An interesting and very dynamic presentation from venture capitalist Bill Gurley on the topic of regulatory capture.
Cases that he discusses include municipal wi-fi projects, electronic medical records systems, and Covid testing.
In response to Bill’s presentation, Sophie @netcapgirl says:
it’s lowkey a shame because the origins of the digital era are rooted in a collaborative environment between government & industry (and academia) that are hard to imagine today. for instance, JC Licklider (instrumental in the computer revolution) held positions at ARPA, MIT & IBM
They’re both right, IMO–Bill is correct about malign impact of regulatory capture on innovation, and Sophie is correct about the historical importance of government involvement in digital innovation.
So what conclusions should we derive from this polarity?
Government involvement is great at first when it is picking off the low-hanging fruit? Do I win a prize?
In the first few years of any really new government enterprise it is not unusual for the people involved to actually be dedicated to the mission. It takes some time for the Iron Law* to take effect.
*Pournelle’s Iron Law of Bureaucracy states that in any bureaucratic organization there will be two kinds of people”:
First, there will be those who are devoted to the goals of the organization. Examples are dedicated classroom teachers in an educational bureaucracy, many of the engineers and launch technicians and scientists at NASA, even some agricultural scientists and advisors in the former Soviet Union collective farming administration.
Secondly, there will be those dedicated to the organization itself. Examples are many of the administrators in the education system, many professors of education, many teachers union officials, much of the NASA headquarters staff, etc.
The Iron Law states that in every case the second group will gain and keep control of the organization. It will write the rules, and control promotions within the organization.
When a technology is first developing, those who are only interested in money and/or power can’t get a feel for what it can do. The triggering event for the government taking over is when the goose starts laying the golden eggs. After the non-innovators take over, innovations slows to a crawl or stops. The bureaucratic mindset feels threatened by the unknown, particularly if they don’t control it.
And don’t forget that the main reason the Internet was invented was for a fault-tolerant network that would always get the message through.
First of all Bill Gurley is an idiot and not just he called Clinton one of our most heralded presidents or thought Obama was on his side regarding regulation.
To Sophie’s point there were strong ties back then among government, business, and academia at the level of people and basic research but in development. ARPANET is the classic example because that network was established, as the name implies, to facilitate research. It was only after the government got out of the way and allowed commercial traffic to flow across it that we got the Internet that we know today; before then it was proprietary networks like AOL and CompuServe. In fact the chatter before the government freed ARPANET was that the national common network should be something mandated from the top on the model of France’s Minitel. With the Internet, government developed the technology and then got out of the way.
The thing that initially held up the newly-freed Internet was last mile connectivity because that involved government-regulated Comcast and Verizon (you hear what I’m saying Gurley?)
Why don’t I like Gurley? Well he started with his example of how he was victimized by regulatory capture while working with one of the most radical big city mayors of the past 50 years John F. Street (who was up to his eyeballs in corruption and used race to deflect an FBI investigation) in order to supply free WiFi and wondered why other government-regulated companies would object that their business would be affected. Huh? He then described how his understanding of civics and the workings of American government came from a Saturday morning cartoon that was shown between “Hong Kong Phooey” and the “The Banana Splits”
Gurley took the easy money route when addressing the crowd by holding regulatory capture to the ridicule it deserved. Nobody likes to be called a regulatory capturer, not even the people who do it, it’s one step up from people who kick puppies and steal kids’ lollipops He then goes on to blame it all on the revolving door and donations, but doesn’t quite explain why there is such or door or those donations.
Well before Gurley came to Silicon Valley, heck before I went there, that place was known for its libertarian bent because people there had an implicit understanding that things worked best for them when government kept out of the way. Each of the examples that Gurley cites (municipal Wifi, mandated electronic medical records, COVID tests) involve government getting involved in and therefore affecting the private sector. He then wonders why private interests have an interest in government affairs and look to influence them. Don’t start none and there won’t be none.
Silicon Valley’s libertarian bent is long gone. Companies such as Google and Apple are big into government intervention through ESG-style programs, green energy, and various partnerships with government security agencies. Silicon Valley overwhelmingly supports Democrats via political contributions with the top 6 companies supporting them at a ratio of 20-to-1 (https://www.wired.com/story/silicon-valley-opens-wallet-joe-biden/)
My thing with Gurley is two-fold. He should have set up his audience with regulatory capture but then explain that this is a normal feature of the big government that they were supporting with their money because it would eventually turn on you either out of malice or because it was captured by other interests. Second, I theorized that the reason he didn’t tell the audience that larger truth was because he playing 4-D chess, getting them to bite on regulatory capture in order to make them receptive to a libertarian message. However then I saw the rapturous reaction from the audience and panel and how he failed to follow-up on it.
