This is the first in a two-part series examining how technological innovation has thrown up new hurdles to the regulatory process.
“Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.”—Stewart Brand
By: Srivathsan Karanai Margan
WHEN A NEW TECHNOLOGY OR INNOVATION EMERGES,
it challenges the laws and regulations that are currently in vogue. It is the responsibility of lawmakers and regulators to enumerate the rules that govern its usage to maintain safety, protect the public, promote fairness, and support economic growth. To publish the appropriate regulations, the rulemaking authorities assess the technology for its capabilities, impacts, and risks. It is a normal evolutionary process for technological innovations to precede regulations, with the latter catching up in due course. However, when technological innovations outpace regulations overwhelmingly and there is an inordinate and unreasonable lag, it is called the “pacing problem.”
The range of technologies that have emerged in the last decade has caught regulators off guard. The pace of evolution, rapid proliferation, and the profound ramifications they bring are overwhelming. This deluge is aggravating the pacing problem; traditional regulatory structures and rulemaking approaches are overburdened and struggling to keep pace. This article discusses the pacing problem, the reasons behind it, and ways to rein in.
The Pacing Problem
The “pacing problem” refers to the notion that technological innovation is increasingly outpacing the ability of laws and regulations to keep up. The pacing problem is not new but has existed ever since modern human civilization progressed by making countless discoveries, inventions, and innovations, and created various tools. It occurs because many new innovations seem to emerge unexpectedly, take everyone by surprise, and forge ahead at a rapid pace compared to the slower pace at which the regulatory system progresses.
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When a technological innovation emerges, it is an outlier that occurs outside the realm of the existing regulated environment and conflicts with established practices and principles. Governments, lawmakers, and regulators step in to publish governing laws, regulations, directives, or procedures either prescribing how to use it or advising against its use. These rulemaking agencies promulgate rules after analyzing the capabilities of the technology, its progress trajectory, the impact it might have on the industry, economy, environment, and society, and the risks it might pose.
It is a norm for innovations to always precede rulemaking, and for rulemaking to trail technological innovation. The reverse scenario, where a regulator publishes preemptive rules by imagining something that is yet to be innovated, is an oxymoron. The traditional rulemaking process follows a golden principle: Once the rules are published, they must be set in stone, and there must not be a need to change them. It is also the desire of regulators that these regulations are Goldilocks regulations—striking the right balance between innovation and control; risk acceptance and aversion; and being neither too strict nor too lenient. To meet the Goldilocks regulation target, regulators wait to comprehend the technology fully. This planned and constructive lag could happen due to two reasons: a “balancing act” and “waiting until it matures.”
- Balancing act: Regulators are required to strike a delicate balance between collective protection and societal well-being on one side, and individual freedom, innovation, industrial activity, and economic growth on the other. Rushing to regulate a technology while it is still in its early stages could stifle innovation and development. As the technology progresses from the introduction stage to the growth stage, all its rough edges get smoothened, and it takes a concrete shape. Starting the rulemaking process at this point helps regulators achieve a balance.
- Wait until it matures: To publish regulations on any technology, regulators must have a deep understanding of technological innovation and see a real demand. Hard evidence is required to differentiate between the signal and noise. The potential impact and risks of any new technology needed to qualify its market worthiness and for consideration in rulemaking emerge only when the technology gains reasonable market penetration, achieves its full potential, and survives until maturity. Known as the “information problem,” this requires time to resolve. It would be a colossal waste of effort if regulators rushed toward rulemaking for a technological innovation at the sight of its green shoots only for it to fizzle out in its infancy. In addition, premature rulemaking could result in poorly framed under- or over-regulations.
Due to these reasons, regulators often adopt a reactive rulemaking approach that starts with an early gap until they have more clarity. While these represent the positive causes of the pacing problem, there are a few other less positive causes. These might be related to the technological innovations for which the regulations are to be made, the regulatory process, and/or the regulating entities.
Problem with emerging technologies
The evolution of technology follows long cycles, also known as long waves or Kondratiev waves (named after the economist Nikolai D. Kondratiev). Every wave typically lasts for about 40 to 60 years and is driven by major technological breakthroughs that transform industries, spur economic growth, and fundamentally shift social structures. Each sinusoidal wave goes through four phases: prosperity, recession, depression, and improvement. The prosperity phase is characterized by the emergence and growth of new technologies, while the other phases are related to their decline, maturity, and saturation.
