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This piece has been originally posted on Medium.

What is the effect of government regulations on innovation?

The most comprehensive answer to this question is: It depends. It can be positive. In a recent article, I present evidence that corporate innovation can be fostered by social liberalization policies and by laws that limit firms’ ability to discharge employees at will.

We also have a shining example of a government regulation that had a profound negative effect on innovation: Prohibition of 1920–1933, a nationwide ban on the sale of alcoholic beverages. 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 had disrupted the established pattern of people-to-people interactions.

Prohibition and patenting

Before the passage of federal prohibition, U.S. 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. (I’m not surprised. Are you?) And this leads Andrew to his main 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 a particularly attractive model to study the role of social networks in innovation. Prior to prohibition, bars and saloons acted as social hubs 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 didn’t change its scale or the identities of the individuals within the network.

One of the study findings seems to carry 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 not only bring people together but also let them exchange ideas between them.

And let’s not forget: moderate alcohol consumption may have a stimulating effect on human creativity. Bars and saloons not only bring people together—in a way religious services or charity events would also do — and let them exchange ideas; by serving alcohol they may improve the quality of ideas that are being exchanged.

COVID-19 and innovation

Andrews’s study is especially relevant when we consider the massive disruption of global innovation networks 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. Now, we can only guess what the long-term consequences of this disruption will be.

In this context, one more Andrew’s finding deserves attention. 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.

What is interesting, however, is that when people 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, which apparently led to their exposure to different ideas. This was manifested in a long-lasting change in the types of inventions these individuals filed, 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.

And that means that the post-COVID innovation may turn out to be different. Will we like it more? Less?

Innovation and the “return-to-office” policy

Recently, we’ve been seeing increasing attempts by firms to change the established pattern of remote work and bring employees back to office — all under the banner of caring about communication and collaboration.

Theoretically, innovation too will gain from employees returning to office. Experts warn that online communication, a hallmark of remote work, is characterized by lower information sharing. That leads to reduced exchange of ideas between innovators, the major cause for the prohibition-induced patenting slump. From this vantage point, the “return-to-office” policy can be viewed as an attempt, conscious or not, at rebuilding corporate innovation networks damaged by remote work — and bringing them as close as possible to the structure that existed before the pandemic.

Unfortunately, this pattern of restoring corporate innovation networks — “forceful” is the word that comes to mind — carries a risk. By and large, corporate employees are unhappy with the mandatory return to offices. According to a survey conducted by Clarify Capital, 68% of employees said they would rather look for a new job than return to the office.

I’d like to remind my readers that freedom is a powerful driving force of innovation. Yes, you can force people back to their offices and make them communicate in person. But will these unhappy people freely exchange creative ideas with other unhappy people? I have my doubts. It’s like bringing a nondrinker to a bar and expecting them to have fun while chatting with a bunch of other nondrinkers.

I think a better way to restore productive collaboration between members of innovation teams would be bringing them to regular off-site meetings. Placing employees in enjoyable settings — with ample time for physical activity and relaxation — will generate conditions for a free and unrushed flow of ideas between the participants. Sooner or later, something innovative will emerge.

Should alcohol be served during these events? Why not, if all the participants are above 21?