Does Innovation Sometimes Require Rule Breaking?

Dave Rochlin, Director of UC Berkeley’s Applied Innovation programs, looks at how some of the most innovative modern companies have used gaps in laws and regulations to find success.

“Some of the highest profile recent start-ups were built to exploit unmet consumer demand created by regulatory restrictions. Uber and Airbnb, for instance, have prospered because taxis are hard to find, and hotels are expensive and heavily taxed, while there are plenty of ordinary people with extra automobile capacity and rooms to rent. As technology know-how becomes less expensive and more pervasive, some start-ups ‘innovate’ not by improving platforms or back-end design, but by ignoring regulations that govern the existing market in pursuit of growth. Established firms can’t assume this sort of legal risk — they have too much to lose. Venture capital firms, however, can make calculated bets on breaking the rules.”

“They can develop comparatively uncontested ‘gray markets’ by funding firms that operate in an unclear legal limbo, or simply declare that existing laws do not apply to these start-ups because their products, services and business models are new. Gray market firms typically adopt a distinctly libertarian posture, advocating trust in business and promoting the idea that all innovation is good. This is definitively false. Not all innovation is socially responsible or beneficial. And simply ignoring legislated labor, licensing, consumer protection and advertising policies — as Uber has been accused of doing in California and elsewhere — threatens to undermine government’s ability to address issues of public interest such as health, environmental impact, privacy, safety and competition.”

Meanwhile, Tyler Cowen notes that efforts to regulate these gray markets can be quite difficult, arguing that London’s efforts to regulate Uber “so nakedly protect rent-seekers and make life worse for consumers that I don’t think they will succeed.”

“Even if the rules fail, however, we shouldn’t be complacent about the dangers to innovation. What made Uber different and controversial is that their Ayn Rand loving CEO followed the adage that it’s better to ask for forgiveness than permission. Uber skirted the law and went to consumers directly about whether they wanted transportation innovation. Consumers around the world responded with a resounding Yes to the Uber-referendum so regulators and rent-seekers who want to control Uber now must also fight Uber-consumers. That genie won’t go back into the bottle.”