The last decades in the United States have been marked by what has been called the era of “permissionless innovation.” From the early days of the internet to the rise of mobile computing, American entrepreneurs and innovators have been free to experiment and create new products and services without being hampered by excessive regulations or government interference.
In a free market, individuals and businesses can freely innovate, compete, and succeed based on their merits without government favoritism or intervention. The culture of permissionless innovation in the US exemplifies this free-market ideal, enabling entrepreneurs and innovators to pursue their ideas and compete in the market freely. This strategy has fostered significant growth and innovation in the tech industry and other sectors. The achievements of American-founded companies like Amazon, Google, and Facebook exemplify the power of the permissionless innovation culture in fostering economic growth and development.
Yet recent antitrust suits may indicate an end to that era. Many factors push the US towards greater public involvement, oversight, and stricter regulations.
A Clash of Approaches: Permissionless Innovation vs. the Precautionary Principle
Permissionless innovation is a term that refers to the idea that anyone should be able to innovate without having to seek permission from a government or other authority. It means that, as a general rule, experimentation with new technologies and business models should be allowed unless there is a strong argument that it will cause significant harm to individuals. Conversely, the precautionary principle suggests that innovations should be limited or prohibited until their inventors can verify their lack of harm toward individuals, groups, specific entities, cultures, or existing laws, norms, or traditions. This principle places the responsibility of proof on those proposing or engaging in an activity to demonstrate its safety rather than on those expressing concerns about potential risks.
The United States is often associated with a culture of permissionless innovation. The US has traditionally embraced a more of laissez-faire approach to regulation, prioritizing economic growth, competitiveness, and technological advancement. This approach can be seen in various aspects of the US system, such as the relatively minimal regulatory burden on startups and technology companies, the freedom given to entrepreneurs to experiment and invent, and the emphasis on market forces to drive innovation. As a result, the US has been known for fostering groundbreaking innovations in industries like technology, biotech, and finance.
In the mid-1990s, the Clinton administration made a wise choice. They declared the internet a “market-driven area,” not regulated, with limited government involvement only to support and enforce a predictable, minimalist, consistent, and simple legal environment. This policy allowed a new generation of creative minds to explore this frontier for business and commerce. This approach led to the internet’s success, resulting in a surge of innovation. Today, the US is home to the most innovative tech firms, hosting vibrant internet-based companies and bringing countless benefits to consumers and small businesses.
On the other hand, Europe leads in adopting the precautionary principle in its regulations and decision-making. European regulatory frameworks prioritize consumer protection, public health, and environmental preservation. This approach can lead to stricter regulations, mandatory impact assessments, and more rigorous safety standards. It has been applied in various areas, including genetically modified organisms (GMOs), chemicals, pharmaceuticals, and emerging technologies. Nonetheless, inadequate regulation can result in unanticipated outcomes, including privacy worries, market monopolies, and detrimental societal effects. Overregulation hampers advancement, deters investments, and undermines the competitiveness of European industries.
Europe’s precautionary principle culture has led to increased costs, market distortions, and a risk-averse approach to innovation in Europe. This principle, employed in Europe when faced with scientific uncertainty, has had numerous unintended consequences. For instance, the EU’s ban on genetically modified food crops has spiked food prices while reducing agricultural productivity, making it challenging for European farmers to compete globally. Additionally, it has led to a decrease in innovation. Companies are less likely to invest in new products and technologies if they are unsure whether they can market them in the EU. This situation has adversely impacted the EU economy. Precautionary measures enforced through stringent regulations and requirements can increase expenses for enterprises, ultimately affecting consumers. Moreover, they can discourage investments and hinder progress in specific industries.
Every year, Boston Consulting Group (BCG) has compiled a list of the world’s most innovative companies. Notably, American tech companies have consistently dominated this list. In 2013, seven of the top ten most innovative companies were based in the United States. Despite increasing global competition, the 2023 list still features 16 U.S.-based giants among the top 25, including Amazon, Alphabet, Intel, Microsoft, Apple, Facebook, Space X, and Tesla. In stark contrast, European digital tech companies were conspicuously absent from this prestigious list back in 2013 and have a rare presence in the 2023 list, as mentioned in the chart below. Only the US and China have expanded their portion since 2013, displacing companies from European nations such as Germany, the UK, and Italy. Notably, there have been noticeable decreases in the presence of Japanese and South Korean firms. Despite the recognition and popularity of American tech firms in Europe, it remains challenging for many to identify even one EU digital innovator.
