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When is it time to say “no” to innovation? When are innovations so destabilizing that society must intervene? To raise this question isn’t to launch down the path toward Luddism. The idea that innovators work under limits isn’t new. The great military innovations of World War II spawned legal and practical prohibitions on what could be done with nuclear and biochemical weapons. Medical and pharmaceutical technologies are routinely regulated. So are cars, planes and other transport innovations.

Yet information technologies are often presumed to be in a different category altogether. And there are good reasons to think that’s true. Consider two examples. Britain’s Labour government has introduced legislation that would make it a crime to withhold a computer password from the country’s domestic spying agency. The government also wants its snoops to have the right to read any e-mail and monitor any Web site without even asking for a court order. The U.S. government, meanwhile, limits the quality of cryptographic products-software that encodes secret messages-that can be sold abroad by U.S. companies.

Such barriers are ultimately exposed as folly. Britain’s security law, if it takes effect, will soon drive talented people and businesses from the country. U.S. controls on cryptography are effectively rendered irrelevant by the willingness of foreign companies to create and spread “hard crypto,” codes too tough for government spies to crack quickly.

The result is that regulators rarely succeed in harnessing IT innovation. But does this mean limits on IT are never desirable? No. Governments can and should draw lines, even in a field as dynamic as information technology. In certain cases the public has the right, indeed the duty, to declare some fields off-limits for further “improvements” because these innovations are just too costly. Innovators can keep on innovating in private if they wish, but the fruits of their labors aren’t fit for public consumption.

This sounds draconian, but consider the policy of exempting e-retail sales from taxation. Many innovators applaud this example of enlightened restraint by lawmakers. Taxes on sales via the Web would stifle innovation by discouraging customers and adding to the already high burdens on those building e-businesses.

But innovators shouldn’t count on a permanent tax holiday. The policy is discriminatory. It gives a benefit to e-businesses that bricks-and-mortar retailers lack. Someday, and probably someday soon, sales taxes will be imposed on e-retailers. While raising costs, this obligation will stimulate further innovations as e-commerce vendors scramble for ways to more efficiently satisfy the tax collector’s demands.

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