Silicon Valley WAS successful because it was 2,851 miles away from DC. Now not so much and that’s because this takeover is enabled, even if indirectly, by people like Gurley who is simply LARPing as a rebel.
Bill Gurley is certainly not an idiot, he is a very successful VC and looking over his deals, doesn’t look like a lot of them have a lot to do with government, except in some cases as a potential obstacle (Uber, for instance). I’ve only met him once, but IIRC he seemed pretty sharp.
I wouldn’t read ‘one of our most heralded presidents’ (Clinton) as meaning ‘one of our *best*presidents’…it is certainly true that he was heavily heralded by media and much of the population. And the cartoon reference when discussing government sounds like more of a rhetorical strategy than a statement about where his political science knowledge came from.
Quite true that the buildout of the Internet to scale was done by private companies that were competing with one another: UUNET, PSInet, and ANS being some of the major ones. An alternative would have involved a ‘national information infrastructure’ which was a government utility, with selected contractors operating various parts of it under government control, say, IBM for the processing services and AT&T for the network per se. Which IMO would have been a very bad thing.
re Electronic Medical Records, government was already heavily involved in paying for healthcare as well as regulating it; in that context, attempting to make it more efficient & effective via EMRs seems rational…a far better strategy would have been to encourage it but not attempt to drive everyone to it quickly via a forced-draft approach. (Don’t think I’ve ever talked to a physician or other frontline healthcare person who actually liked the EMR they were forced to use)
re the Covid tests, an interesting question to explore would be: WHY did regulatory capture of the test market not happen in Germany while it did in the US? It’s certainly not because Germany currently has a wise and thoughtful government.
David,
As far as my calling Gurley an idiot, it was either that or calling him grossly dishonest. I chose to not attack his integrity. He is intelligent, but he doesn’t strike me as particularly wise
Second I think we’re all of the age where we have enough wisdom to say that one’s resume merely buys you the ticket to where I will listen to your pitch, but by no means does it guarantee I ‘ll buy what you are selling. He was there riding on his resume as a 25-year veteran of being a successful Silicon Valley VC speaking to everyone on behalf his industry… and he knows how to speak in front of an audience, You are going to get people’s attention in that situation and I think he has a very timely message. So what did he do with that opportunity? He did something worse than lie, he told a half story. A half story is when you give people enough information to think they know the whole truth, but you leave out the parts that might contradict your story.
His basic pitch had a great theme, that SV is successful because Washington is 2,851 miles away and it has also had great elements of why DC is so toxic. Besides his focus on regulatory capture I loved the story about the lobbyist and the donations. His message stop regulatory capture, keep DC out of our business. However that’s only half the story and the reason it’s problematic is because all those people there think that is the whole story. It seems the All-In Summit where Gurley spoke is one of those conferences with that entrepreneurial, socially liberal Democratic demographic that now votes Democratic. I would all also willing to bet that if polled they would be heavily in favor of government intervention to solve humanity’s “problems.”
If Gurley had just taken a short drive from his SV office to Stanford he could have talked with one of the great economists of our time, Thomas Sowell. Sowell would have told him that regulatory capture is merely an instance, a predictable result of government in the economy. I bet you he would also have told Gurley that he was a fool for thinking that he could treat government as a partner, that he could use it for all sorts of social interventions, without having it coming back to devour him. Maybe he would then assign Gurley to go read Hayek and the Federalist Papers.
But Gurley didn’t say that did he? An SV vet would have been aghast at what he saw and when Gurley mentioned his conversation with Obama he would have laughed at him (Gurley), asked him if he was entranced by the crease in Obama’s trousers, and that while Gurley might have thought of himself as a great man Obama probably saw him as just another SV sucker.
The reason for my anger at Gurley regarding half-stories is that the tech industry is at an inflection point regarding its relationship with Washington. The social media companies are in bed with the security agencies and I’ll guarantee you other big techs like Apple and Microsoft are as well regarding national security issues. The next steps on the tech-government partnership horizon are social credit and digital currency and with that its game over.
Gurley knows that, he has to have given his position, but he didn’t say anything. Instead he played the crowd for cheap applause lines about 2,851 miles. Why? I would actually give $1,000 to his favorite charity to spend an hour with him and ask him that because whatever his answer was would explain so much.
In his favor though, seeing various pictures of him I bet he would be a great guy to go out drinking with
We had a national communications infrastructure. It was called the phone company, permanently crippled by having to maintain backward compatibility with the height 1870’s technology.
