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What Medieval China Teaches Us about Overregulating Innovation

Blog Post | Economics

What Medieval China Teaches Us about Overregulating Innovation

European powers established their dominance through the very technologies that China repressed.

The launch of OpenAI’s ChatGPT chatbot in late 2022 triggered a flurry of panic about the risks posed by artificial intelligence (AI). In fact, a recent CNN poll reveals that 42 percent of business leaders believe that AI could “destroy humanity” in 5–10 years. 

Though pessimism about potentially transformative technologies is nothing new, what is truly concerning are the calls for government regulation of AI development and deployment. For example, in March, leading figures in the tech industry, including Elon Musk, called for a temporary pause in the development of AI systems “more powerful than GPT-4.” Their open letter has received over 33,000 signatories. An April YouGov poll also disclosed that almost 70 percent of Americans endorsed a similar six-month pause on AI development. These polls ominously reveal that a non-negligible number of Americans, fearing threats to existing stability, not only desire ethical regulations of AI but also want suffocating restrictions on the entire industry.

Why is this concerning? History reveals that a severe bias toward stability and the overreach of technological alarmists in the policy space can dangerously obstruct human progress. Look no further than Medieval China.

In the 12th and 13th centuries, the Song Dynasty was the pinnacle of global civilization, destined to outpace the rest of the world. In the words of Harold B. Jones, “asked to pick from among the world’s nations the one with the best prospects for years ahead, an early fifteenth-century futurist would have bet on China.” Song China led the world in technological progress, inventing gunpowder, movable print, and the compass. It was home to the most advanced infrastructure and fleet of trading ships in the world, enriching China through overseas commerce with the coastal states of Africa. Moreover, by opening its society to foreign travelers, China benefited from the scientific knowledge and expertise of foreign innovators, making impressive strides in agriculture and astronomy. Some even say Song China was on the cusp of its own industrial revolution centuries before Great Britain. China simply had the materials and knowledge to dominate the world long before the West. Why didn’t it?

Despite Song China’s vibrant society and thriving economy, it was constantly skirmishing with its northern neighbors, eventually succumbing to the military prowess of the invading Mongols in 1279. The subsequent Yuan Dynasty marked the first time in China’s thousand-year history that a foreign-ruled dynasty seized all of China, an embarrassing defeat for Chinese traditionalists. 

The Yuan Dynasty was short-lived, as internal factionalism and corruption led to widespread rebellions, propping up the Ming Dynasty in 1368. However, still humiliated by the “barbarian” occupation, Ming leaders made it a priority to distinguish themselves from their Song predecessors. Blaming the collapse of the Song Dynasty on their embracement of a “disordered” open society, the Ming dynasty established a highly authoritarian and isolationist regime, significantly extending the Great Wall and, more significantly, unleashing an “anti-modern revolution” meant to reinvigorate China with traditional Confucian values and restrain destabilizing innovation.

Part of this anti-modern revolution was cultural, stifling innovation by stressing conformity and suppressing individualism. For example, one of the first actions of Zhu Yuanzhang, the founding Ming emperor, was to institute a strict dress code. He banned foreign fashion and dictated standards for each social position, reinforcing a neo-Confucian hierarchy. Technological progress and commercial prosperity brought about choice, fostering unsettling social disorderliness that could manifest itself through clothing. Thus, for fear of disrupting the existing order, the Ming emperor banned expressive clothing. 

In a similar vein, the Ming Dynasty reinstituted the controversial imperial examination system. The Ming education system generally prioritized the regurgitation of Confucian philosophy, overlooking scientific and technical skills. Though science was still taught, the subject matter was to be accepted as canonical wisdom rather than questioned and improved. The general environment created by the examination culture de-emphasized contributions from creative individuals—if you wrote about new ideas on an exam, you were simply marked wrong. Individualism had no place in the Ming Dynasty.

However, the costliest aspect of this revolution concerned destabilizing technological innovations. Most significantly, the Ming Dynasty severely restricted innovation regarding exploration and oceanic shipping, famously (or infamously) enacting the Edict of Haijin. This policy severely restricted private maritime trading and exploration, leading to the destruction of many private ocean vessels and the imprisonment of hundreds of merchants. The sentiments of this policy were most notably manifested through the destruction of Admiral Zheng He’s fleet.

