How Silicon Valley entrepreneurs need an ethics lesson

The year 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 rationalise 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. Start-ups 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.