In the last few centuries, there have been five Kondratiev waves that produced many general-purpose technologies (GPTs) that affected the entire economy, such as the steam engine, railroad, electricity, automobile, and information technology. Each wave focused on certain unique application areas, such as clothing, mass transportation, mass consumption, individual mobility, and information communication. All these advancements outpaced the regulations that prevailed at that time, causing significant pacing problems in those periods. The first four Kondratiev waves were related to the Industrial Age, whereas the fifth wave started charting a new path toward the Information Age. The sixth Kondratiev wave has begun, and the core technologies and application areas of this wave are still being debated.
It is normal for a deluge of new technologies to emerge during the prosperity phase of the Kondratiev wave, creating the “problem of plenty” for regulators. However, it is important to understand a bit more about the technologies emerging now to understand why the pacing problem is looking scarier. The technology clusters and innovations that are emerging in the sixth wave are radically different in their characteristics from those that emerged in the previous waves. Built on the fifth wave technologies, these are ushering in an informational and intelligent age.
The common characteristics of these technologies are nonlinear, complicated, and heterogeneous. These technologies are pursuing unknown and uneven growth pathways and unpredictable future states. In many cases, these technologies transcend the physical realm that the current laws and regulatory frameworks were originally designed to handle and move into the digital, virtual, or a convergence of the physical, digital, and biological worlds.
Multilinear innovation surge
The prosperity phase of the sixth wave is characterized by the emergence of several technological clusters and different technological innovations. These technological innovations are evolving across various technological clusters, including additive manufacturing, advanced telecommunications, artificial intelligence and machine learning (AI/ML), augmented and virtual reality, biotechnology, data analytics and simulation, digital wallet, distributed ledger technology, energy storage, genomics, geoengineering, human augmentation, internet of things, nanotechnology, quantum computing, renewable and clean energy technologies, and robotics. Within these clusters, scores of technological innovations are emerging and concurrently evolving. The variety of these technologies and velocities is bewildering. Each technology has a unique pace of evolution and follows a multilinear growth trajectory across different industries, resulting in the surge of regulatory overload on the regulators. The continuous regulatory juggle to prioritize the technologies that seek immediate attention results in the reprioritization of others, causing a delay in the regulatory attention.
Triggering new business models
Even during the initial phase, these technologies are influencing new products, services, and business and financial models, such as the gig economy, platform economy, sharing economy, on-demand services, peer-to- peer models, and quick commerce. In addition, the number of technology-driven startup companies that deliver innovative products and services across various business domains have multiplied. As a result, even heavily regulated sectors such as finance, wealth management, and insurance are undergoing radical transformations. Many of these companies are operating in information- intelligence-age businesses where regulations are either nonexistent or unclear. The existing regulations that were created for governing industrial-age businesses are exposing their deficiencies in handling these companies and models.
The shapeshifter nightmare
The pace of change and growth of these technologies outpaces the capacity of regulators to comprehend the change by a very large margin. For example, technologies from the AI/ML cluster—such as deep learning, natural language processing, computer vision, reinforcement learning, generative artificial intelligence, and autonomous decision-making systems—are proving to be extremely challenging due to their complexity. In addition, these technologies are seamlessly fusing with other technologies, businesses, and processes to transform and shapeshift the way they operate. To make things worse, these technologies are evolving so dynamically that by the time regulators draft some controlling regulations, the technologies would have shapeshifted by growing further, increasing their scale and scope, and becoming more complex. Due to this moving target, the already framed regulations become irrelevant by the time they come into force. Applying the conventional strategy of “wait till it matures” may not be an ideal option, as any planned lag in oversight could portend a major misadventure.
Aggressive market penetration
The market penetration rate of these new technologies is a big challenge for regulators. Industrial Age technologies took several years or even decades before they achieved significant market penetration. This slower pace of market penetration gave regulators ample time for rulemaking. In contrast, informational-intelligence-age technologies are exhibiting an unprecedented speed of diffusion. The nature of these technologies and their democratization are the two important reasons attributed to this higher speed. Industrial Age technologies were developed for large institutions, whereas the new technologies are created with a focus on the mass user base of small institutions and individuals. The proliferation of the internet, digitalization, and communication technologies has played a significant role in democratization. Technologies are now becoming more accessible and affordable to small institutions and individuals. This exacerbates the pacing problem, as the risk from the uncontrolled application of technologies could affect many.
