to the American people. Moreover, conservative pundits now enjoy unparalleled opportunity to get their views out to the wider world thanks to all the digital soapboxes they now can stand on. YouTube and Twitter are chock-full of conservative punditry, and the daily list of top 10 search terms on Facebook is dominated consistently by conservative voices, where “the right wing has a massive advantage,” according to Politico.

Nonetheless, conservatives insist they still don’t get a fair shake from the cornucopia of new communications platforms that earlier generations of conservatives could have only dreamed about having at their disposal. They think the deck is stacked against them by Silicon Valley liberals.

This growing backlash culminated in a remarkable Senate Commerce Committee hearing on Oct. 28 in which congressional Republicans hounded tech CEOs and called for more favorable treatment of conservatives, and threatened social media companies with regulation if conservative content was taken down. Liberal lawmakers, by contrast, uniformly demanded the companies do more to remove content they felt was harmful or deceptive in some fashion. In many cases, lawmakers on both sides of the aisle were talking about the exact same content, putting the companies in the impossible position of having to devise a Goldilocks formula to get the content balance just right, even though it would be impossible to make both sides happy.

In the broadcast era, this sort of political harassment was known as the “regulation-by-raised-eyebrow” approach, which allowed officials to get around First Amendment limitations on government content control. Congressional lawmakers and regulators at the FCC would set up show trial hearings and use political intimidation to gain programming concessions from licensed radio and television operators. These shakedown tactics didn’t always work, but they often resulted in forms of soft censorship, with media outlets editing content to make politicians happy.

The same dynamic is at work today. Thus, when a firebrand politician like Sen. Josh Hawley suggests “we’d be better off if Facebook disappeared,” or when Sohrab Ahmari, the conservative op-ed editor at the New York Post, calls for the nationalization of Twitter, they likely understand these extreme proposals won’t happen. But such jawboning represents an easy way to whip up your base while also indirectly putting intense pressure on companies to tweak their policies. Make us happy, or else! It is not always clear what that “or else” entails, but the accumulated threats probably have some effect on content decisions made by these firms.

Whether all this means that Sec. 230 gets scrapped or not shouldn’t distract from the more pertinent fact: few on the political right are preaching the gospel of permissionless innovation anymore. Even tech companies and Silicon Valley-backed organizations now actively distance themselves from the term. Zachary Graves, head of policy at Lincoln Network, a tech advocacy organization, worries that permissionless innovation is little more than a “legitimizing facade for anarcho-capitalists, tech bros, and cynical corporate flacks.” He lines up with the growing cast of commentators on both the left and right who endorse a “Tech New Deal” without getting concrete about what that means in practice. What it likely means is a return to a well-worn regulatory playbook of the past that resulted in innovation stagnation and crony capitalism.

A More Political Future

Indeed, as was the case during past eras of permission slip-based policy, our new regulatory era will be a great boon to the largest tech companies. Many people advocate greater regulation in the name of promoting competition, choice, quality and lower prices. But merely because someone proclaims that they are looking to serve the public interest doesn’t mean the regulatory policies they implement will achieve those well-intentioned goals. The means to the end—new rules, regulations and bureaucracies—are messy, imprecise and often counterproductive.

Fifty years ago, the Nobel prize-winning economist George Stigler taught us that, “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits.” In other words, new regulations often help to entrench existing players rather than fostering greater competition. Countless experts since then have documented the problem of regulatory capture in various contexts. If the past is prologue, we can expect many large tech firms to openly embrace regulation as they come to see it as a useful way of preserving market share and fending off pesky new rivals, most of whom will not be able to shoulder the compliance burdens and liability threats associated with permission slip-based regulatory regimes.

True to form, in recent congressional hearings, Facebook head Mark Zuckerberg called on lawmakers to begin regulating social media markets. The company then rolled out a slick new website and advertising campaign inviting new rules on various matters. It is always easy for the king of the hill to call for more regulation when that hill is a mound of red tape of their own making—and which few others can ascend. It is a lesson we should have learned in the AT&T era, when a decidedly unnatural monopoly was formed through a partnership between company officials and the government.

Many independent telephone companies existed across America before AT&T’s leaders cut sweetheart deals with policymakers that tilted the playing field in its favor and undermined competition. With rivals hobbled by entry restrictions and other rules, Ma Bell went on to enjoy more than a half century of stable market share and guaranteed rates of return. Consumers, by contrast, were expected to be content with plain-vanilla telephone services that barely changed. Some of us are old enough to remember when the biggest “innovation” in telephony involved the move from rotary-dial phones to the push-button Princess phone, which, we were thrilled to discover, came in multiple colors and had a longer cord.