The following chart compares the country breakdowns of the 2013 and 2023 rankings.
The policy battles between the US and Europe favored permissionless innovation over the precautionary principle.
Today, the permissionless innovation culture is facing significant threats. Although this culture has been a driving force behind technological advancements and economic growth, many factors are posing challenges to this culture in recent years.
The Permissionless innovation culture is under threat.
Several reasons exist for the belief that the U.S. innovation culture is at risk. A primary concern is the rising government regulation and intervention in the technology sector. Despite its success, numerous individuals today express concerns about the uncontrolled nature of technology and call for governmental oversight. There are worries that technology might jeopardize consumers, displace jobs, or be used by criminals or foreign powers. In response, many advocate increased regulation in the name of promoting competition, safety, choice, quality, and lower prices. However, the intention to serve the public interest does not guarantee that the implemented regulatory measures will effectively accomplish these well-intentioned objectives. The methods employed, like the new rules, regulations, and bureaucracies, tend to be complex, vague, and often counterproductive.
New regulations often reinforce established businesses rather than promoting increased competition. Many experts have extensively documented the issue of regulatory capture in various scenarios. Based on historical indications, we can foresee that numerous major technology companies will openly embrace regulation as they perceive it to be a valuable means of preserving their market dominance and blocking new competitors. Most of these new competitors will likely struggle to handle the burdens of compliance and the risks associated with rigid regulatory systems. In the Theory of Economic Regulation, the economist George Stigler, a Nobel laureate, explicitly pointed out that established businesses embrace regulation for their benefits: “As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits.”
Populist figures from both the political left and right are launching attacks against major technology corporations due to their size and success. Certain companies have aligned themselves with these proponents and are leveraging antitrust and data regulation laws to impede their competitors. For example, in 2020, Mark Zuckerberg requested greater government regulation of the internet. Zuckerberg argues that more regulation is essential to shield society from harmful content, uphold election integrity, protect privacy, and enable data portability. However, Zuckerberg’s appeals are not driven by humanitarian reasons, but there is hidden agenda behind it. Government regulation would lead to higher costs for internet companies, primarily borne by smaller businesses. Larger companies like Facebook and Google would easily absorb these costs, while startups and smaller businesses would struggle to compete. This could potentially reinforce the dominance of tech monopolies, favoring the most substantial and wealthiest companies.
Zuckerberg’s call for regulation is perceived as an attempt towards regulatory capture, favoring the interests of big corporations like Facebook. Increased regulation could aid Facebook in restoring credibility after the data scandals following the company name for years and safeguarding its position against potential rivals.
This alliance seeks to replace permissionless innovation with precautionary regulation, advocating for increased government intervention as the solution to every problem they identify. This interference can impede innovation, hinder entrepreneurial experimentation, and make it difficult for startups to compete with established firms. If the trend persists, it could lead to diminished innovation in the US, negatively impacting both the US and the global economy.
It is essential to protect permissionless innovation culture in order to promote economic growth and prosperity. This means resisting the temptation to regulate new technologies too heavily and ensuring that businesses are not afraid to innovate for fear of government regulations. It also means educating the public about the benefits of innovation and the risks of excessive regulation. The costs of regulation do not mean not to regulate; instead, it highlights the need to understand and consider these costs when deciding whether and how to regulate. Innovation thrives within systems that maximize flexibility for ongoing social and economic experimentation, evolution, and adaptation.
In conclusion, countries that promote innovation without restrictions are more likely to enjoy sustainable economic growth. Conversely, those that diminish such principles and adopt a more cautious policy approach are more likely to hinder innovation and experience economic stagnation. By creating an environment that fosters entrepreneurship, experimentation, and technological advancement, nations can unlock their potential, attract investment, and address societal challenges. Embracing this culture as a fundamental principle opens doors to long-term opportunities and positions countries as leaders in global innovation.
Mohamed Moutii is a research associate with the Arab Center for Research and the Montreal Economic Institute. He is also a research fellow at the Institute for Research in Economic and Fiscal Issues (IREFeurope), where he analyzes economic policies and their impact on society. Furthermore, he translated numerous books from English to Arabic, facilitating the dissemination of free-market literature in the Arab-speaking region.