Multi-institutional regulatory overlap
Another unusual characteristic demonstrated by the emerging technologies is that an array of them interact or converge in symbiotic ways to create combinatorial outcomes that involve multiple institutional domains and regulators. The convergence of the physical, digital, and biological worlds is taking different forms, such as the internet of things, internet of industrial things, and internet of medical things that are reshaping the way we live. For example, the convergence of robotics, AI/ML, and autonomous systems is taking the form of guided and autonomous vehicles. These new forms of technological convergence have a multi-industry and multidisciplinary overlap and require intense collaboration for rulemaking. The inseparable fusion of various technologies with different industry domains and the blurred industry boundaries make it a challenge to define clear regulatory turf. The issue with turf identification and interagency coordination delays the rulemaking process.
Regulatory entrepreneurship
Regulatory entrepreneurs are companies that intentionally pursue a line of business for which the governing laws are unclear, unfavorable, or prohibitive. Changing the law is a part of the business strategy, as their survival depends on resolving the legal issues related to their core business. The companies leverage their innovator and first-mover advantage to pursue a “guerrilla growth” model and gain widespread market adoption, which makes it difficult for regulators to ban or restrict them. They use their large user base as a powerful lobbying force for political support and regulatory power, influencing regulators to enact rules that accommodate or ratify their activities. This “too-bigto-ban” model is also called “Travis’s law,” named after former Uber CEO Travis Kalanick, who used it extensively. Though this is not a new business model, the number of such regulatory entrepreneurs is suddenly increasing due to the innovative adoption of informational-intelligence-age technologies, thus adding to the regulatory mess. The complexity of the informational- intelligence-age innovations, the speed at which they are scaling, the rapid pace of market penetration, their potential socio-economic impact, and the regulatory vacuum exacerbate the pacing problem by smashing the contours of traditional regulations and rulemaking approaches.
Problem with regulatory process
The traditional rulemaking process is to develop regulations slowly and precisely, so that once published, the regulations remain unchanged for longer periods of time.
There are two basic types of legal mechanisms used for rulemaking and governance: hard laws and soft laws. Hard laws are legally binding rules that are enforceable by government or legal systems and are punishable if violated. Hard laws take different forms, such as acts, directives, guidelines, laws, policies, principles, protocols, regulations, standards, and treaties. On the contrary, soft laws are nonbinding, voluntary, flexible, and rely on moral or reputational influence to be effective.
Considering that the technological innovations from the past five Kondratiev waves had a relatively slower pace of market penetration and mostly impacted institutional users, the regulators mostly adopted the hard law system for regulating them. The hard law system comprises various rulemaking approaches, such as prescriptive, outcome-based, principle-based, preventive, risk-based, and sui generis.
Prescriptive regulation
The innovations and business models that emerged during the past Kondratiev waves were foundational in nature. These required regulators to make clear, enforceable standards to ensure safety, accountability, and compliance. Consequently, the rulemaking approaches adopted specified clear and unambiguous rules that left nothing for subjective interpretation. Prescriptive regulation is also known as rule-based rulemaking or command-and-control rulemaking. This is the basic form of the notice-and-comment method of rulemaking, in which regulators conceptualize new rules in response to market developments and spend many months or years drafting rules before presenting the first draft of the proposed rule for public comment. After the public comments are examined, changes are made to the proposed rule, and final rules are published. Prescriptive regulations provide clear guidance in detail, making it easier for companies to ensure that they are meeting legal requirements. There are two variants of this approach: direct final rulemaking and negotiated rulemaking.
- Direct final rulemaking is an approach used to expedite the creation of noncontroversial or minor rules. In this approach, the elaborate notice-and-comment phase of prescriptive rulemaking is bypassed. The regulator drafts the rule and provides a public notice of the presumptively final, rather than proposed, rule. If no adverse comments are received within a specified number of days, the rule goes into effect and has the status of law.
- Negotiated rulemaking is an approach in which the regulator invites affected stakeholders (industry representatives, interest groups, and public advocates) to collaboratively draft a regulation before it is formally proposed. The participants negotiate and agree on a draft of the rule. Based on this agreement, the regulator drafts the proposed rule and presents it for public notice. After this, the traditional notice-and-comment process takes over. This approach aims to reach a consensus on regulatory language, reduce conflicts, and improve compliance.