In a similar way, the impending close of the permissionless innovation era signals the twilight of technological creative destruction and its replacement by a new regime of political favor-seeking and logrolling, which could lead to innovation stagnation. The CEOs of the remaining large tech companies will be expected to make regular visits to the halls of Congress and regulatory agencies (and to all those fundraising parties, too) to get their marching orders, just as large telecom and broadcaster players did in the past. We will revert to the old historical trajectory, which saw communications and media companies securing marketplace advantages more through political machinations than marketplace merit.

Will Politics Really Catch Up?

While permissionless innovation may be falling out of favor with elites, America’s entrepreneurial spirit will be hard to snuff out, even when layers of red tape make it riskier to be creative. If for no other reason, permissionless innovation still has a fighting chance so long as Congress struggles to enact comprehensive technology measures. General legislative dysfunction and profound technological ignorance are two reasons that Congress has largely become a non-actor on tech policy in recent years.

But the primary limitation on legislative meddling is the so-called pacing problem, which refers to the way technological innovation often outpaces the ability of laws and regulations to keep up. “I have said more than once that innovation moves at the speed of imagination and that government has traditionally moved at, well, the speed of government,” observed former Federal Aviation Administration head Michael Huerta in a 2016 speech.

The same factors that drove the rise of the internet revolution—digitization, miniaturization, ubiquitous mobile connectivity and constantly increasing processing power—are spreading to many other sectors and challenging precautionary policies in the process. For example, just as “Moore’s Law” relentlessly powers the pace of change in ICT sectors, the “Carlson curve” now fuels genetic innovation. The curve refers to the fact that, over the past two decades, the cost of sequencing a human genome has plummeted from over $100 million to under $1,000, a rate nearly three times faster than Moore’s Law.

Speed isn’t the only factor driving the pacing problem. Policymakers also struggle with metaphysical considerations about how to define the things they seek to regulate. It used to be easy to agree what a phone, television or medical tracking device was for regulatory purposes. But what do those terms really mean in the age of the smartphone, which incorporates all of them and much more? “‘Tech’ is a very diverse, widely-spread industry that touches on all sorts of different issues,” notes tech analyst Benedict Evans. “These issues generally need detailed analysis to understand, and they tend to change in months, not decades.”

This makes regulating the industry significantly more challenging than it was in the past. It doesn’t mean the end of regulation—especially for sectors already encumbered by many layers of preexisting rules. But these new realities lead to a more interesting game of regulatory whack-a-mole: pushing down technological innovation in one way often means it simply pops up somewhere else. The continued rapid growth of what some call “the new technologies of freedom”—artificial intelligence, blockchain, the Internet of Things, etc.—should give us some reasons for optimism. It’s hard to put these genies back in their bottles now that they’re out.

This is even more true thanks to the growth of innovation arbitrage—both globally and domestically. Creators and capital now move fluidly across borders in pursuit of more hospitable innovation and investment climates. Recently, some high-profile tech CEOs like Elon Musk and Joe Lonsdale have relocated from California to Texas, citing tax and regulatory burdens as key factors in their decisions. Oracle, America’s second-largest software company, also just announced it is moving its corporate headquarters from Silicon Valley to Austin, just over a week after Hewlett Packard Enterprise said it too is moving its headquarters from California to Texas—in this case, Houston. “Voting with your feet” might actually still mean something, especially when it is major tech companies and venture capitalists abandoning high-tax, over-regulated jurisdictions.

Advocacy Remains Essential

But we shouldn’t imagine that technological change is inevitable or fall into the trap of thinking of it as a sort of liberation theology that will magically free us from repressive government controls. Policy advocacy still matters. Innovation defenders will need to continue to push back against the most burdensome precautionary policies, while also promoting reforms that protect entrepreneurial endeavors.

The courts offer us great hope. Groups like the Institute for Justice, the Goldwater Institute, the Pacific Legal Foundation and others continue to litigate successfully in defense of the freedom to innovate. While the best we can hope for in the legislative arena may be perpetual stalemate, these and other public interest law firms are netting major victories in courtrooms across America.

Sometimes court victories force positive legislative changes, too. For example, in 2015, the Supreme Court handed down North Carolina State Board of Dental Examiners v. Federal Trade Commission, which held that local government cannot claim broad immunity from federal antitrust laws when it delegates power to nongovernmental bodies, such as licensing boards. This decision made much-needed occupational licensing reform an agenda item across America. Many states introduced or adopted bipartisan legislation aimed at reforming or sunsetting occupational licensing rules that undermine entrepreneurship.

Even more exciting are proposals that would protect citizens’ “right to earn a living.” This right would allow individuals to bring suit if they believe a regulatory scheme or decision has unnecessarily infringed upon their ability to earn a living within a legally permissible line of work. Meanwhile, there have been ongoing state efforts to advance “right to try” legislation that would expand medical treatment options for Americans tired of overly paternalistic health regulations.

Perhaps, then, it is too early to close the book on the permissionless innovation era. While dark political clouds loom over America’s technological landscape, there are still reasons to believe the entrepreneurial spirit can prevail.