Imagine you are the captain of an old ship. we’re talking about a sailing vessel the like of which you saw on Pirates of the Caribbean. This thing is massive (by the standards of the day). Your ship has multiple masts and all manner of sails, each of which has a different function. You need a large crew to operate it. Everyone fills a specific role and ensures you glide across the water in the direction you want to go.
Now, let’s scale it down. Your Black Pearl (that’s a big pirate ship on the movie for those of you who haven’t seen the film) is now the size of a kayak, but you still have the same set of sails and masts (albeit miniaturized versions). Can you still operate it? What if you come across choppy waters? You can’t fit much of a crew on that boat, so now just a couple people need to fill all of those roles while navigating and staying afloat.
Your rigging (masts and sails) is the system of rules, regulations, bureaucracy, and infrastructure in place for a given line of business in this metaphor. Every time we add regulation, we add more rigging, making it harder for startups and small businesses (the kayaks) to compete with bigger, established crews…ahem…businesses. Sometimes this is helpful. After all, a simple set of sails are simpler to operate and help move you forward. Sometimes this is necessary. We don’t want anyone dumping toxic waste in our drinking water. In many cases, however, we are adding unnecessary complexity while failing to accomplish what we would like.
By making it harder for small businesses or new entrants to compete, we limit competition and choke off potential areas of innovation and growth. Remember our kayaker? He sunk as soon as he encountered his first small swell in the water because he couldn’t figure out how to work his rigging (comply with complex regulations). A complicated system of regulations and bureaucracy also closes opportunities for all US citizens while benefiting incumbents with deep pockets and a large organization over which to distribute costs. This, in turn, encourages consolidation. If the benefits outweigh the costs, the regulations are straightforward, and there is a negative externality or a natural distortion in the market to be corrected, this is OK! Still, all first order and follow-on effects must be considered when contemplating the implementation of new rules and regulations.