Everyone knows the famous rhyme, “in 1492, Columbus sailed the ocean blue”; however, what many people do not realize is that several decades before Christopher Columbus, a Chinese admiral named Zheng He made larger and more ambitious voyages with a fleet 300 times larger than Columbus’s. Yet, rather than opening the world to trade as Columbus did, the Ming government burned his great fleet, stifling a critical source of economic advancement. Why did they hinder such progress? Though the official reasoning concerned piracy, many scholars point to a general fear of foreign interaction and the rise of a powerful merchant class, all of which would have disrupted the post-Mongol order—the Ming emperor appeared to prefer stagnation over progress, for stagnation weakened threats to his power.

As China fostered a long period of cultural and technological stagnation, Europe entered a great age of individualism and innovation. By embracing scientific progress and overseas commerce during the Renaissance, Europeans made remarkable economic and technological strides, overtaking China as the global economic and technological epicenter. In fact, European powers used the very innovations that China repressed to establish their dominance—namely, maritime and naval technologies. As the Ming Dynasty burned ships and oppressed merchants, Europeans were establishing enriching trade routes and colonizing the globe with their powerful navies. The British even used these tools to later humiliate China during the Opium Wars. Thus, the Ming Dynasty’s “anti-modernism” significantly contributed to the “Great Divergence,” subjecting China to a centuries-long game of catch-up with the West.

Therefore, as we consider a temporary termination of the deployment of AI, the legacy of the Ming Dynasty provides a cautionary tale. Through unregulated data collection and short-term jolts to the labor market, AI certainly has the potential to disrupt existing stability. However, there is something to be said about the potential upsides of AI development. From automating monotonous tasks to revolutionizing modern medicine, many benefits would be delayed by a pause in development, delays that, like what happened in China, could set the United States back for decades. Though techno-optimism has its own concerns, we must also be wary of the over-implementation of the precautionary principle, for, as the Ming Dynasty shows, ill-advised and overcautious social policy meant to preserve stability can and often does foster costly stagnation.

Blog Post | Infrastructure & Transportation

The Race to the Sky: How Competition Pushes Humanity Forward

Cities could still be growing quickly upward, but regulations are limiting their growth.

“I would give the greatest sunset in the world for one sight of New York’s skyline.”

—Ayn Rand, The Fountainhead

The story of how the Empire State Building came to dominate Manhattan’s skyline—defeating 40 Wall Street and the Chrysler Building for the title of the tallest building in the world—is an illustration of the power of competition and innovation.

In 1929, the successful businessman George Ohrstrom hired architect H. Craig Severance to design 40 Wall Street. Severance was a well-known architect in New York City and together with William van Alen had built amazing constructions, such as the Bainbridge Building on W. 57th Street and the Prudence Building at 331 Madison Avenue. Van Alen was an innovator and a revolutionary who often challenged the classical and Renaissance styles that had influenced most American cities since the beginning of the 20th century. He often ran into problems with clients who rejected his modern styles. Severance, worried about losing clients, decided that he no longer needed Van Alen’s partnership, and they ended their business relationship in 1924. In 1929, Walter Chrysler hired Van Alen to design a monument to his name, the Chrysler Building.

Competition Incentivized Innovation

In April 1929, Severance learned that his former partner was designing a structure of 809 feet. Ohrstrom and Severance, worried about falling behind, announced that they would add two additional floors to their original design so that 40 Wall Street would end up with a total height of 840 feet. That same year, Empire State Inc., led by former General Motors executive John Jakob Raskob, entered the race—putting pressure on Severance and Van Alen. To keep pace with the other two projects, architectural firm Shreve, Lamb & Harmon and builders Starrett Brothers & Eken accelerated the construction process. According to architectural historian Carol Willis, the framework of the Empire State Building rose four and a half stories per week due to an A-team design approach in which architects, builders, and engineers collaborated closely with each other.

Troubled by both Severance and the Empire State project, Van Alen designed the famous chrome-steel art deco crown for the top of the Chrysler Building and a sphere to stand on top of the crown. The sphere was built inside the crown, hidden from the public, and it was never announced to the press or explicitly mentioned. On the other hand, Severance modified his design one more time and asked permission to add a lantern and a flagpole at the top of the tower, increasing the height by 50 feet. Severance planned to have 40 Wall Street reach the 900-foot mark to secure its place as the tallest building in the world.

