In any ecosystem, there is a natural resistance to change. From simple familiarity to structural interdependencies, many elements converge to support the existence of the status quo. That doesn’t mean that the status quo is ideal or even good – simply that the cost of changing out of that state is more expensive in some aggregate way than the cost of remaining there.

This ‘cost of change’ creates a form of static friction in the system, allowing it to continue in it’s current state even when pressure for change exists. But like at the fault lines that define the boundaries between the continental plates of our planet, this pressure for change will continue to build up until it reaches a level that can no longer be resisted. When that point arrives, the built up pressure gets released in a single, significant shift (an ‘earthquake’ event) that ushers in change – producing a period of instability as the system searches for a new state of equilibrium. This is an unavoidable process in any dynamic, living environment – be it economies, technologies, political systems, or even cultures.

And for those that need to go through these shifts, it can be very scary and painful.

I’ve been thinking about all of this in the context of two key forces that exist in most ecosystems – regulation and innovation. Regulation is typically put in place to ‘raise the cost’ of the system moving in certain directions. Innovation, by contrast, attempts to ‘lower the cost’ of the system in moving in certain directions. While both of them try to influence what the system should look like in a future state, they are fundamentally different in nature and intent.

Regulation can take two forms – proscriptions and mandates. Regulatory proscriptions artificially raise the cost of certain actions through the implementation of penalties. For example, fines can be imposed, businesses licenses revoked, taxes levied, or even people locked up if they try to do certain things that are no longer ‘allowed’. Regulatory mandates can impose similar penalties if certain specific actions are NOT taken, forcing activity to take place that would otherwise not happen on it’s own. Sometime, regulatory mandates will eschew penalties to take the form of incentives – rewarding certain actions by artificially lowering the cost of the system moving in a particular direction.

The whole premise for creating regulations is a belief that we can understand enough about a desired future state to formulate an optimal plan to get there. Because of this, the broader or more far reaching a regulation is, the harder it will be to get right. The more complex an ecosystem is, the harder it will be to change or influence predictably.

What makes innovation different from regulation is that the innovator, unlike the regulator, doesn’t get to impose their view of the ‘best future’ path on the system they operate in. Instead, they need to offer something new and compelling enough that it can lure people away from the status quo. They constantly need to compete with other visions of the future – other potential options that are being offered. This forces them to continuously adapt and improve what they offer, or to drop out of the ‘selection process’.

In an innovation driven system, bad ideas don’t last long. The costs and the benefits of every path tend to be exposed early, and choices made at one point can constantly be reassesed against new alternatives being offered and adjustments made. Nothing is ‘locked in’, lending an efficiency to the process that biases it to positive outcomes.

Regulation, on the other hand, doesn’t provide anywhere near the same clarity. Since regulations aren’t about choices, their benefits can only be measured against the hypothetical end state they were implemented to avoid (‘Millions would have lost their jobs if we hadn’t done XYZ…”). There isn’t an actual alternative path their effectiveness can be measured against, allowing regulators justify them against theoretical extrapolations of past conditions that normally assume nothing else in the system would have changed to provide a different, better outcome. The only time a regulation typically gets challenged is when the damage it does – the only real measurable cost of a regulation – clearly outweighs the perceived benefits of keeping it in place. This biases regulation to negative outcomes.

My point here isn’t that all regulation is bad and all innovation is good – just that it is easier to identify and correct bad innovations than it is to identify and correct bad regulations. Innovations need to prove they are better before being adopted, and are constantly challenged by new ideas moving forward. Once passed, regulations are not normally challenged, and usually need to reach a point where they are demonstrably bad before being thrown out.

This means that regulations tend to create a status quo that is highly resistant to change, making the inevitable dislocations extremely painful when they finally arrive. Innovations tend to reduce the strength of the status quo, allowing change to happen on a more continual, ‘just in time’ basis.

Both have their place, but I strongly believe we need to be looking to innovation as the defining component of our path to a better future.

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