Flexible regulations
As the pace of technological innovations increased and different industries emerged, it became impractical and burdensome for regulators to define every action or rule in detail. This resulted in the evolution of flexible rulemaking approaches, such as outcome-based and principle-based approaches. While prescriptive rulemaking provides more certainty by specifying the compliance pathways, flexible rulemaking is subjective, open to different interpretations, and allows regulated entities to select their own compliance pathways.
- Outcome-based regulating approach focuses on achieving specific goals, outcomes, or measurable results. The regulator sets clear, quantifiable outcome standards without dictating the pathways on how to reach them. The focus of the regulation shifts from input to achieving a defined result. The regulated entities are allowed to choose the most efficient, cost-effective, or innovative methods to achieve the result. This flexibility often leads to creative solutions as organizations strive to find efficient pathways. However, the lack of prescriptive guidelines and being subject to interpretation could result in a compromise, where the focus is only on achieving specified results rather than genuinely addressing underlying issues.
- Principle-based regulation is an approach in which, instead of prescriptive detailed rules, the regulator specifies a high-level, broader set of qualitative principles that the regulated entities must follow. The regulated entities have the flexibility to determine how to apply the principles to their products and services. These entities are expected to adhere to the spirit of the principle and adopt their own pathways for complying with the regulations. The success of this approach heavily relies on the mutual trust and openness of the involved companies.
As technological innovations became more complex, unique, and risk-prone, some additional rulemaking approaches emerged.
- Preventive regulation: In contrast to the reactive rulemaking approaches that respond to problems after they arise, preventive regulations are designed to prevent harm before it occurs. The process involves a thorough assessment of risks associated with specific activities or technologies. After evaluating potential hazards, regulators establish appropriate controls to minimize the likelihood of adverse events. By addressing potential problems proactively, regulators ensure a safer environment for society.
- Risk-based regulation: The risk-based rulemaking approach works on the principle that the type and level of regulation will be effective only when it is targeted and proportionate to the risk. The regulator prioritizes the activities and resources based on the actual risk presented. For this, the regulator assesses the types and levels of risk and allocates intense scrutiny to high-risk technologies and lighter scrutiny to low-risk technologies. This helps regulators reduce the administrative burden of regulatory overload.
- Sui Generis regulation: Sui generis is a Latin term that means“of its own kind.” Sui generis laws are drafted exclusively for aunique situation for which there are no precedents to compareor relate. When a new technology emerges, regulators face the choice of either adopting a sui generis rulemaking approach to keep pace with technolog, or regulating using one of the existing laws. The main limitations of sui generis regulation are that it could suffer from the problem of completeness or the problem of technological change. The problem of completeness occurs when some entities and activities from the general legal regime are excluded while attempting to create tailored sui generis rules, causing gaps and uncertainties. The problem of technological change is that sui generis regulations may not be future-proof and could quickly become obsolete as technologies change dynamically.
Collingridge dilemma
While rulemaking for technologies, regulators face the Collingridge dilemma (coined by David Collingridge), which is also known as the “dilemma of control.” The dilemma suggests that attempting to control a technology is difficult because, during its early stages, when it is easy to control, its potential impacts and risks are unforeseeable, making it difficult to pick the appropriate approach for rulemaking. However, by the time the impacts and risks are clear, control becomes costly and difficult, as the adoption of the technology might have reached a certain inflection point in society, becoming part of the entire economic and social fabric. The complexity of the emerging technologies aggravates both the “information problem” and the “dilemma of control,” worsening the pacing problem.
In the Industrial Age, when following a certain rulemaking approach for a given technology or situation became unviable or caused a regulatory lag, a new approach emerged. However, the rigidity of the rulemaking process and the iron-clad centralized control of the regulators continued. Prescriptive rulemaking remained a time-tested dominant approach that was followed for regulating the vast majority of technologies across the five Kondratiev waves.
The traditional approaches were based on the fundamental premise that, for rulemaking, the regulator must have a complete understanding of the impact that a technology has on the market and users, as well as the technological, political, social, and economic risks it poses. For the Industrial Age innovations, procuring this information in advance was possible as the speed of diffusion was slower, and the impact and risks were mostly tangible. However, for the Information Age technologies, it is extremely difficult, if not impossible, to rein in the pacing problem by following the old-school rulemaking approaches. It is imperative for regulators to move away from archaic, rigidly structured, and templated reactive approaches to adopt a more proactive and agile form of rulemaking.
