January 4, 2020

by Maleka Momand

Value of Networks

“The more we know about the world, and the deeper our learning, the more conscious, specific, and articulate will be our knowledge of what we do not know.”- Karl Popper

Scientific philosophers including Karl Popper, Michael Polanyi, and Thomas Kuhn have long stressed the importance of networks in helping spread and test new theories and produce evidence in support or rejection of claims. Healthy networks where information is easily exchanged is a critical component of scientific innovation and thriving markets. And, when used effectively, networks also help to distinguish between effective and ineffective policies within government. Modern technology can amplify the application of network theory in government to create more feedback loops between the public and private sector.

For thousands of years, networks have catalyzed the evolution of scientific thought and human progress. The propensity of a flourishing network to disseminate information and drive market intelligence cannot be underscored enough. Some of our most significant breakthroughs in science and the humanities are the result of rich information networks that span across geographies and socioeconomic class.

Conversely, top-down hierarchies with limited distribution channels stall feedback loops and slow a culture’s ability to evolve. If we examine some of our most catastrophic failures and abhorrences, behind them we might find rigid hierarchies that controlled information to the detriment of progress.

A limited network is like a one lane highway: there’s only one way to go and only so much room on the road. One car accident can create hours of traffic and delay everyone on the road. You can think of a robust network as a multi-deck, multi-lane, bi-directional highway that is intentionally designed to support efficient paths for travelers.

In this essay, we explore the benefits of robust networks and how they can be applied in government to create more opportunities for growth. We also discuss the dangerous side effects of weak networks and top-down hierarchies that contribute to societal decay. In both cases, governance structures play a critical role in how networks flourish or decay. We posit that a well-functioning administrative state can fuel healthy networks that allow a marketplace of ideas and further enable progress.

Modern technology supports the creation of new data-driven governance structures — and efficient checks and balances — that upgrade our regulatory state to reflect the wisdom of America’s founding. Governments can leverage an updated understanding of network theory that allows liberty to drive progress in markets.

From the very beginning, information has been our most valuable asset. The earliest civilizations placed the great orators on pedestals for their ability to teach and inspire with their words. Their lessons reached broader audiences as we began to write and document their stories. The invention of ink, paper, the printing press, telegrams, internet, cell phones….all of these tools helped build, expand, and reinforce networks. One might argue that the most important human inventions are the ones that catalyze multi-directional flow of information and increase the potency of networks.

One of our favorite historical examples of dialogue and its widespread distribution is the Federalist papers, a series of essays penned by Alexander Hamilton, John Jay, and James Madison under the pseudonym Publius. The essays argued in favor of ratification of the Constitution, and were published in newspapers that reached city and rural audiences. In response, the Anti-Federalist papers were published opposing the proposed Constitutional design and helped drive healthy discourse across the newly independent America.

Politics aside, both parties intellectually contributed to the debate of how the United States government would be structured and the eventual passage of our Constitution as we know it. Ironically, we may have strayed from the careful system of checks and balances in support of networks that our founders originally intended. The growth of unchecked systems is best exemplified in the growth of the administrative state- a largely unchecked power that wields massive influence over networks today.

Critical inquiry is an essential component of the scientific method. It encompasses the freedom to unpack an idea, question its existence, hypothesize, test, and share findings. The body of scientific knowledge has grown through our ability to communicate findings to larger audiences. Through such exchange, we collectively evolve our understanding of concepts and are able to take one scientist’s contributions to a new level through critical inquiry and experimentation. The presence of feedback loops propels science to new discovery.

Healthy markets are microcosms for the practical application of the scientific method. The best markets, in which the best ideas win, have the ability to test ideas, record results, and share findings. But sometimes institutional structures fail us by creating roadblocks for testing and communicating new ideas.

In science, the ivory tower and professional reputations can be compromised when new evidence contradicts old. One of the most notable examples is Ignaz Semmelweiss’s discovery that the lack of handwashing was contributing to mothers dying during childbirth. In the 1840s, childbirth fatalities were shockingly high- to the point that women feared giving birth. Semmelweiss studies two hospitals: a midwifery clinic and a hospital staffed by doctors. He observed that mothers died far more often at the hospital staffed by doctors and hypothesized that it was because the doctors were performing autopsies and contaminating new mothers with cadaverous particles. In contrast, the midwives had less deaths because they routinely washed their hands and did not touch corpses.

Semmelweiss tried in vain to introduce chlorine hand-washing into doctor’s offices, but doctors were resistant to the idea because it made them look responsible for the death of mothers. He was ostracized for his idea and died in a mental asylum. Countless lives could have been saved with Semmelweiss’s findings, but an entrenched market of doctors stifled his findings to protect their reputational interests.

In his seminal work “The Structure of Scientific Revolutions,” Thomas Kuhn wrote “Because it demands large-scale paradigm destruction and major shifts in the problems and techniques of normal science, the emergence of new theories is generally preceded by a period of pronounced professional insecurity…Failure of existing rules is the prelude to a search for new ones.”

