21 June 2019

The trouble with tech regulation

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It’s cool to hate tech companies these days. From the Home Secretary’s description of the internet as a “hunting ground for monsters” to Labour Deputy Leader Tom Watson’s call to break up tech giants, our politicians have their eyes on the whizz kids.

Even more regulation is on the horizon: the Government’s Online Harms White paper proposes creating a new state online speech censorship bureau; the EU’s new Copyright Directive will require swathes of content to be blocked; and GDPR has already cost small businesses billions.

Strangling the internet in red tape will mean crushing startups and dismantling Britain’s liberal freedoms.

We should be taking an optimistic tone towards online technologies that are making our lives better, creating communities and contributing to Britain’s economy to the tune of £170bn a year. Internet companies alone are estimated to be responsible for 400,000 jobs and 80,000 businesses, and are growing twice as fast as the rest of the economy in recent years.

The Adam Smith Institute’s new report, ‘Safeguarding Progress: The risks of internet regulation’, which I am the co-author of alongside Sam Dumitriu and Philip Salter of The Entrepreneurs Network, argues the case for ‘permissionless innovation’ to be put at the heart of the government’s approach to dealing with the digital economy.

Permissionless innovation means allowing entrepreneurs to experiment with new business models and technologies and only intervening when there are clear, demonstrable harms to the public. It is the opposite of the precautionary approach of the EU that seeks to regulate away potential harms before the arrival of an evidence base. The United States’ culture of permissionless innovation helps explain why a global top 500 company is ten times more likely to set up in the go-getting USA than in over-regulated Europe.

Inspired by the work of Adam Thierer of the Mercatus Centre at George Mason University, we have developed Five Principles for Permissionless Innovation:

  1. Identify and remove barriers to entry and innovation;
  2. Protect freedom of speech and entrepreneurship by retaining immunities for intermediaries from liability;
  3. Rely on existing legal solutions, the common law, and competitive pressures to solve problems;
  4. Push for industry self-regulation and best practices;
  5. Adopt targeted, limited legal measures for truly hard problems based on evidence.

In ‘Safeguarding Progress’ we discuss two issues that threaten permissionless innovation: the undermining of liability exemptions for platform intermediates and growing red tape that creates barriers to entry for start-ups.

A fundamental building block of the internet is the platform liability exemptions built into the EU’s E-Commerce Directive and Section 230 in the US. These sections mean that online platforms – like Facebook, Twitter and Mumsnet – are treated like libraries rather than as publishers. The companies are not liable for illegal activity of their users much like a library is not responsible for the content of the book on its shelves. In the case of illegal activity, responsibility lies exclusively with the user who posted the content. Platforms must still remove content when they are alerted to its illegality, and do work closely with police and security forces. These exemptions allowed for the development of the internet as we know it, since many sites would not exist if they had to pre-censor all material for fear that it could break the law.

The exemption, however, is being undermined by a broad new array of regulation and policy, including the EU’s codes on hate speech and terrorism content, Germany’s NetzDG law, and the UK Government’s Online Harms White Paper. Threats of fines, jail time and website blocks, like in the White Paper, have perverse, illiberal consequences. They incentivise the platform companies to become excessively censorious in their content moderation, seriously undermining free speech.

The other major threat to the internet are growing regulations that create barriers to entry.

It is a myth that major tech firms do not compete. Facebook, Twitter, Google, Amazon and hundreds of other upstarts compete heavily for user attention. They also compete in sub-markets, like travel search competition between Google, TripAdvisor, Expedia and many others; or online purchases competition between Amazon, Tesco, and ASOS. The high level of competition is indicated by the large amounts continuously invested in R&D; that would not be the case if the market was stagnant and monopolistic.

The view that a company holding a large part of a market segment means they have market power is demonstrably false. For competition authorities to intervene you must show consumer harm in the form of using a market position to excessively charge consumers. But if Facebook or Google began charging for their service they would lose most of their users.

But new red tape, such as the GDPR, is threatening competition. This is because regulations are disproportionately costly to startups and small- to-medium-sized enterprises that have fewer resources for compliance. Startups do not have armies of moderators or the capacity to develop complex AI systems. They are hit hard by new red tape. Eighty-one per cent of tech investors agreed that ‘policy and/or legislation in order to target specific companies (i.e. global giants) could lead to poor outcomes that inadvertently hurt or hinder tech startups’. They are right.

The challenge for the next Prime Minister will be to keep the internet open and free, and articulate a vision for an optimistic, forward looking culture of permissionless innovation.

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Matthew Lesh is the head of research at the Adam Smith Institute.