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How to Manage the Costs of Innovation

by Edoardo Campanella

Regulators everywhere are going after Uber, a fast-growing ride-sharing platform. China, Denmark, France, Germany, Italy, and Norway have outlawed the app, while Australia, Dubai, India, and Taiwan have severely limited its operations. Even in the United States, several municipalities have questioned the legality of the cab services provided by the San Francisco-based firm. Cab drivers themselves have spurred much of this response: through blockades, lawsuits, and physical assaults, they have pushed policymakers to address supposedly unfair competition. As a London cabbie put it during a march against Uber in 2016, “Why has this American company come here and been given free rein?”

Such a vigorous reaction was predictable. Uber and apps like it are disrupting one of the world’s most protected industries. For decades, taxi drivers the world over have invested financial capital in gaining the support of public officials in order to curtail the number of driving licenses for sale and preserve their own revenue. Thus protected by thick barriers to entry, incumbents had little incentive to innovate and improve the quality of their service. Uber took advantage of this innovation inertia by combining readily available technologies such as GPS, smartphones, and the Internet. Its outspoken CEO, Travis Kalanick, has radically remodeled a previously inaccessible industry. Even in countries where taxi drivers have so far succeeded in pushing back the advances of Silicon Valley, the sector no longer looks the same.

The conflict between innovators and defenders of the status quo is a recurring pattern in the history of innovation. That is the focus of Innovation and Its Enemies, a new book by Harvard professor Calestous Juma. A leading scholar of innovation, Juma looks at the past 600 years of economic history to explain how and why incumbents, and society more broadly, resist technological disruption. With so many inventions coming out of the world’s many “Silicon Valleys”—inventions ranging from artificial intelligence to 3-D printing to gene-coding to Big Data—the topic could not be more relevant. Today, taxi drivers are at the barricades. Tomorrow it may be lawyers protesting, threatened by IBM Watson. Or nurses replaced by humanoid robots, university professors rendered obsolete by MOOCs, or journalists outclassed by smart algorithms. 

Innovation is a process that involves different actors with diverging interests. If innovators and policymakers underestimate the backlash that innovative ideas can trigger, then the world might delay or even forego the adoption of highly transformative improvements. Given the magnitude and pervasiveness of the digital revolution, Juma believes that policymakers should strike a balance between suffocating overregulation and unconditional techn-enthusiasm, making innovation more inclusive. But today’s challenge is so big that such a constructive approach might not be enough to contain opposition. 

INNOVATORS VS. INCUMBENTS 

The book enriches an often one-sided debate in which innovation is seen as the ultimate source of prosperity: something to promote and accept no matter what. Through innovation, the argument goes, firms open new markets, workers find fulfilling careers, societies solve daunting problems, and nations boost their global standing. This is why economists, business leaders, and politicians are concerned with creating the right conditions for a flourishing culture of innovation, while paying little attention to the costs generated by technological disruptions. By definition, however, innovation creates discontinuities with the past that can generate social trauma. Even the Austrian economist Joseph Schumpeter, who in the 1930s coined the term “creative destruction” to celebrate innovation as the driving force of capitalistic economies, noticed that these deviations from established practices may lead to social ostracism.
 
Juma argues that, in light of the social dislocation that may result from innovation, an entrepreneur needs more than drive, vision, and ambition to succeed. Features, functionality, and design are not all that determine whether a new product will become widely adopted. What really matters is the willingness of a society to embrace change. Innovation requires adaptation, and adaptation can be costly: from the adoption of new business strategies in an altered industry, to workers who have to upgrade outdated skills or alter their lifestyles. With online news services replacing print newspapers, for example, newsagents have no alternative but to find a new profession, whereas retailers need to move online in order to respond to Amazon’s competition. But in some cases, adaptation might arrive too late, if ever. The media streaming service Netflix contributed to the destruction and bankruptcy of a giant incumbent like the video rental company Blockbuster because it did not update its business in time.   
 
