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Silicon Valley's New Ethics Lesson

Elaine Ou is a blockchain engineer at Global Financial Access, a financial technology company in San Francisco. Previously she was a lecturer in the electrical and information engineering department at the University of Sydney.
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2016 hasn’t been a brilliant year for Silicon Valley. Lawsuits and regulatory investigations have shed light on the antics of high-profile companies such as Theranos, Zenefits, Hampton Creek and Hyperloop One. Even outside of public scandal, dubious tactics abound.  A recent Fortune column asks whether Silicon Valley pushes ethical boundaries too far. Has cutthroat competition led the righteous industry to lose sight of its moral values?

Silicon Valley has an innovative and nuanced view of ethical boundaries. Y Combinator founder and investor Paul Graham wrote a guide explaining what his fund looks for when making investments. As he sees it, the most successful founders are the ones that “delight in breaking rules, but not rules that matter.”

“Rules that matter” is a subjective idea, and it’s especially fuzzy in the minds of the young technologists who receive investor capital. When the creator of a file-sharing company decided to start Uber, he felt that local taxi regulations were not rules that mattered. With no background in health insurance, the founder of Zenefits decided that state licensing requirements might not matter. For a 19-year-old Stanford dropout with no medical training, even FDA regulations don’t matter.

And if these young entrepreneurs can’t understand the rules governing their own industry, how can they be expected to appreciate abstract ideas like generally accepted accounting principles or securities fraud?

Silicon Valley sees itself as a beacon of virtue constantly under assault by unethical players in a hopelessly corrupt system. The downside of such conviction is that young idealists come to rationalize bizarre actions against anything that stands in their way.

Tight-fisted investors are barriers who need to be swayed with inflated growth metrics. Facts are inconvenient truths to be papered over with exaggerated marketing hype. Regulatory requirements impose artificial limits on the market and can be circumvented. 

Much of the appeal behind funding young college dropouts is that their minds haven’t been corrupted by the establishment, so they have the ability to approach problems with fresh eyes and Think Different. Startups aim to disrupt legacy industries not for sheer sake of anarchy; they do so because they believe the incumbents have gained a coercive monopoly through regulatory capture and hence are economically inefficient. If regulations exist, it’s only to protect the establishment from competition. Venture-backed companies genuinely do want to make the world a better place, but the world can’t seem to get out of their way.

Most regulations make some attempt at protecting the public interest, but the fact that industry rules are defended by highly paid lobbyists suggests that they might serve less altruistic purposes as well. Uber’s success exposed the incredible inefficiency of the taxi medallion system.

Zenefits recently ran into trouble with Washington state’s insurance regulators for providing customers with free human resources software. According to the Washington insurance commission, free software violates anti-rebating law. The general counsel of Zenefits argues that the commissioner is trying to raise prices for consumers. The high-profile blowup of Theranos distracts from the dozens of legitimate health-technology companies that failed to navigate the FDA’s notoriously bureaucratic labyrinth.

As Paul Graham says, “It is the people who break rules that are the source of America's wealth and power.” The people who break rules are also the source of America’s prison population, but on a global scale Graham’s statement is historically correct.

For hundreds of years, medieval craftsmen formed guilds to limit competition and protect the exclusivity of their trade. In rural areas, independent practitioners took up knitting and weaving in cottage homes. Even though guild members periodically sent expeditions to destroy unauthorized equipment in the countryside, business people realized that contracting with individuals outside the guild system gave them greater ability to expand operations. These cottage industries provided the scalable production systems that later led to the Industrial Revolution.

Even the 19th-century Luddites were concerned about the loss of monopoly privileges. They destroyed machinery not because they disliked technology, but because they felt that manufacturers were using machines to get around standard labor practices. The Luddites wanted machines to be run by workers who had gone through an apprenticeship, just as they had.

We criticize Silicon Valley’s blatant disregard for rules and procedures, but it’s this same disregard that makes the industry capable of changing the world. The point is not to blithely break rules, but to question whether existing rules always make sense.

Condemning all regulatory transgressions as a Silicon Valley ethics problem just means that the next self-righteous idealist will come along and make the exact same mistakes, and that the only way for anyone to succeed is to become as dismal as the industries they set out to displace.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Elaine Ou at elaine@globalfinancialaccess.com

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net