Larry Downes, The Laws of Disruption: Harnessing the New Forces that Govern Life and Business in the Digital Age, Basic Books, 2009
In “The Laws of Disruption”, Larry Downes describes the disruptive impact of technology innovation and how the revolution in communications and commerce in the digital age is outpacing existing social, economic, and legal frameworks.
Downes is an author and partner at the law firm of Bell Mason Group. Currently a nonresident Fellow at the Stanford Law School Center for Internet & Society, he has held faculty appointments at various universities. His previously authored ““Unleashing the Killer App: Digital Strategies for Market Dominance” (Harvard Business School Press, 1998)”, which was a Business Week and New York Times Best Seller.
Downes’ central thesis is that “technology changes exponentially, but social, economic and legal systems change incrementally.” Downes criticizes much of the existing legal instruments as being outdated in the digital age, and he proposes that the best regulation for innovation is by “leaving it alone” (270).
Downes explains the laws of disruption, by first examining history. Technological breakthroughs like the adaption of metal stirrups to flexible leather in the middle age have far reaching consequences. Downes points out the two forces driving the law of disruption in the Internet age: Moore’s law that computing power doubles every year or so and Metcalfe’s law that the power of a network increases exponentially with each new user.
Downes argues it often takes much longer, for “human systems”, economic, social and legal, to keep pace with innovation. Therefore, we are always playing catch-up. Downes summarizes nine areas of disruption and offers analysis and solutions.
In the second half of the book, Downes further explores the conflict between innovation and law. Since the production of information is accumulative and not always original, he argues that industrial era laws are inadequate in the current reality of digital environments. Downes criticizes the strict legal codes in current copyrights laws, using examples such as Shakespeare’s practice of borrowing heavily from others. Finally, he offers advice for policymakers, business leader and individuals to adapt to the new realities.
In analyzing the thesis and arguments, Downes makes a strong case for the disruptive nature of technology and innovation – by focusing on a critical characteristic of digital technology, which is efficiency, or “lower transaction costs”. In order to explain how technologies operating under the laws of disruption have driven up productivity and efficiency in the digital economy, Downes uses the theory first proposed by Nobel Prize-winning economist Ronal Coase. Transaction cost is a form of inefficiency, yet up to 45 percent of total economy consists of it. Companies are created because the additional cost is still cheaper than individual transactions. However, in the digital age, transaction costs are coming down dramatically. Downes clearly captured the true impact of digital innovation, which is the free flow of information at almost negligible cost – “As transaction costs in the open market approach zero, so does the size of the firm” (40).
Downes’ notion that big companies may not exist as technology is minimizing transaction costs is a rather simplified view. What Downes fails to distinguish is the difference between economic and non-economic activities. Clearly, the digital revolution is pushing some of the traditional economic activities into non-commercial production. For example, open systems and peer production emerges to provide similar capability offered by commercial systems. However, not all transaction costs are approaching zero, and not all big companies are doomed to fail. Thus the one size fits approach may not be applicable when it comes to the laws and policies governing commercial enterprises and not-for-profit segment of the market.
Downes advocates the “neutrality” principle – legislators should resist temptation of regulation. Downes uses the example of AT&T, a monopoly that took twenty years to break up. His argument that laws of disruption eventually overruled everything is less convincing. AT&T does not become a monopoly because of government regulation. So one may argue, government let AT&T become a monopoly. Then you are arguing for regulation. Often, monopolies are created as a result of innovation and disruption – invention of telephone created AT&T, much like the birth of PC gave rise to Microsoft, and Internet made what Google has become today. Without government intervention (however late it was), would it be acceptable to wait fifty years for the innovation of packet based networks to break up AT&T’s dominance in circuit based networks? For the Ohio woman that was still paying $30 a month to lease a black rotary-dial phone after forty-two years and over $14000, anti-trust laws could not come too soon. The lesson of AT&T shows us that slow and inadequate government action is not always in the best interest of the economy and consumers.
Downes is very convincing is his presentation of copyright laws, or, in his own words, “the perfect storm of copyright abuse made both possible and inevitable by the Internet” (195). Downes refers to work done by Chapman University law professor John Tehranian, who draws the stunning conclusion that a hypothetical professor commits at least eighty three acts of infringement on a single day, and faces liability in the amount of 12.45 million. According to today’s copyright law, “Happy Birthday to You” is protected till 2030 in the United States, singing it without paying a royalty constitutes an unlicensed public performance. However, Downes’ over generalization that other laws should be relaxed in the same manner significantly weakens his argument. His notion that law enforcement cannot effectively deal with online crime, and his proposal to use private enforcement is rather naïve and lacks supporting evidence.
In conclusion, Downes captured the essence of technology innovation and the resulting disruption that reshapes our societies. It is well argued and supported by intriguing observations. Downes also makes a compelling argument that outdated laws always play catch up to innovation; therefore policy makers’ best way to regulate innovation is to leave it alone. However, there are many other factors at play that calls for preservation and regulation. Downes offers captivating thoughts, but policymakers, businesses and individuals are well advised to take a balanced approach.
Diana F. Oviedo
December 11, 2009
From your review I gather is book is basically Economics of Digital Media 101. I felt like I was listening to Prof. Kathy give as a recap of the class this past Tuesday. This must be a great book to read to get the basics of Social Media. Moore’s Law, Metcalf’s Law, Coase’s Theorem, and more. It is very interesting to think about the pace at which technologies move versus the pace at which different aspects of society move. It only makes sense that there should be such a disparity. Expecting people to change at the same rate at which technology is evolving, is like expecting us to grow in dog years. I feel like it is only normal for society to be playing catch up, what is important is that people recognize the areas where change is needed. For example, just today I read about a recent ruling from the Judicial Ethics Advisory Committee arm of the Florida Supreme Court prohibiting lawyers and judges from befriending each other on Facebook. It is true, in a lot of ways society is playing catch up with technology. Many times we have to wonder whether it’s even doing it the right way. Should we ban lawyers from befriending judges on Facebook? According to the Florida Supreme Court we should, but is it really necessary? These types of questions can seem silly sometimes, but they are in fact the type of stuff that shapes society. It is also important to note that, while society plays catch up, so does technology. We are pushing more and more for a shift towards seamless real-time connectivity, and we are getting closer and closer to achieving it. However, as we continue to move in that direction important questions of privacy emerge. We are looking at a very symbiotic relationship, one where society and technology continue to shape each other.