The more disruptive and abrupt a transformation is, the more vigorous resistance will be; an entrepreneur must proceed with awareness of this fact. By heavily investing in driverless cars, for example, Uber might be pushing its already destabilizing revolution too far, too quickly. In a way, Uber is preparing the ground for disrupting itself. At some point its own employees will join the cabbies and protest against being replaced by software. Striking a balance between the long-term benefits of innovation and the reassuring stability of the status quo is a reality that all societies, and all entrepreneurs, have to face. 
 
Innovation and Its Enemies describes a number of historical innovations, from electricity and the printing press to coffee, margarine, and mechanical refrigeration, that demonstrate how resistance to change materializes. Juma particularly emphasizes fear of loss rather than fear of novelty. When faced with transformational technologies, people are afraid of losing things: cultural identities, ways of life, or economic security. In nineteenth-century England, for instance, the Luddites destroyed textile machines in order to preserve their jobs and livelihoods, not out of a stubborn aversion to technology. But attitudes toward novel products or innovative ideas can also be hard to predict. Europe, for example, has sternly opposed genetically modified crops; the United States has enthusiastically adopted them. Institutions, culture, and history all play a role. Capitalistic economies are better suited to overcoming forces of inertia than are centralized regimes defined by conformism. And even within capitalistic societies, those characterized by flexible labor markets, solid research universities, well-developed venture capital markets, and dynamic corporations display more positive attitudes toward innovation. Think about the United States compared to Europe. 
 
 
Opposition to innovation also comes from many quarters. Incumbents, unsurprisingly, are often among its harshest critics. When recorded music made its appearance in the United States in the 1940s, the American Federation of Musicians feared that touring musicians would lose their jobs and managed to temporarily ban it. In other cases, it is the established authority that blocks innovation. When coffee spread from Ethiopia to the Ottoman Empire in the seventeenth century, local rulers fiercely opposed it. Coffeehouses were seen as places where citizens could acquire news, air ideas, be distracted from spiritual life, and conspire against the government. Finally, consumers themselves may boycott (or simply ignore) a new product if it does not accord with their current preferences. Coffee was welcomed by imams in the Middle East because they had to stay awake and call the morning prayer. But it was largely ignored by the British upper class, who favored their afternoon tea.
 
Although the introduction of new technologies or products has always activated multiple defense mechanisms, important innovations usually defeat skepticism. In some cases, groups succeed in preventing, or at least delaying, the adoption of new technologies, giving a whole industry time to adapt. Think about the printing press. Invented in 1440, its widespread use and full development was obstructed by the powerful scribes’ guild until the 18th century. But at some point, incumbents have to give in. Or at least this is the message that you get from a book that thoroughly analyzes cases of innovations that eventually caught on, even if it acknowledges that some innovative ideas never did take off.
 
Juma delineates the many forms of opposition to innovation: taxes, labeling laws, smear campaigns, licensing provisions, or other regulations. Even the innocuous margarine did not receive a warm welcome when it was introduced in the United States in 1870. The powerful dairy lobby, in order to preserve its butter production, mobilized to curtail the supply of margarine through legislative instruments such as labeling, segregation of production, and limitations to interstate trade. Further, to vilify the new product, milk producers even resorted to false advertising and product disparagement. Sterility, stunted growth, and male baldness were all health problems that, according to the dairy industry, could be caused by this new competitive product. 
 
Juma synthesizes all these examples to make his key point: No innovation succeeds if social and political institutions do not respond by providing information to address citizens’ concerns, managing conflict within society, and channeling resources to best uses. When mechanical refrigeration threatened the ice industry, the establishment of the International Association of Refrigeration in Paris in 1909 was instrumental in enabling this new technology to defeat entrenched opposition. When institutions fail to adapt to the changes around them, social costs increase. One reason why today’s workers struggle to preserve their jobs is that in most countries educational systems were designed 70 years ago for lifetime jobs in the manufacturing sector and are now inadequate for careers that zigzag across industries. Thanks to its strong commitment to the digital agenda, Singapore probably boasts the best educational system for coping well with today’s revolution.
 