Similarly, markets can be dominated in government by entrenched interests that fight to limit competition and restrict the flow of information between producers and consumers. Occupational licensing regulations are a well-documented example of entrenched interests. Dozens of independently-appointed boards and commissions exist across the United States to regulate professions such as nurse practitioners, optometrists, electricians, even florists. These commissions, composed of licensed professionals in the field, create licensing exams, fees, and other credentialing requirements for people to legally operate.

While some of these guide rails are important to the health and safety of our communities, many serve entrenched interests and are designed to keep new competition out, often disproportionately hurting the working class. For example, recently released prisoners are more likely to seek occupations that require a license, but with limited resources in the face of daunting licensing requirements, they often turn back to previous criminal activity and find themselves in prison again. The Arizona State University Center for the Study of Economic Liberty estimates that between 1997 and 2007 the states with the heaviest occupational licensing burdens saw a 9% average increase in the three-year, new-crime recidivism rate, while the states with the lowest burdens and no such character provisions saw an average 2.5% decline in that recidivism rate.

The growth of the administrative state continues to rapidly increase as new regulations, departments, and authoritative institutions are created to reign in markets. The creation of these organizations are often well-intentioned, and serve our innate human desire to create and preserve order. However, they often have counterintuitive effects that, when unchecked, create compounding roadblocks for markets and networks. Moreover, they imbue a larger lack of trust in our individual ability to think and seek truth for ourselves. The over-regulation signals an over-estimation of top-down leadership and an under-estimation of bottom-up exchange of information.

The Constitution originally intended three branches of government, with each holding unique power to check the other in certain circumstances. There was no real mention of a bureaucratic fourth branch, yet one has indeed emerged over the past century with virtually no check on its powers. The administrative branch of government has its own legislative, enforcement, and adjudication powers. While the early 20th century Wilsonian era of public administration placed great trust in a cadre of top-down experts to create and enforce rules, it did not design effective feedback networks around these organizations.

At present, our regulatory scheme is not optimized for a dynamic marketplace and is slowing our network effects tremendously. In fact, one study from the Mercatus Center estimates that regulation — by distorting the investment choices that lead to innovation — has created a considerable decline in US gross domestic product, averaging a 0.8 percent reduction in the annual growth rate of the US GDP. In distinction, a well-designed regulatory scheme is responsive to an evolving marketplace and inspires confidence in the private sector to innovate and take risks.

Regulations and regulatory bodies should have checks to verify and audit their processes similar to the other branches of government. For example, requiring legislative review of regulations or automatically expiring regulations on a regular cadence if they are not updated. One of the best examples of this is the Texas Sunset Commission, which audits regulatory agencies on a fixed schedule and makes a determination on whether or not they should be eliminated or consolidated to improve government efficiency and citizen experience. In 2019, the Commission reports it eliminated over 68 types of licenses, consolidated several agencies into one, and increased data interoperability between Texas agencies.

With more dynamic systems of feedback, we can hold regulators accountable to the regulations they produce and enforce. For example, if a certain number of enforcement actions or consumer complaints are made, this should trigger an audit of the regulatory agency by an independent third body. Regulators should also be comparing and learning from other jurisdictions to experiment and understand what is working. One example of this is the regulatory sandbox the state of Arizona hosted for financial companies, effectively allowing them to test innovative products without undergoing an arduous and time-consuming licensing process. Since the sandbox launched, other states have introduced similar reforms and the federal Consumer Financial Protection Bureau developed an Office of Innovation to encourage more experimentation in financial agencies across the United States.

The common denominators from the different reforms discussed above is that they introduce oversight and greater flexibility to make changes to regulations and regulatory agencies. They reflect an understanding of network theory by creating and strengthening networks in government and business. More importantly, they create feedback loops to hold both the private and public sector accountable.

Technology can enable these process checks and verifications in government by opening up paths for the documentation and exchange of information. It requires a paradigmatic shift within governments to move away from failing processes and test new methods. The Commonwealth of Kentucky is one of the first state to move toward tech-driven regulation. The government introduced the sunset of regulations and leveraged a regulatory management platform to hold agencies accountable to goals of better, more business-friendly regulation. Over the course of several years, the government eliminated outdated rules, introduced online licensing, consolidated agencies, and changed its internal culture to be more embracive of flexible regulatory process.

For the first time, governments have an opportunity to leverage world class technology that applies network theory in its own processes. Governments play an important role in helping networks thrive and evolve over time. To best serve the public, governments should be mindful to avoid concentrating too much power in a single body and stifling creativity within and outside of governments. By creating intelligent feedback loops between the public and private sectors, we can better encourage vibrant, network-driven markets that propel us to new discoveries.

Maleka Momand, Co-Founder & CEO, Esper

Joe Lonsdale, Co-Founder, Esper & Partner, 8VC