The same thing is playing out with the “Space Launch System” where we are spending billions of dollars a year to use systems designed in 1970. Assuming they ever manage to launch an actual moon rocket, they will have spent more money on the tractors to haul the thing from the assembly building to the launch pad than Spacex has spent to develop Star Ship and Super Heavy.
The only thing that might be better at stifling innovation and efficiency than a nuclear war is any government program, widely distributed among different states and congressional districts. And notice I say might.
I thought the presentation was useful by providing a vivid portrayal of the realities of government involvement. Didn’t find it dishonest at all, guess we’ll have to disagree on that, Mike. While he didn’t talk about social credit and digital currency, he did talk about AI regulation, which IMO would likely be used to inhibit free speech (Biden admin is already talking about ‘cognitive infrastructure) as well as skewing market development in favor of the best connected and lawyered-up companies.
I’m quite concerned about the impact of Biden administration ‘help’ on the very important industries they say they are trying to help. These aren’t the kind of people to think through some general principles on what can make the US more competitive in these areas, their operating mode is thousands of oages of micromanaging regulations.
A long response to the presentation:
https://twitter.com/packyM/status/1704124129551450162
Another conclusion is that there’s no magic formula. Sometimes a government program succeeds brilliantly, and sometimes it’s a nightmare. (Either way there will be unexpected second order effects.) You need vigilance and the willingness to axe entrenched programs and let go all its bureaucrats. OTOH, sometimes there needs to be a temporary program–the GI Bill did what it was supposed to.
Last line:
“In the coming decades, Silicon Valley will need to be successful by getting so fucking close to Washington, DC that it can improve it from the inside.”
What universe is he from? Silicon Valley hasn’t been about anything but making money since last century. Anybody the is depending on them to make the government “better” has an idea of better I don’t want anything to do with.
Thanks for the link, that was an interesting presentation by Packy. Rather than fisking it, let me switch frames of reference of it and describe my basic approach based on my background,
I had a high school English teacher who drilled into us the difference between a reliable and a valid argument. The reliable argument is one that hangs together internally. I you knew nothing about a topic but heard a presentation or read an op-ed on it and the creator of it was any good you would be hard-pressed to find anything wrong with it since it would all hang together. A valid argument is when that matches up with reality, with what you know, with how it performs.
A while back I followed a mentor’s suggestion and instituted informally after-action reports with my teams. After we finished a project or a task I would ask them what they learned from the experience, what surprised them, and what they thought they could do better. In other words don’t make the same mistakes again, but learn from them and go make new ones. The other side of that is when people pitch for funding, Gurley and others experienced in VC drill down through the BS and happy talk and ask for evidence regarding the ability of these guys to pull it off. Why do they think they can pull this off. That’s why I made the comments I did about Gurley because all of the sudden it seems he abandoned all that hard-won wisdom.
I feel that way about Packy, except from his apparent age I would give him some friendly advice.
He’s giving me a pitch, a reliable argument, happy talk. My first question to him is “Do you think you’re the first one who has tried to change DC in this way?” and my follow-up would be “Tell me why you think those others failed.” I wouldn’t do it to crush Packy, but to move his thinking along. I have been following attacks on DC for more than 40 years and his approach smacks of someone who hasn’t learned from those attempts but rather is getting high on his own supply. Don’t get me wrong, I’m on Packy’s side here as far as what he wants to do but one must dream with his eyes wide open and what he wrote seems like it was lifted en total from a Club for Growth speech 20 years ago.
30 years ago I was involved at the nexus of education and IT, specifically the Internet. We thought we could radically change K-12 with good ideas backed by good technology, that the better argument would win. Guess we didn’t get the job done. Now we’re at it again with school vouchers, but we understand that societal change generally doesn’t come from presenting the “best” and working to reform a corrupt system because that’s not the way things work. The education bureaucracy of today is riddled radical reformers of 20 years ago because they thought they could win based on the best ideas and that solving the “algorithm” was obvious, what happened to them?
So Packy let me help you win. Tell me what you learned from previous attempts to storm the castle, drain the swamp of DC, and why this time you’re going to win. Smarter people with even better arguments than you have tried and failed, tell me about those attempts and why they failed, show me you’ve done your homework. Stop giving me “reliable argument” happy talk and give me a valid one. Btw… I’m with Packy on all of this but I like winning. What was Wellington’s famous quote? “They came on in the same old way, and we sent them back in the same old way.” That in a nutshell is how DC sees people like Packy
I’ll give him a hint, it’s not “regulatory capture” ; that’s merely an instance of a larger problem. The larger problem begins with his conception of the “good.” In other words he is already part of the problem.