NEW YORK, NY – SEPTEMBER 16: New York City taxi drivers hold a rally in front of Governor Andrew Cuomo’s office to protest against recent inroads made by the Uber car service on September 16, 2015 in New York City. Calling Uber’s business model dangerous to worker’s full time employment, the drivers joined with the New York Taxi Workers Alliance in demanding that the state begin to regulate private car services. (Photo by Spencer Platt/Getty Images)

BACK TO THE FUTURE

Technological change is no longer moving on a linear path but rather on an exponential one, taking policymakers by surprise and forcing them to potentially overreact, as in Uber’s example. Each industrial revolution has taken fewer years to produce its effect than the preceding one, while also affecting a larger number of industries. According to the Law of Accelerating Returns, developed by futurist Ray Kurzweil, the years between 2000 and 2014 saw progress equivalent to that of the entire 20th century, and another 20th-century’s-worth of progress will happen in half that time, by 2021.
 
It is no surprise that ordinary citizens struggle to keep up with these radical changes. A widely cited study by the University of Oxford points out that 47 percent of employment in the United States is at risk of automation. The International Monetary Fund recently argued that about half of the decline in labor’s share over the past four decades can be traced to the impact of technology, while only one-fourth is due to globalization. A major backlash against technological progress could emerge when populists realize that innovators, not immigrants or imported goods, are the greatest threat to the well-being of their voters. Promising technologies thus might be suppressed in the name of social stability. Given the magnitude and pervasiveness of the changes triggered by the latest economic revolution, incumbents across all sectors might band together—just as drivers threatened by Uber have made common cause with hotel owners challenged by Airbnb. 
 
To avoid this kind of turmoil, innovators and policymakers should cooperate to smooth out the disruptions generated by technologies that change or eliminate jobs. Some tech companies in Silicon Valley, for example, are launching universal basic income programs to compensate those who have not benefited from innovation. But this would create a hopeless technological proletariat. Taxing innovation, as suggested by Microsoft founder Bill Gates, could delay the adoption of radical technologies long enough to give workers more time to adapt.
 
 
Juma, instead, concludes with grand statements about a new technological governance aimed at making innovation more inclusive. Policymakers need to make sure that the interests of innovators and status quo defenders converge, so that innovators appreciate the incumbents’ perceptions of losses and the groups can develop appropriate approaches for supporting informed decision-making. This requires timely assessment of the costs and benefits of new technologies through scientific research and greater public awareness and citizen engagement. In short, inclusive innovation requires a deeper understanding of the sources of exclusion or injustice that shape the social responses to innovation, and it should lead to a continuous evolution of the regulatory and institutional framework. 
 
Although Juma’s recipe is correct in principle, it requires a degree of collective effort and coordination that seems unachievable in the current environment, especially given the time lag in the political process. Unlike the historical cases analyzed in the book, major breakthroughs today don’t just threaten small interest groups in well-circumscribed industries. Now, no sector, job, or aspect of life is immune to radical changes in the tech world. Moreover, successful innovations are those that catch both incumbents and regulators by surprise, giving a first-mover advantage to their developers. When the impact of the change becomes clear, it is often too late to intervene.
 
Only a combination of targeted taxation, well-designed regulation, and effective life-long learning programs can give workers and firms time to adapt. But calibrating the right doses of each of these ingredients is challenging. At the same time, innovators themselves should consider delaying the introduction of new disruptive technologies when the level of stress in a certain industry is already high. Amazon’s drones, for example, might represent the fatal blow for retailers who are not likely to stand still observing the collapse of their businesses.    
 
In such a fast-paced environment, reactionary forces will come from the most disparate angles of the economy, reinforcing one another. It is possible that medieval-style guilds, like today’s taxi drivers, will resurface and push for overregulation to suffocate any innovation that could emerge. Blue and white collars could unite to destroy all the intelligent machines that will replace them, thus giving rise to a modern wave of Luddite-style protests. And, a bit like the Ottoman rulers did with coffeehouses four centuries ago, governments themselves will increasingly be tempted to censor new digital platforms such as Twitter or Facebook to avoid the proliferation of fake news and preserve the soundness of the democratic process. If this is the case, some kind of rebellion against innovators might be in the making. Uber might be only the first victim.

This article was originally published on ForeignAffairs.com.

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