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The Interaction Hierarchy: A Theory of Technical Standards and Regulations

The Interaction Hierarchy: A Theory of Technical Standards and Regulations

Feb 28, 2010

Standards and regulations are at the very core of what makes us human. Without standard interactions and methods of communication, what we now consider “society” could never have developed. Nonetheless, we are constantly innovating, creating new products and processes that do not yet have standard parts or regulated interactions. This leads to one of the fundamental questions of human social organization as well as of innovation: when and how should standards and regulations be implemented?

Two seemingly polar schools of thought dominate the debate over the effects of technical standards and regulations on static and dynamic efficiency—in other words, the degree to which standards and regulations support short term economic efficiency, as well as an economy’s ability to adapt to changing conditions. The first theory calls for technical uniformity by claiming that consistent technical standards enhance interoperability and market integration and that regulatory convergence eliminates barriers to trade, fosters the realization of scale benefits, and prevents races to the bottom. The second theory is one of technical diversity, and claims that standards and regulations tailored to particular applications and jurisdictions improve static efficiency while also enhancing dynamic efficiency through experimentation with diverse standards and regulations. However, these theories are not mutually exclusive, but simply apply to technical standards and regulations at different levels of the “interaction hierarchy.”

The interaction hierarchy is the idea that standards and protocols exist at one or more levels of social interaction: the individual, the family unit, the personal network, etc., both nationally and internationally. Each level is composed of a certain number of groups—such as countries at the national level—as well as a uniform set of standards and regulations that govern interactions within each group. For example, different families have different household rules and ways of raising their children, but within each family there is one set of rules despite there often being more than one adult. However, when the rules start affecting interactions at the next level in the hierarchy, such as the acceptable level of roughhousing among children at school in a local community, the rules begin to be set by the higher level of interaction. In this case, the local community would set standards for the level of violence exhibited by children and each household would be expected to uphold the community standards. While this example is not technical in nature, it clearly demonstrates the core principle behind the interaction hierarchy.

Technical diversity is appropriate when standards and regulations are primarily interacting at or below the penultimate level in the hierarchy and technical uniformity should be applied when standards and regulations are primarily interacting at the highest level. Furthermore, there appears to be tension between these two theories when standards and regulations transition from one level of interaction to the next. Therefore, we see the theories of technical uniformity and technical diversity as diametrically opposed because, for the first time in history, the barriers that limited the interaction of products, processes, information, and capital to regional and national groups are crashing down on an international scale as transportation and communication costs plummet. It is important to note that these theories pertain to the international static and dynamic efficiency of standards and regulations regardless of the level that the standards and regulations interact on. Technical diversity is appropriate when one examines static and dynamic efficiency at the international level for standards and regulations that interact in or below the national level.

A prime example of this can be found in income tax policy. At this stage in the development of human society, individuals live as part of local, regional, and national communities, but don’t see themselves as part of a greater global community. If you are skeptical, ask anyone where they are from. They might say the name of their home city or country, but I wager no one would name a continent (except for Australians) let alone reply with “Earth.” As such, we are taxed by our resident groups at varying levels that depend on the laws of those groups. The levels are tailored to the particulars of jurisdictions and are much more efficient than they would be if an international body tried to set a universal income tax rate. Furthermore, groups can learn from the successes of other groups and replicate their policies if they so choose. This enhances the dynamic efficiency of income tax policy. Therefore, the overall or international efficiency of income tax policy is greater under a regime of technical diversity than under a regime of technical uniformity. While income tax policy is by no means the only example of the functionality of technical diversity, it serves as a clear, representative example for standards and regulations that interact in or below the national level.

Technical uniformity is appropriate when one examines static and dynamic efficiency at the international level for standards and regulations that interact at that level. The international level is unique in that there is only one group, the world, and like all other groups, its actors need to communicate and operate efficiently amongst themselves. Therefore, the convergence of technical standards and regulations at the international level promotes international efficiency by allowing for interoperability and communication within the international community. These standards and regulations can either seamlessly connect disparate standards at lower levels in the hierarchy—i.e., provide communication protocols between groups at the national level—or can simply mandate a single standard to propagate down the hierarchy. Two prime examples of top level protocol creation are TCP/IP, the set of protocols governing communication over the internet, and international exchange rates. Both allow for groups at a lower level in the interaction hierarchy, either local networks or national currencies, to maintain their individual standards while allowing them to interact as if there were a single standard. On the other hand, a prime example of single standard propagation is the global acceptance of the Ohm as the international unit of resistance. International standards for physical quantities, as well as the $125 million crash of the Mars Climate Orbiter, provide quintessential examples of the simplicity and efficiency gained from using uniform standards within a group.

Contention between technical diversity and technical uniformity occurs as standards and regulations transition from interacting at the national level (or below) to interacting at the international level. While it is more important for these standards and regulations to transition from technical diversity to technical uniformity than how and when they do so, firms can gain or lose significant competitive advantage depending on the details of the transition, often creating entrepreneurial opportunities in the process. While all firms would prefer their standard to be universally adopted and encoded into law—the ultimate case of Stiglerian regulatory capture—startups and entrepreneurial ventures have additional unique incentives. Due to their small size and capital constraints, startups often have much more difficulty navigating heterogeneous regulatory environments than larger, more established firms. In addition, first movers often attempt to set a uniform standard as their advantage relies on the benefits gained from sunk development costs. In combination, these factors often lead nascent firms to push for a more constrained and homogenous regulatory environment if they believe they cannot win a pure standards war.

Beyond reconciling the theories of technical diversity and technical uniformity, the interaction hierarchy can be used to explain a wide range of sociotechnical phenomena, such as the distinction seen between product and process regulations. Products often interact with individuals on a much higher level in the hierarchy than processes do. For example, many products produced in China are sold at the international level, but the processes used to produce them interact with individuals at the national, regional, or local levels. Therefore, we would expect to see international standards and regulations applied to the products, but national, regional, or local regulations applied to the production. This is exactly what we observe with respect to both product safety ratings and Chinese labor laws.

The interaction hierarchy is a powerful new framework for analyzing technical standards and regulations. Nonetheless, it relies on the analyst’s ability to determine where the pertinent technology sits in the hierarchy. While a technology’s level is not always obvious, finding it is rarely intractable. Even though this might seem like a theoretical exercise, there are significant opportunities to guide the future of synthetic biology research and the structure of the internet by applying the interaction hierarchy, as both are struggling to settle on a stable framework of standards and regulations. No matter your field of interest or affiliated policy-making body, since the core ideas behind the interaction hierarchy can be implemented within a business just as easily, this new framework can help you better understand and implement effective standards and regulations.