Why should we care that government regulations are causing potentially profitable new businesses to fail? In a word: innovation. It’s empirically demonstrated that small firms are more innovative than larger companies. There’s an Economist column named after Joseph Schumpeter, who first explained why. One post sums him up well: “Although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game.” Think Facebook, Uber, Air BnB, eBay. As Entrepreneur magazine put it, “Large companies more successfully acquire instead of innovate.” The kind of people large firms attract, the nimbleness of their operations, and the level of risk they can tolerate all contribute.
This is all pretty theoretical, so let’s make it real-world for a second. When you think about small firms innovating, think about the services you use every day. Think about the companies which have transformed our economy. Google, Amazon, Apple, and Microsoft are all behemoths whose contributions to improving our standards of living are simply incalculable. They all started as small firms. Simply put, today’s technology sector looks nothing like the tech we used 50 years ago, while we do manufacturing, construction, and utilities almost exactly the same. There are many reasons for this, among them the fact that tech is comparatively free from innovation-stifling regulations.
And lest we fall for the lie that regulations are just the cost of maintaining safe, functional, fair markets, we should note that most regulations frankly absolutely fail to accomplish their stated aims. That’s because most are written by and for incumbent businesses, and are aimed at creating barriers to entry for startups in order to protect existing companies’ from competition and maintain their places in the market.
Indeed, it’s no shock nor accident that compliance costs disproportionately impact small businesses. It’s by design.
You’re going to see numbers like $1.863 trillion when talking about the cost of regulations. And they matter. But remember that what you don’t see matters even more. What would the poverty rate look like if America’s manufacturing, and energy and utilities sectors had their own Facebook, Uber, Air BnB or eBay? The compliance costs of regulation may be difficult to measure, but the cost of regulation on innovation is incalculable.