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Technological Change, Institutional Stasis

January 6, 2011

Conor Friedersdorf has a wonderful column in City Journal on the harm caused by regulation’s failure to keep pace with technological change. He argues that pre-digital rules block the enormous entrepreneurial possibilities opened up by new communication technologies, making us all worse off:

Technology enables city dwellers to engage in sophisticated, small-scale entrepreneurial activity as never before. That anyone can easily become a publisher enhances aggregate output and innovation, as do new opportunities in other industries where barriers to entry are falling. Too often, however, city ordinances that arose in a pre-digital economy stymie these efforts.

The taxi is a good example. Famously subject to municipal regulation, most fleets underserve their cities. It’s easy to hail a ride in Manhattan because of its density and singular geography—and orders of magnitude harder in most other cities, especially outside the Northeast. Enter UberCab, a smartphone application for the Bay Area that uses GPS to locate cabs, match them to passengers in real time, and facilitate their transaction, even calculating distances, determining prices, and handling payments. Similar technology could make every city dweller with a car a part-time cabbie, picking up passengers whenever convenient—except that most cities prohibit such informal arrangements.

…City officials would do better to take lessons from the tech industry. Assume that everyone wants to be an active economic participant, rather than a passive patron of established firms. Allow for different degrees of entrepreneurship. Make submitting necessary forms as easy as uploading high-definition films to Vimeo. Craft minimal rules that aim to facilitate transactions, rather than regulate them out of existence. The successful cities of the future will very probably be those that harness the entrepreneurial ambitions of empowered citizens.

In a healthy institutional environment, rules and technology would co-evolve. In the current monopolistic market for governance, they do not. An environment continually conducive to technological innovation requires a meta-environment conducive to institutional innovation.

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