Prescriptive Policies Undermine the Freedom to Innovate

Chile’s recent rejection of a new constitution highlights that democracies do not want to be micromanaged. Chile’s proposed constitution included 388 articles outlined in 170 pages enshrining a series of prescriptive rules as the law of the land. Luckily, the people of Chile soundly voted it down. Passage would have reversed the “Miracle of Chile,” a term coined by Milton Friedman to describe the replacing of a military junta in 1990 with a free-market system resulting in decades of economic growth – a system that made Chile one of the most prosperous and stable economies in Latin America.

Chileans recognized that their economic freedom is tied directly to the strength of their democracy and at its core that freedom rested on their ability to uninhibitedly pursue jobs and compete in markets. 

Here in the U.S., a recent study by Cast From Clay, a communications firm focused on strengthening democracy, found that “65% of [U.S. policy makers and political] insiders admitted that they feel they should care about democracy but don’t.” This sentiment is clearly seen in the increase in regulation creating a barrier to vital innovation and investment.

Cumbersome regulation enacted by non-elected judges and policymakers continues to create unnecessary hurdles for American entrepreneurs striving to forge groundbreaking opportunities. My recent CEOWORLD article, Irrational Regulation: An Underlying Cause of Our Economic Woes highlights regulatory challenges to new entrants in the nuclear energy space and the cost of chip manufacturing in the U.S. versus China. 

In recent years, government rules have been added at an unprecedented rate. Supreme Court Justice Neil Gorsuch explored this challenge in his book, A Republic, If You Can Keep It. Gorsuch provides an overview of the intent of our system of checks and balances shaped by our Founding Fathers to ensure that a non-elected body cannot superimpose its will on the electorate. Gorsuch warned that “we the people” were slowly ceding the authority which was granted to us by the Constitution. He notes, “At the end of 2012, the number of pages in the Code of Federal Regulations exceeded the number of pages in the United States Code [of Laws] by a factor of nearly four—topping out at over 160,000 pages.” 

Fundamentally, a regulatory construct should be designed to keep pace with the speed of innovation. Every day, American businesses face limited options for working our way out of the post-Covid malaise. As a result, the nation is falling rapidly behind China and other competitors. Investors and business leaders continue to be wary of the impact of pending regulations amidst rising costs.

It is difficult to finance high-potential high-risk ventures if reinterpretation of a regulation results in an entity being held retroactively to a standard that did not exist when action was planned or taken. In addition, when regulatory rules are too inflexible, innovation has no wiggle room.

The good news is regulatory redesign is an opportunity for bipartisan collaboration. Big data and artificial intelligence provide efficiencies that did not exist when many of regulations were designed–in some cases 50 years ago. Leveraging the technology of today and tomorrow would vastly improve decision making and time-to-market while ensuring safety. 

A recent example of a practical bipartisan solution was outlined in the Wall Street Journal opinion editorial, “How Animal Testing Harms Humans.” The author discussed the passage of the bipartisan FDA Modernization Act 2.0 which would end the mandate that pharmaceutical drugs be tested on animals before human trials—a rule set in place in 1938 which could never have anticipated the technological innovations of today. The Journal notes: “The decision to enshrine animal testing in law was misguided, but it teaches a valuable lesson: The more specific the mandate, the more harmful, innovation-hindering and costly the results.” 

To maintain our economic freedom, I suggest we embrace these two principles:

One: Most issues are too complicated for a “one size fits all” solution. Too many times, policymakers become enamored with big ideas and are surprised when voters react negatively. They forget that people are driven by many factors – their upbringing, socio-economic status, where they live, their individual health requirements, fear of change, and obviously, their tastes. As we saw in Chile, this means people don’t always react to an idea the way we expect. What works for one group will not work for all.

Two:  Create standards-based solutions that works for everyone, everywhere. Regulation that is easy for one business, state, or county to implement, may be expensive or technically difficult somewhere else. Identify the desired outcome and loosen up the controls on the “how to” so it can be implemented based upon the needs of the locality.

Sometimes, policymakers fail to recognize that in a democracy their voice is equal to everyone else – the truck driver, the teacher, the small business owner, and so on; and their customer is the taxpayer. They don’t get a “super vote” because they are more important, influential, or powerful. 

It is no surprise Americans continue to see a drop of confidence in our national institutions if the electorate struggles to deploy innovation to achieve important goals and improve lives. As the Chilean people demonstrated, democratic systems still work, but to function properly democracy requires active engagement that creates positive change which supports freedom and liberty. 

Written by Lisa Gable.
Have you read?
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5 ways to prepare yourself for the future of work by Michelle Gibbings.
How to Prepare Your Brand for the Future by Ryan Jenkins.
What Harvard MBAs and Fortune 500 CEOs can learn from small business owners by Jacob Wolinsky.

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