Along that line. I would be curious to know what he thinks of WEF because what makes that group so dangerous is that they have their own conception of the “good quest” but their thinking is a bit further down the road than Packy after they hit reality. After they hit reality, they just changed their methods
I thought I would pass along some additional thoughts from a friend at lunch. re: Packy
1) He said after reading Packy and the follow-up tweets, the first thing that came to his mind was “Children’s Crusade”; however he was a bit more positive about Gurley than I was. He said he did an eye roll when he came to Packy’s comment 3/4s of the way through his piece “I don’t have the answers for how we do this” because to my friend that’s usually what someone says during their 2nd year of college, coming up with global solutions, while smoking half a bowl. Oh and he pointed me to Packy’s substack (200,000+ subscribers!) which claimed inspiration from Bill Simmons (my friend knew I went through my Bill Simmons phase way back)
2) He wondered if Packy made it all the way though his high school civics course because while he seemed to grasp how DC worked he wasn’t quite clear what sort of people were there. Packy talks about “good quests” as opposed to “regulatory capture” as if the whole town was just some evil cabal of corrupt interests that prevent good things happening. Yes there’s a lot of that, but there are also a lot of people and money pushing their versions of “good quests” that compete with each other, so how is what Packy proposing any different on a moral plane than all of those “special interests” backed by PACs and dark money?
3) When I speculated that maybe Packy was trying to play the game so that his proposed projects of energy, supersonic transport, and the like can be freed from government’s grip, my friend disagreed and pointed me to his Substack link (https://www.notboring.co/p/weekly-dose-of-optimism-56):
“There goes that man again, Jobs Biden. Seems like all of that investment in clean energy is translating into real jobs growth. The renewable energy sector is benefitting from decades of declining cost curves and pushes towards a clean energy transition, and it seems that the Inflation Reduction Act is accelerating its deployment and job growth in the sector. The IRA has already dumped tens of billions of dollars of investment into spurring the clean energy transition, and that’s translating to real jobs.”
Does that sound like a man (Packy) who wants to capture Washington so that he can get government to stay away from him or does that sound like someone wants to use the power of government to work for him? Subsidies, laws, regulations… all in the name of the common good mind you. Maybe I’m not on Packy’s side any more
My friend came back to Gurley and told me that I needed to expand my scope because Gurley was probably addressing an entire audience of Packys, people who thought they could use government as a partner, and Gurley was telling them to stay away
A response to the Gurley presentation here:
https://twitter.com/steviemctweets/status/1704591841008423383
David,
That was an interesting tweet from Stevie. I hadn’t thought too much about social interactions between companies and regulators, seeing rather a matter of polar opposites between the extremes of regulatory capture and “deterrence”.punitive actions. In fact from his tweet and a quick survey of the literature, there is a whole range of actions involving cooperation between the two.
I doubt though that EPA would market itself as “Your Regulatory Partner”
I thought about Gurley after seeing this link at Insty regarding California’s impending passage of two lawns mandating corporate reporting of “greenhouse gasses” and associated financial risk (https://www.19fortyfive.com/2023/09/gavin-newsom-is-going-to-destroy-california) Would his audience rebel against such measures, feeling sympathy toward part of the economy coming under crushing regulation or would it support the legislation out of sympathy for its goals? I have the strong suspicion that one’s views on regulation, as with “regulatory capture”, depends not so much on absolute values but rather on your perspective.
As a side note, I see Scott Wiener was a prime mover behind the legislation. He’s probably a guy to watch because his name keeps coming up on aggressive social and regulatory legislation coming out of California. I wouldn’t be surprised to see his name to pop up nationally.
The problem with regulatory capture is the same as catching a tiger by the tail. That’s when the real trouble starts.
Governments regulate by prohibition. That kills innovation. Dead.
The history of the phone company is a prime example. They had very smart people working for them and have the Nobel Prizes to prove it. But look how they used all that; mostly to stuff more voice circuits into each wire beyond the last mile, where they’re still using the same 20mA loop that Bell, as in Alexander Graham, used 150 years ago. While arguably consumers benefited by the disappearance of party lines, the tiny band width left them out in the rain when data rather than voices was what was wanted. The phone company is now mostly irrelevant, Mostly having “right sized” themselves out of all the employees that knew how to deal with the analog system. Have a line connected to a fire alarm go out? Good luck getting it repaired in any reasonable time frame. You can, however, get the unit to put it on a cellular connection delivered from Amazon the next day and now there’s one more dead pair joining all the others under our cities. Line costs will be much lower too.