There is a simple reason the drug trade is so lucrative: Government mandates create a market opportunity for businesses willing to shirk the law.
In the technology and venture capital world, this principle has not gone unnoticed. Some of the highest profile recent startups 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 plenty of ordinary people have extra automobile capacity and rooms to rent.
Some startups "innovate" not by improving platforms or back-end design, but by ignoring regulations that govern the existing market. Established firms can't assume this 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 a legal limbo, or simply declare that existing laws don't apply because their products, services and business models are new.
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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 — threatens to undermine government's ability to address issues of public interest such as health, environmental impact, privacy, safety and competition.
Nor is it true, as some gray market firms and their investors would have us believe, that regulation necessarily stifles innovation.
Napster, one of the first sharing firms of the Internet era, was a test case. As much as the public may not like copyright laws, they were deemed to apply. Yet Napster's legal takedown did not end disruption. Apple, Spotify, Amazon and others have worked within the existing system and changed how music is consumed.
Conflict between innovators and the existing world order is nothing new. Attempts to regulate automobiles in the early 1900s through vehicle registration, driver's licensing and speed limit ordinances were considered by manufacturers to be prejudiced against the industry. Henry Ford sued the city of Detroit, claiming that automobiles were unfairly singled out vis-a-vis horse-drawn carriages. But resistance gave way to cooperation as manufacturers realized that regulation could help consumer confidence by promoting safety.
More recently, Netflix took an active role in shaping regulation around net neutrality. Since Netflix uses more than one-third of all Internet bandwidth in the U.S., net neutrality is as crucial to its business model as the open roads were to Ford.
The many legal battles of companies such as Uber are not about whether the sharing economy has merit (it does) or whether regulations that protect older, traditional companies benefit consumers (some do not). They are about whether startups should have limits to their rights, like the rest of us.
Democratic governments make rules for all sorts of reasons, and many do not operate as intended, or even benefit the public. But whether it is regulating the sale of tobacco products or requiring drivers to obtain a license before transporting others, we should consider carefully whether we want to abandon our system of government oversight in favor of short-term business gains, the markets and granting unfettered freedom to operate for whatever innovation comes along next.
Dave Rochlin lectures at the University of California, Berkeley's Haas School of Business and directs the University's Applied Innovation programs and Innovation Roundtable.
The Los Angeles Times