Circumventing government

In 1995, Monsanto formed a partnership with India’s Mahyco to import a new variety of cotton that had been modified to express a natural insecticide called Bacillus thuringiensis (Bt) – making it resistant to bollworm, a pest which unchecked would cause losses of 50 percent or more of a typical cotton crop.  

By 1998, the government of India had not yet issued a permit for the sale of Bt cotton, but some enterprising farmers in the state of Maharashtra managed to get hold of some (illegally produced by another seed company, Navbharat) and started growing it.  

The farmers growing Bt cotton saw their yields rise dramatically and their use of pesticide fall. Other farmers demanded the seed and its use grew rapidly. When the government of India finally came to consider the license application in 2002, it had little choice but to grant it. Since then, Indian cotton production has more than doubled, making it the world’s largest producer.  

In the past decade, entrepreneurs have developed various technologies that confer significant benefits to consumers by enabling them to access goods and services at lower cost. As with Bt cotton in India, these technologies often flout existing regulations.

They have also been met with fierce resistance from incumbent businesses. The political response has been varied: in some jurisdictions, restrictions have been removed; in others, new restrictions have been imposed.

So-called “ridesharing” services, such as Uber and Lyft, utilize a robot dispatcher to connect riders to nearby drivers via a smartphone app. Once connected, the two parties arrange a meeting point and the driver takes the rider to his or her desired destination.

The ridesharing service takes payment from the rider and pays the driver. This system dramatically increases the efficiency of operating a car service by reducing the amount of time that cars and drivers are idle. These cost savings are passed on to consumers. For example, a taxi from Newark Airport to my home in suburban New Jersey typically costs over $60. The last two rides I took using Uber on the same route cost me around $30.

There is another significant advantage to ridesharing services: rider and driver are given each other’s names, photo (if it has been uploaded to the site), and rating (riders rate drivers and drivers rate riders). For me, such crowdsourced assessment beats government regulation hands down as an assurance of quality.

Millions of other riders clearly agree, as do investors: Uber is currently valued at approximately $40 billion and Lyft at $2 billion. Unfortunately, taxi companies are not so enthusiastic and have sought to ban ridesharing services or force them to comply with the same regulations as their drivers, including fare schedules.

Government regulated fare schedules have traditionally been justified on the grounds that they are necessary to protect consumers from being ripped off. But given the efficiencies of ridesharing and the transparency of its prices (fare estimates are available before taking a ride), forcing ridesharing services to comply with taxi fare schedules perpetrates a fraud on the consumer.

Just as ridesharing services result in more efficient use of cars and drivers, so Airbnb makes more efficient use of accommodation, enabling tenants (including owners) to rent out unoccupied rooms and entire dwellings. Airbnb effectively operates as a robot letting agent matching tenant with renter and, like Uber and Lyft, enabling both parties to evaluate one another and share those evaluations with others.

Perhaps unsurprisingly, Airbnb has incurred the ire of hotel companies, which object that owner/occupiers letting their rooms are effectively operating as unlicensed hotels.

Opponents have had some success: a 2010 New York state regulation prohibits tenants in properties with three or more units from renting out spaces for periods of less than 30 days. Such rules obviously affect not only Airbnb but all short-term lets and seem an egregious violation of the principle of freedom of contract.

Crowdsourced evaluations are also a key feature of peer to peer (P2P) lending sites such as Zopa, Quidcycle, Funding Circle, and Lending Club, which match borrowers to lenders. Lending through these and other sites has grown rapidly and now totals several billion dollars, though it remains a small proportion of total lending. While the U.S. and U.K. governments now regulate such P2P lending, the regulations are far less onerous than those imposed on commercial lenders.

As Juan Llanos explains in this issue, the blockchain that was developed as a means of verifying transactions in cryptocurrencies offers an alternative to existing payment networks. Contrary to some media reports, blockchain-based decentralized ledgers do not offer a means of engaging in illegal transactions.

Quite the opposite: the open and transparent nature of the transactions ensures that the parties can be identified with relative ease (as the vendors of illegal goods operating on Silk Road – and the owner – found to their cost) – a stark contrast to payment card fraud, which can occur entirely anonymously. Unfortunately, at present the use of the blockchain as a payment network suffers from limits on the number of transactions that can be processed in any period, so while it is very secure it may be too slow to offer serious competition to existing payment networks.

It seems highly likely that at some point in the future, a payment network will be developed that combines the fraud-prevention elements of decentralized ledgers with the speed of conventional payment networks. Ironically, the development of such a network may be delayed by regulations being imposed on payment networks in many parts of the world.

Of particular concern are the price controls discussed by Todd Zywicki, Geoffrey Manne and me in another article in this issue, which undermine incentives to invest in such innovation.

One of the traditional objections of socialists to capitalism is the “wastefulness” of “middlemen.” But as Richard Cantillon pointed out in his 1730 Essay on the Nature of Commerce in General, such middlemen serve an important function, identifying wants among consumers and transmitting that information to suppliers. Those societies, such as the Soviet Union and modern day North Korea, that have attempted to eliminate middlemen suffered enormously.

As the examples above show, in the past two decades, the Internet and sophisticated computer programs have begun to replace some of the functions previously played by middlemen, to the benefit of consumers and the economy as a whole.

While it seems unlikely that the middleman will ever be entirely eliminated, online peer-to-peer services are dramatically reducing the extent and cost of such intermediaries and thereby challenging existing business models and market structures. In other words, technology developed by entrepreneurs driven by the profit motive is achieving what socialism was never able to achieve.

Humans have a knack, a desire, and a fascination for circumventing restrictions on their freedom. In the short term, new technologies that expand freedom by circumventing regulations unjustly limiting human action are often met with resistance and even new regulations.

However, the iniquity, futility and harm done by such regulations means that in the longer term they are often overturned – especially if some jurisdictions continue to take a less prohibitionist stance. Those more permissive jurisdictions are likely to benefit by becoming a hub for activity in the area that is being restricted elsewhere.

Cayman has taken just such a permissive approach to certain forms of financial regulation and has reaped the benefits. Extending that approach into other areas – from cryptocurrencies to ridesharing – might well enable the island to become a hub for other entrepreneurial activities, to the benefit of islanders and to the world.

 

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Julian Morris

Julian graduated from the University of Edinburgh with a Masters in economics. Graduate studies at University College London, Cambridge University and the University of Westminster resulted in two further masters’ degrees and a Graduate Diploma in Law (equivalent to the academic component of a JD). 

Julian is the author of dozens of scholarly articles on issues ranging from the morality of free trade to the regulation of the Internet, although his academic research has focused primarily on the relationship between institutions, economic development and environmental protection. He has also edited several books and co-edits, with Indur Goklany, the Electronic Journal of Sustainable Development (www.ejsd.org).  

Julian is also a visiting professor in the Department of International Studies at the University of Buckingham (UK). Before joining Reason, he was executive director of International Policy Network (www.policynetwork.net), a London-based think tank which he co-founded. Before that, he ran the environment and technology programme at the Institute of Economic Affairs, also in London. 


Julian Morris

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