In the world of AI, an age-old question resurfaces: Can morality be imposed by law, or must it be cultivated by design? Many AI ethicists believe the industry’s reluctance to embrace their solutions shows that the free market discourages ethical behavior. Disheartened by this perceived indifference, they often look to government regulation to compel companies to act ethically. Yet this approach rests on a questionable premise: that one can simply mandate ethical outcomes into existence.

This episode offers a different perspective. True ethical AI isn’t created by force or fiat; it’s achieved through thoughtful design, built on user trust, and guided by systems that align technical performance with human values. In this light, the free market emerges as the most effective environment to foster ethical innovation because it encourages creators to build technology that people genuinely trust and value. We will examine how heavy-handed regulation can stall progress, how market forces reward trust and transparency, and why designing great products with ethics in mind is the surest path to truly ethical AI.

The Deficiencies of Government-Enforced AI Ethics

The primary problem with relying on government regulation to drive AI ethics isn’t just that it’s slow. Regulation distorts the market, often stifling meaningful innovation. Lawmakers move at a deliberative pace, lagging far behind the speed of technological advancement. By the time legislation is passed, the underlying technology has evolved beyond its scope. This mismatch makes regulations largely reactive, addressing problems only after they’ve caused harm rather than incentivizing proactive, ethical design from the start.

More troubling is the phenomenon of regulatory capture, where incumbent companies use their influence to shape laws in ways that reinforce their dominance. In theory, regulation should level the playing field and protect consumers. In practice, it’s frequently shaped by industry lobbyists to erect barriers that only the largest players can navigate. In other words, market leaders often co-opt government rules to solidify their power through complex compliance requirements that effectively make competition illegal. Ironically, attempts to impose ethics through top-down rules can backfire, entrenching powerful incumbents at the expense of fresh ideas.

Consider the cryptocurrency industry: the U.S. SEC’s enforcement actions have been widely viewed as favoring established financial institutions while hindering decentralized innovation. Similarly, Tesla faced legislative barriers to its direct-to-consumer sales model due to laws long supported by traditional car dealership networks. In healthcare, Epic Systems, a major electronic health records provider, has maintained dominance for decades, aided by rules and infrastructure that make it nearly impossible for competitors to offer more interoperable or patient-friendly alternatives. In 2024, the health data startup Particle Health filed an antitrust suit against Epic for exactly this reason, alleging the giant used its control over patient records to stifle competition.

Regulation, originally intended to improve systems, is too often used as a strategic tool to limit competition, masquerading as ethical reform. When a dominant player pushes for expensive compliance frameworks under the banner of “safety” or “transparency,” the public might assume it’s a step forward. In reality, these legal requirements are a heavy hand in place of lower-cost, more agile, or even more ethical alternatives, ultimately cauterizing the human imagination. 

Fear-Based Ethics Don’t Scale

Another persistent issue with a policy-driven, compliance-first approach to ethics is that it tends to operate through fear. Risk aversion has come to dominate the AI ethics field not just because practitioners are cautious but because a burdensome regulatory environment encourages fear-based thinking. Companies toe the line because they’re afraid of penalties, lawsuits, or public shaming, resulting in most discourse focusing on avoiding harms (i.e., bias, misinformation, and privacy breaches). The problem with risk-based thinking is that when compliance becomes the ceiling instead of the floor, we lose the opportunity to ask, “What could ethical AI make possible?” 

Fear enforces a minimum standard of behavior but is a short-term, low-trust motivator. A culture of fear leads to defensive strategies, minimal compliance, and innovation bottlenecks. Companies are incentivized to just meet the threshold to avoid trouble rather than strive to do better by their customers. Over time, this mindset calcifies into a checklist mentality that satisfies the letter of the law but not the spirit of ethical technology.

Freedom Is a Better Motivator than Force

By contrast, markets reward organizations that take calculated risks to create real value. The best companies don’t operate out of fear of doing the wrong thing but rather opportunity to do the right thing better than anyone else. A useful analogy comes from the culinary world: the most celebrated chefs aren’t obsessed with merely avoiding food poisoning; they’re focused on creating a unique, unforgettable experience while dining. Similarly, the top AI companies aren’t content with basic compliance but are building tools people love, trust, and return to. Fear can enforce the baseline, but inspiration and competition drive excellence. 

Contrary to the notion that the free market is amoral, competitive environments can foster trust, transparency, and accountability, especially in the long run. When products are perceived as untrustworthy, discriminatory, or overly invasive, users respond. Public backlash, brand erosion, and user attrition act as powerful feedback mechanisms that push companies to improve. In a free market, this kind of feedback loop encourages businesses to earn trust or suffer the consequences of losing it.