Problem within regulating entities
In the process of rulemaking, several stakeholders—such as legislative, executive, judiciary, regulatory, institutional, and societal entities—are involved. These entities must perform multiple functions, such as tracking new trends and events, analyzing impact and risk, drafting and proposing new regulations, updating existing regulations, conducting public consultations and hearings, collaborating with industry stakeholders, conducting inspections and monitoring compliance, and imposing fines and penalties for noncompliance. These functions span across a spectrum of institutional domains, with technology being one of them. The rulemaking process is expected to be a zero-error activity. This prompted these entities to create exclusive organizational structures and operating procedures for every function to ensure an efficient rulemaking process. However, the years of rulemaking have made these entities hierarchical, bureaucratic, departmentalized, and procedure laden.
Kludgeocracy
Kludgeocracy (popularized by Steven Teles, a social scientist) combines “kludge,” which means a quick, inelegant, or makeshift solution, and “ocracy,” indicating a form of rule or governance. Kludgeocracy is characterized by a tendency of regulators to publish regulations in patches as issues arise, without addressing the root cause. The regulator adopts a piecemeal and quick-fix approach to rulemaking in response to advancing technologies. As new technology emerges, a new layer of patchwork is applied to the old rules without integrating or rewriting them. The regulatory edifice starts heavily leaning on temporary fixes and workarounds instead of a coherent, long-term policy. This form of governance results in a confusing regulatory landscape with a complex network of overlapping rules and procedures. The accumulated burden of such patchwork creates a complex mess and delays the rulemaking process.
Ossification
In the context of rulemaking, ossification refers to the situation where the process that is supposed to be flexible becomes rigid, inflexible, and slow to adapt to new circumstances. Ossification occurs due to a combination of external factors, such as judicial oversight, legislative mandates, and strict procedural requirements. Regulators become concerned about the legal battles they may face from affected parties and fear the possible embarrassment of having enacted regulations overturned by the judiciary. To avoid this, regulators tend to be extra cautious by introducing elaborate procedures and rituals, such as mandates to conduct comprehensive impact studies, hold multiple rounds of public comments, and justify their decisions in detail. The presence of such cumbersome rituals prevents regulators from updating existing rules or enacting new ones in a timely manner.
Demoscelerosis
Demosclerosis (popularized by Jonathan Rauch, American author and journalist) refers to the gradual, systemic hardening of the arteries of democratic governments. The presence of special interest groups, entrenched policies, institutional inertia, and red tape leads to inefficiency, an inability to adapt, and a decline in democratic responsiveness. Special interest groups and lobbying firms accumulate and exert influence over legislators and regulators to preserve or expand certain policies, tax breaks, or regulations, even when broader reform might benefit the public. With more vested interests influencing the rulemaking process, policy paralysis sets in, making it extremely hard to enact new policies and reforms or repeal outdated or inefficient ones.
Bureaucratic inertia
Bureaucratic inertia is a phenomenon that occurs when regulators become immune to change, slow to act, and inefficient in updating or enacting new rules. Bureaucracies are hierarchical, protocol-driven, and prioritize stability and predictability. They tend to prefer the status quo and are averse to risk-taking. Due to these reasons, they move slowly in response to social and economic change. In contrast to ossification, bureaucratic inertia is driven by internal factors such as institutional structure, culture, administrative overload, and resource constraints. It slows down responses to emerging issues, decision-making processes, and the adoption of new rules.
Despite all the shortcomings, there is a genuine reason why regulators have adopted the current structural form. It is practically impossible for even the best-analyzed and drafted regulations to anticipate all possible risk scenarios and prevent them. Even when comprehensively drafted, some might not age well. The longitudinal risks or impacts could expose gaps related to both foresight and oversight. These could create a litigious environment that might result in unpleasant and painful scenarios. Even if regulators cannot completely prevent these mistakes, they aim to keep them minimal.
To this effect, hierarchy and procedure-driven organizational structures help ensure standard practices are followed, process efficiencies are achieved, and no inadvertent omissions occur. Over the years, the organizational structures that were created to improve process efficiency have, in turn, worsened the pacing problem. Structures that were designed to handle the slower-paced technological innovations of the industrial age are now struggling to manage the fast-paced innovations of the Information Age.
References
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