On October 23, 1929, the sphere of the Chrysler Building was lifted from the inside of the crown, reaching 1,046 feet and surpassing the final height of 927 feet of 40 Wall Street. The crash of Wall Street on October 28 distracted the press from the trick played by Van Alen, and it was not reported immediately. When Severance found out, it was too late to change his design—40 Wall Street held the title for one month from its opening in the first week of May 1930 to the opening of the Chrysler Building on May 27. The Chrysler Building held the title for only 11 months until the Empire State Building was completed in 1931 and became the new tallest building.

Regulations Limit Us

The Empire State Building held the title of tallest building in the world for 40 years, and it was built in only one year and 45 days. Bryan Caplan, professor of economics at George Mason University, believes that excessive restrictions slow construction today. Regulations such as height restrictions prevent cities from going up. Humanity now has better technology than in the time of New York’s race to the sky, but getting permits to build upward is extremely difficult. Excessive restrictions also generate artificial scarcity, which is slowing the growth of cities and making it difficult (and expensive) to live in them. Cities could grow upward, but regulations limit their growth.

However, we continue to see competition in many industries; technology companies fighting for the dominance of artificial intelligence are creating better and more efficient tools. The race between SpaceX, Blue Origin, and Virgin Galactic is improving the development of innovative technologies. Soon we might even have commercial flights to the moon. History has shown that when brilliant minds have freedom to compete, humanity moves forward.

Blog Post | Financial Market Development

The Promise of Cryptocurrency | Podcast Highlights

Chelsea Follett interviews Jack Solowey about the potential benefits of cryptocurrency and the regulatory challenges it faces.

Listen to the podcast or read the full transcript here.

Let’s start with the big picture. What is cryptocurrency? 

Cryptocurrency is an application of blockchain technology that leverages cryptography and game theory to create public digital ledgers that are highly secure and highly resistant to tampering. In its best form, cryptocurrency could replace the traditional balance sheets at institutions like banks and brokerages with this open distributed ledger. You’d have something like a bank account balance, but rather than being managed by a centralized intermediary, it’s run by computers all over the world that are incentivized to maintain the database and check each other’s work.

What are some of the benefits of cryptocurrency? 

Crypto is relatively young, so a lot of the benefits are potential benefits. However, we do already see use cases around the world.

Vietnam is one example. The blockchain analytics firm Chainalysis publishes an annual survey of the leading countries for crypto adoption, and Vietnam has led that list for a couple of years. An interesting corollary is that 69 percent of Vietnam’s population lacks access to a traditional bank. I think it’s reasonable to say that cryptocurrency is filling that need.

Can cryptocurrency be a hedge against inflation? 

Ultimately, this is an empirical claim that will have to be evaluated over time. There was some thinking initially that Bitcoin could be an inflation hedge because it has an ultimate cap on its supply. According to the protocol, there will only ever be 21 million Bitcoin minted. But that hasn’t borne out empirically, or at least hasn’t borne out yet.

With that said, there are places around the world where we’ve seen both national currency depreciation and relatively high crypto adoption or spikes in crypto adoption around national currency depreciation events. Examples include Turkey, Nigeria, Kenya, Argentina, and Venezuela.

There’s also a class of crypto token known as stablecoins, which are designed to be pegged to the value of another asset, for example, fiat currencies like the US dollar. Stablecoins have actually been growing in popularity in some of the same countries I just mentioned as a way to access the US dollar.

What about the potential of blockchain technology to combat censorship or resist authoritarianism? 

I think it’s helpful to look at the tactics that are used by the totalitarian regime in George Orwell’s Nineteen Eighty-Four. In that story, control was often a matter of changing and deleting the historical record. The thinking is that if there was no evidence of a free society, the idea of freedom or liberty could be extinguished.

And as we know, totalitarian regimes are not mere fiction. The Cato Institute recently awarded the Milton Friedman Prize to Jimmy Lai, who was the founder of the pro-democracy Apple Daily Newspaper in Hong Kong. When the central government in Beijing applied the draconian national security law to Hong Kong and raided the Apple Daily offices, civic and cyber activists were able to maintain a record of thousands of Apple Daily newspaper articles on a blockchain called Arweave. That is one example where blockchain technology thwarted the Orwellian authoritarian ambition.

What are some of the challenges or potential drawbacks of cryptocurrency? 

Like all financial instruments, crypto can be abused by bad actors, who can use cryptocurrencies to fund terrorist activity and trafficking. However, it’s important to keep this in perspective. Even high estimates of crypto-related illicit activity are an order of magnitude smaller than the UN’s estimate of, for example, total global money laundering each year, and law enforcement agencies in the US acknowledge that crypto has a relatively small role in crime when compared to traditional financial technologies.