Crucially, markets reward high-trust relationships between companies and their users. Trust leads to higher retention, deeper engagement, and longer customer lifetime value. For example, research indicates that as many as 62% of consumers will stay loyal to a brand they trust, a strong correlation between trust and long-term loyalty. This dynamic benefits both businesses and users: Companies gain sustained revenue and brand equity while users enjoy more reliable, transparent, and value-aligned experiences.

Market-based incentives also enable responsiveness. When an AI system is shown to cause harm or fails to meet public expectations, companies have the capacity and motivation to adapt quickly. Unlike regulatory processes, which can require years of deliberation to adjust a rule, market mechanisms reward quick iteration and course-correction. A company facing public outcry over an AI misstep will deploy a fix or an update in weeks or days, not years. Mistakes are addressed and lessons learned much faster in a competitive environment than under a compliance regime.

Startups, in particular, are positioned to drive ethical innovation. With greater flexibility and fewer institutional constraints, young companies are pioneering tools for auditing algorithms, preserving user privacy, and increasing model transparency. Many early-stage firms are also finding that a strong ethical foundation makes them more attractive to mission-aligned capital, investors who value long-term social impact as well as profitability. In an open market that rewards innovation, doing the right thing can align with doing well. The freedom to innovate becomes a better motivator for ethical behavior than the fear of breaking a rule.

Values Are a Competitive Advantage

The outdated belief that companies will only act ethically if forced underestimates the evolving dynamics of modern business. Today, ethical alignment is an increasingly important factor in consumer choice, investor strategy, and employee retention. Surveys have reinforced this shift: for instance, across 25 countries, an average of 70% of consumers say they buy from brands that reflect their personal principles. People are paying closer attention to what companies stand for, and they reward those whose values resonate with their own.

One of the clearest signs of this trend is the growing number of companies taking specific, non-generic stances on cultural or social issues. For example, Disney has leaned into progressive commitments around DEI, making public statements and internal changes that reflect those values. In contrast, companies like Chick-fil-A and Black Rifle Coffee have built their brands around conservative or traditional values. Even Bud Light, traditionally seen as a neutral, mass-market product, has entered the political spotlight following a marketing campaign tied to a transgender influencer; values are now an inescapable part of brand identity. In today’s market, every brand makes a statement, whether intentional or not.

Brands willing to take a clear stance and back it up with consistent behavior are often rewarded with stronger customer loyalty and deeper engagement. This isn’t without risk. A company may isolate themselves from segments of the market and missteps can provoke backlash. In a fragmented and value-conscious consumer landscape, however, prolonged neutrality or ethical apathy is often more costly than commitment. Both customers and employees now expect companies to have principles beyond profit.

Ethical AI as Human Flourishing

If AI ethics isn’t just preventing harm, what would a proactive, positive vision of ethical AI look like? Ethical AI should actively enhance human well-being, agency, and understanding. 

For instance, an ethical AI product might give users meaningful control over what data it uses and how it behaves. Recommendation systems could be transparent and customizable, empowering people to shape their own digital experiences instead of being passive targets of opaque algorithms. In healthcare, AI could support doctors by flagging overlooked diagnoses or potential errors without excluding human judgement or eroding the doctor-patient relationship. In education, AI tutors could adapt to individual learning styles while maintaining transparency and accountability so students and teachers understand how decisions are made. In each case, the design of the technology is centered on empowering the user and aligning with human values.

Ethical AI could also tackle broader societal challenges like climate change resilience, mental health support, and accessibility for people with disabilities. Rather than minimizing harm, these maximize positive value. Crucially, these advancements come from creative choices made by designers and engineers, not from merely checking off a list of compliance requirements. In other words, realizing ethical AI is fundamentally a design challenge aimed at human flourishing rather than a compliance exercise to satisfy regulators.

Innovation, Not Regulation, Will Define Ethical AI

The future of ethical AI will not be built through mandates or compliance checklists alone. It will be shaped by those who understand how to integrate ethical principles into products that people trust, need, and love to use. The free market is a dynamic arena that can drive this progress. It rewards transparency, penalizes failures, and accelerates learning, which are essential to navigate the complex ethical challenges of AI development. We cannot mandate moral machines into existence by fiat, but we can design and incentivize them through the collective pressures of the market and the desires of informed users. In the end, good technology, like good character, must be good by design, not by force.