The best answer to the question “Do government regulations hurt innovation?” seems to be “It depends.”

The suspicions against regulations are fueled by wide-spread belief that they damage economic growth, with which innovation is intimately connected. Yet, academic research on the topic paints much more nuanced picture. For example, several studies show that corporate innovation is fostered by laws that limit firms’ ability to discharge their employees at will. This phenomenon is called an insurance effect: feeling increased protection from negative consequences of failure, employees are more committed to engaging in risky innovative projects.

However, there is a shining example of a massive government regulation that had profound negative effect on innovation: Prohibition in the United States in 1920-1933. In a brilliant 2020 paper, “Bar Talk: Informal Social Interactions, Alcohol Prohibition, and Invention,” Michael Andrews provides a detailed description of what happened when a government action abruptly intervened in the established pattern of people-to-people interactions. 

Prohibition and patents

Before the passage of federal prohibition, states and counties could determine for themselves whether or not to allow alcohol consumption in bars and saloons. When federal prohibition went into effect, counties that were previously wet saw an 8-18% drop in patenting relative to consistently dry counties in the same state.

As a former researcher, I admire the rigorous checks Andrews applies to prove that the observed effects were caused by preventing people from going to bars rather than by other factors. For example, he shows that the drop in patenting was smaller for groups that did not typically attend saloons, such as women and ethnic groups that preferred to drink in private.

More importantly, Andrews presents evidence that prohibition did not appreciably reduce the total alcohol consumption in newly dry counties (surprise!). And this leads to Andrew’s major point: the negative effect of prohibition on invention was caused not by preventing people from drinking alcohol, but by disrupting natural social networks.  

Prohibition and disrupted networks

Prohibition presents itself as a particularly useful model to study the role of social networks in innovation. Prior to prohibition, the saloons acted as a social hub in which individuals could exchange information in an informal setting. Prohibition is so useful to studying the effects of social interactions on innovation because it disrupted the structure of social networks but not its scale or the identities of the individuals within the network.

In my opinion, one of the study’s findings carries special weight. If networks facilitated invention by simply making it easier for individuals to find collaborators, then only patents with multiple inventors would have declined. Instead, Andrews found that solo-inventor patents declined as well. That means that networks serve not only to bring people together but also as a venue to exchange ideas between them. 

COVID-19 and innovation

Andrews’s study is especially important considering massive disruption of global innovation network caused by the COVID-19 pandemic. Like prohibition, the pandemic did not change the scale or the identity of the individuals within the network. But by massive shifting to remote work (to “drinking from home,” so to speak), it disrupted informal interactions, and we can only guess about the long-term consequences of this disruption.

Following the initial euphoria over the fact that remote work did not result in the immediate end of the corporate world, voices of caution and concern might be already heard. In particular, experts warn that online communication are characterized by lower information sharing—and that means reduced exchange of ideas between innovators, a major factor in prohibition-induced patenting slump. To believe that this will not affect innovation in some negative way in the future is to be a techno-optimist on steroids.

Innovation and post-COVID

There is one more finding in Andrews’s study that deserves mentioning. While patenting fell dramatically in the years immediately after the prohibition onset, it rebounded over time, meaning that affected individuals gradually rebuilt their informal social networks.

Interestingly, however, when folks began rebuilding their social networks after prohibition, they did not collaborate with the same individuals as they did in the past. Instead, they connected with new people in new ways, being exposed to different ideas as a result. This was manifested in a long-lasting change in the types of inventions these individuals created, as measured by patent classes. In other words, while the rate of innovation will restore over time following disruption, the direction of innovation may change.

Sure, innovation will recover post-COVID. But it will be different innovation. Will we like it more? Less?

Check out my eBook, “We the People of the Crowd…,” a collection of stories about crowdsourcing reflecting my personal experience in working with corporate and nonprofit clients.

Image credit: http://www.reddit.com/r/reddeadredemption/comments/9w5ehq/you_can_shutdown_the_saloon/