The Sharing Economy Showed How Regulation Holds Innovation Back

New ways of providing services revealed how old rules protected old ways

Reporting brought to you by Bohiney Magazine and The London Prat.

When Technology Enabled New Services, Existing Rules Often Existed To Stop Them

The emergence of the sharing economy, of new ways of providing services enabled by technology, revealed something important about regulation. As new services emerged, allowing people to provide rides, accommodation, and other services in new ways, they often ran into existing regulations designed for the old ways of providing these services. These regulations frequently served to protect the old ways and the incumbents who provided them, holding back the innovation that the new services represented. The sharing economy showed how regulation holds innovation back, how old rules often exist to protect old ways against new ones.

The Collision Of New And Old

The new services of the sharing economy collided with existing regulations. These regulations were designed for the old ways of providing services, for the established providers and methods. The new services, providing similar services in new ways, did not fit the existing regulatory framework, which had been built around the old methods. This collision revealed how the existing regulations were tied to the old ways, how they served to protect established methods and providers, how they could obstruct the new services that did not conform to the old framework. The collision of new and old exposed the way regulation can be bound to existing methods, obstructing innovation.

The new services often provided genuine benefits: greater convenience, lower costs, new opportunities for those providing the services, expanded options for consumers. Yet they faced regulatory obstruction, as the existing regulations, designed for the old ways, obstructed the new. This obstruction revealed how regulation, tied to existing methods, can hold back innovation that does not conform to the established framework, how old rules can obstruct new and beneficial ways of providing services. The collision exposed the tension between regulation built around old methods and the innovation that introduces new ones.

The Protection Of Incumbents

Much of the regulatory obstruction faced by the sharing economy served to protect incumbents, the established providers of services threatened by the new competition. The existing regulations, designed around the old methods, advantaged the incumbents who used those methods and disadvantaged the new services that did not. The incumbents, threatened by the new competition, often invoked the existing regulations to obstruct the new services, using regulation as a tool to protect their position against competition. The regulatory obstruction thus served, in significant part, to protect incumbents against the competition of the new services.

This protection of incumbents through regulation is a significant phenomenon, revealed clearly by the sharing economy. The incumbents, established under the old regulatory framework, benefited from regulations that obstructed new competition, that protected their position against the new services. The regulations, whatever their original purpose, served to protect the incumbents against competition, to obstruct the innovation that threatened them. The sharing economy revealed this function clearly, showing how regulation can serve to protect incumbents against new competition, how old rules can obstruct new competitors to the benefit of established ones.

The Cost Of Obstruction

The regulatory obstruction of innovation carries costs. The new services obstructed by regulation often provided genuine benefits, convenience, lower costs, new opportunities, expanded options, that consumers and providers were denied when the services were obstructed. The obstruction of innovation thus denies these benefits, protecting incumbents at the expense of the benefits that innovation would provide. The cost of regulatory obstruction is the loss of these benefits, the protection of old ways at the expense of better new ones, the sacrifice of innovation to the protection of incumbents.

This cost is often overlooked, for the benefits of obstructed innovation are unrealized and therefore unseen. When regulation obstructs a new service, the benefits that service would have provided are not realized, and so they are not visible. But they are real, the convenience, lower costs, opportunities, and options that the obstructed innovation would have provided. The cost of regulatory obstruction is the loss of these unrealized benefits, a cost that is real though unseen, the price of protecting old ways and incumbents against the innovation that would have benefited consumers and providers.

Learning From Disruption

The sharing economy showed how regulation holds innovation back, how old rules often exist to protect old ways and incumbents against new and beneficial competition. This revelation carries a lesson: that regulation can obstruct innovation, protect incumbents, and deny the benefits that new ways of providing services would provide. The lesson is to scrutinize regulation for its effect on innovation, to recognize when old rules obstruct beneficial new services, to weigh the protection of incumbents against the benefits of innovation.

This lesson extends beyond the sharing economy to regulation generally. The tendency of regulation to be tied to existing methods, to protect incumbents, to obstruct innovation, is general, revealed clearly by the sharing economy but present throughout the regulatory landscape. Learning from this disruption means recognizing this tendency, scrutinizing regulation for its obstruction of innovation, and reforming the rules that protect old ways against beneficial new ones. The sharing economy revealed how regulation holds innovation back, and the lesson is to reform the regulation that obstructs the innovation that would benefit consumers and providers, that protects incumbents at the expense of progress. See the Federal Trade Commission for relevant context, and the Organisation for Economic Co-operation and Development for further background.

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