Another common critique is that cryptocurrency technology is bad for the environment. 

It’s worth distinguishing here between the two mechanisms underlying major blockchains. You have Proof of Work, which helps secure the Bitcoin network, and because it’s compute-intensive, it’s also electricity-intensive. However, there’s also a different mechanism known as Proof of Stake, which has been implemented by the Ethereum blockchain, the second biggest crypto network by market cap. Proof of Stake reduces energy consumption and carbon footprint by over 99 percent. So, some of the critique needs to adapt to the changing nature of the technology.

But I also think it’s important to keep in mind that this critique begins with the assumption that cryptocurrency is not worth its environmental footprint. I think the role of policymakers is to address downside risks, not to assess the benefits. Regardless of one’s preferred environmental policy, it should apply uniformly and should not single out one specific class of technology.

If cryptocurrency is overregulated, what could be the possible impact of that on the average American? What’s the potential loss there? 

If our policies make the US an uncommonly inhospitable place for crypto, we could lose both the potential gains from this class of technology and the competitive pressure that these innovations put on traditional institutions to improve their own products and services. Crypto is already a very useful tool for sending payments across borders quickly and cheaply.

There are two big problems with how regulators have been approaching this space. One is regulatory ambiguity. Securities laws in the US, at the federal level, are almost 100 years old. It’s not hard to conceptualize how technologies that began as paper stock certificates and are now being replaced with decentralized global networks could pose challenges to existing regulations.

In the 1990s, the SEC actually had a fairly rational rule-making process to adapt laws to new technologies, what are known as alternative trading systems. Laws and rules can keep up with technology if regulators are willing to make those changes. Unfortunately, in the US, we haven’t seen the SEC take the same rational approach to cryptocurrency.

In fact, we’ve seen a bit of gaslighting, where the agency can ask projects to register under existing laws, and the project will say, “Okay, great. Let’s do it.” And then SEC says, “Well, we’re not really sure how to register your project.” And then, a little bit later, the project faces enforcement actions for not registering. It’s not a rational approach to innovation and financial markets.

As of the time of this recording, what are some of the current policy initiatives around regulating cryptocurrency? What are some of the concerns people are wrangling with?

The US is unique in that we have two capital market regulators, the Securities and Exchange Commission, SEC, and the Commodity Futures Trading Commission, the CFTC. This presents an interesting question about cryptocurrencies: should they be treated as a commodity or security?

To answer that question, my colleague Jennifer Schulp and I hone in on decentralization. Decentralization addresses some of the risks that securities regulation is intended to mitigate, which are known as managerial risks. Basically, are the issuers of an instrument going to have information that market participants don’t have, and could they use that information to gain an edge over market participants? Things like insider trading and information asymmetries through disclosures. But when you have a fully decentralized crypto token project, there is no managerial body with that information. So, at a high level, crypto securities are those that are centralized, and crypto commodities are those that are decentralized.

One wrinkle here is that crypto tokens can begin life as centralized projects but evolve into more decentralized projects over time.

Say regulators get this right and allow people to realize all the potential gains of cryptocurrency. What kind of gains could people see? 

In addition to the potential benefits of faster, cheaper payment methods, cryptocurrency promises a more decentralized internet and financial system. Loans could be issued permissionlessly. In the same way that you put a dollar in a vending machine to get a can of soda, you could have lending protocols that, once you put in the designated crypto collateral, you could take out a loan in crypto without some of the traditional gatekeeping by financial institutions. And that’s just one example of this broader ecosystem.

The Human Progress Podcast | Ep. 46

Jack Solowey: The Promise of Cryptocurrency

Jack Solowey, a policy analyst at the Cato Institute focusing on financial technology, joins Chelsea Follett to discuss the potential benefits of cryptocurrency and the regulatory challenges it faces.

Wall Street Journal | Science & Technology

Amazon Introducing Robotics to Speed Deliveries

“Amazon.com is introducing an array of new artificial intelligence and robotics capabilities into its warehouse operations that will reduce delivery times and help identify inventory more quickly.

The revamp will change the way Amazon moves products through its fulfillment centers with new AI-equipped sortation machines and robotic arms. It is also set to alter how many of the company’s vast army of workers do their jobs.”

From Wall Street Journal.