In his satirical essay "The Candlemakers' Petition," Frédéric Bastiat portrays a group of candlemakers pleading for government protection against an emerging powerful foreign rival to their industry: the sun. The candlemakers argue that the sun's natural ability to provide light undermines their sales and request that regulators should mandate every window be bricked over to boost demand for candles and lanterns. Throughout this hyperbolic letter, Bastiat offers a poignant critique of protectionist policies. He underscores the potential harm of regulations in stifling innovation and progress rather than embracing the natural course of economic evolution. Regulation, albeit often well-intentioned, is the primary barrier and risk for innovation. In one of his other essays² , Bastiat argues that the difference between a bad and a good economist lies in their ability to not see one effect, but rather a series of effects. Bad economists rely on the visible effect, while good ones take account both of the effect one can see and of those one must foresee.

I learnt about Bastiat after reading some of Balaji Srinivasan's work³ - an entrepreneur, investor and I'd even argue a modern day philosopher. While Bastiat's sophisms and work were written in the 1800s, Balaji believes that some of his parables are still applicable today. Take Uber and Airbnb as an example: In the late 2000s, it would have been a stretch to claim that hotel and taxi regulations are potentially holding us back from a 100 billion dollar opportunity (for Uber and Airbnb alone). In reality, one of the biggest and most impactful disruptions of business models were being held back by 80-year old regulations. While the economic shift seems like a no-brainer today, only a few would have considered adoption of such models let alone foresee them at the time. It is easy to see a hotel and a taxi, but it requires a certain imagination to see what could have been built but wasn’t. Bastiat's "unseen value" is exhibited through the number of employees paid by these new business models, millions of drivers and hosts who now have new sources of income, and numerous other examples where the value is incalculable.

One other challenge with regulation is its ability to keep up with the dynamic and ever-evolving nature of technology and markets. This concept of 'regulatory lag' further complicates the ability of regulators to match the speed of innovation. Going back to the Uber and Airbnb examples, Balaji argues that objectives of some regulatory agencies can be achieved by technology in better and more effective ways. As opposed to taxi permits and hotel inspections, both Uber and Airbnb have effective review systems where real-time star ratings of both the buyers and the sellers are updated on a per-ride or per-stay basis. In practice, these startups are much more responsive than the regulatory system. Bad actors are banned within hour and the same objectives of regulated marketplaces are achieved in a more effective way based on user feedback.

Pass a law: "I force someone else to do something".
‍Write some code: "I will do something."

Today's landscape exposes all of us to a myriad of distinct and diverse regulatory regimes around the world. In other words, we can sometimes see the unseen elsewhere. Within the realm of AI regulation, Bastiat's notion of "unseen value" takes center stage. Similar to the policymakers the French candlemakers of the 1800s were pleading to, today's regulators face the daunting task of balancing AI's potential benefits with its inherent risks.

The rapid evolution of AI is a test of how to balance innovation and risk management, challenging regulators to create flexible frameworks that can foster progress but also mitigate potential harms. This can be endorsing experimentation and embracing higher risk tolerance. As Balaji says: "without a pilot taking risks, we don’t test a new faster plane. Without the new faster plane, we lose millions of man-years of time (our lives) due to slower air travel." Having spent 5 years studying law, I definitely empathize with regulators as they face the pressure of foreseeing the long term impact of a field that is undergoing daily advancements. Unlocking value creation and capture for nations, however, hinges on their adoption of frameworks that nurture imagination for the unseen.

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¹ “The Candlemakers' Petition" [Bastiat, 1845]. English transcript: bastiat.org/en/petition.html

² "That Which Is Seen, and That Which Is Not Seen" [Bastiat, 1850]. English transcript: bastiat.org/en/twisatwins.html

³ Eric Jorgenson is an author who collects and curates novel ideas from great thinkers. He produced "The Almanack of Naval Ravikant", one of my favorite reads of last year. He just recently put together "The Anthology of Balaji" - a must read for anyone interested in technology and building the future. Link: balajianthology.com

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