Does Technology Trump Regulation ?

I originally wrote this entry on September 1, 2004, and published it on blogs.sun.com.

The short answer is "No," and the slightly longer answer is "No, not in the short term," where "short term" depends.

A post on EconLog (edited by Arnold Kling) about "Telephone Fees", ends with the following question:

Why aren't we able to kill regulations when they become technologically obsolete?

That the main mission of the regulation is to keep up with technology remains a point to be settled. (See my notes on the "unbundled network element" aspects of the 1996 telecom act: 1, 2, 3. Also see my telecommunications category for more on related issues.)

The arguments that blame the slow rate of regulatory change on inherent bureaucratic intertia have their own place and validity. However, . . .

Regulations define the rules of the game.

If you change the rules of the game more than is warranted, people will go play some other game with more stable rules or they will refuse to play the game. If people stop playing there won't be any game, and in commerce and economics, we know what happens when people refuse to play !

So, even when we have a more efficient and perfect bureaucracy (if one could ever exist), "validity" of regulation (which cannot be determined based only on technological criteria) needs to be balanced against its "stability" (which is required as a minimal insurance for protecting investment in assets that take advantage of it).