Regulatory capture is a sort of funny case because though the concept was invented by a Marxist (if memory serves), only economists and libertarians seem to think about it.
I haven’t actually heard the term “regulatory capture” before, but the concept of big businesses owning regulators is a pretty universal rallying cry of the left.
“Regulatory capture” does not mean “the concept of big businesses owning regulators”. It is, rather, a specific proposed explanation for why this takes place, and why it is likely to take place: namely, people working for and invested in a regulated industry have a greater interest in the outcome of regulation than other citizens do, and therefore are likely to expend more effort to influence the regulators.
Notably, regulatory capture does not explain “big business owning regulators” in terms of the members of either big business or regulatory agencies being unusually selfish, evil, or corrupt individuals. It predicts that you can’t fix regulation by installing more honest or virtuous regulators, because the problem is structural rather than personal.
Here’s an example:
I, as a human citizen who likes breathing air without radioactive soot in it, have an interest in shutting down coal-fired power plants. However, the magnitude of my interest in shutting them down is much less than the magnitude of a coal plant employee (especially a well-paid one who is also a shareholder!) in keeping that plant running. Coal soot slightly increases my chance of lung cancer … but shutting down coal plants puts those people out of a job, which is much worse for them than the delta in lung cancer probability is for me. Therefore, any given “coal person” can be expected to spend much more effort on influencing regulators than I will. And if influence is proportional to effort, this means the EPA will tend to favor the views of the coal people and not my views.
However, that said, regulatory capture is part of a broader theory in political economy called public choice theory. And public choice theory has been criticized as not being very predictive; of not having very much in the way of empirical success. Beware the mind-killers, especially when they agree with you!
“Regulatory capture” does not mean “the concept of big businesses owning regulators”. It is, rather, a specific proposed explanation for why this takes place, and why it is likely to take place: namely, people working for and invested in a regulated industry have a greater interest in the outcome of regulation than other citizens do, and therefore are likely to expend more effort to influence the regulators.
That’s not how I was using the term. I was using it as a label for a fact—that over time, the industry being regulated by an agency tends to eventually take over that agency. Public choice economics, whatever it’s limitations, is trying to explain this fact. Note that my usage is consistent with wikipedia (link in parent and grandparent):
In economics, regulatory capture occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating.
For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether.
It usually goes without saying, but we assume for such examples that the aggregate harm done over all parties is higher than the aggregate good.
The problem here is that the expected utility of acting against coal plants is too small to be worth doing at all. That is, once we solve microtransactions (in practice, rather than in theory), this problem may be much more tractable.
The problem here is that the only institution that does have an interest in the long-term health of the entire population and does have the ability to overrule the interests of the coal plant owners—the state—is crippled under a liberal democracy because its members only have an interest in being re-elected.
Actually I think the state’s interest in the long-term health of the population isn’t really an enduring feature, its more of a plausibly useful strategy.
A state can reasonably defined as a local monopolist of violence, generally speaking its long term interest is basically to maintain that monopoly. There are imaginable scenarios where this involves hurting the long-term health of its entire population if say the result makes the population more docile or if they improve rent extraction that the state needs to maintain its monopoly ect.
Its even possible to imagine stable states that hurt the long-term health of their citizens so much that they die too fast for fertility to compensate, or rather infertility rates rise until they are sub replacement. Since its easy to import new workers (who may or may not be citizens). The obvious example of this seems to be places where the state relied on the slave owning class and the nature of the work produced by the slaves was so demanding it required constant new imports to maintain populations. A hypothetical (or so I hope) example would be a state using dietary and industrial regulations to ensure that the population as a whole was more docile than average due to hormonal and developmental changes while suffering greater infertility. The slow bleeding of citizens seem easy to replace with hard working first generation immigrants who might not be motivated to cause a fuss over any faults in the system because the system is overall much better than the one they came from.
I’m pretty sure public choice theory does not adopt the intentional stance with regards to institutions, and so does not assume that they have interests.
Well, there’s the obvious (though obvious != effective, of course) solution of making it even harder to get hired by a company that does work or the government after leaving a government job, and imposing stricter hiring rules on regulators. This is the idea behind rhetoric about “getting rid of the revolving door.”
Well, there’s the obvious (though obvious != effective, of course) solution of making it even harder to get hired by a company that does work or the government after leaving a government job, and imposing stricter hiring rules on regulators. This is the idea behind rhetoric about “getting rid of the revolving door.”
Such a policy would require regulators to enforce, who would themselves be subject to regulatory capture.
The problem of regulatory capture has very little to do with regulatory-body agents and more to do with the governing body’s rules being set by the groups with the greatest interest in them: the groups governed.
“Regulatory capture” describes a state of affairs. If it just meant the basic incentives common to all regulation ever, it would be a useless term. And it causes harm not based on the basic incentives just sitting there, but based on a specific state of affairs existing. To prevent the harm, therefore, anything will do as long as it stops a harmful state of affairs from happening.
The thing is, there are methods of establishing regulatory bodies that do not create a governing body beholden to the entities regulated. Consider the Sierra Club, for example; they regulate environmental impact but don’t answer to the corporate interests they oversee/certify, but instead to their shareholders/members directly.
Consider the Sierra Club, for example; they regulate environmental impact but don’t answer to the corporate interests they oversee/certify, but instead to their shareholders/members directly.
Remember that time someone gave the Sierra Club a bunch of money, explicitly so they would drop opposition to immigration from their platform, and they did?
Nope, they didn’t. The Sierra Club never, ever supported immigration restriction; the one time it came up on the ballot, it was voted down by a ratio of 3:2. (By, yes, the Club members in an election, not the Board of Directors.) Election results here.
From 1989 to 1996 the position was that immigration should be “stabilized”- i.e. reduced to the level where the entire US’s population does not grow. In 1996 the position was changed to neutrality; from 1998 to the present the club has been split on whether or not to oppose immigration (with the majority favoring neutrality).
I assume that any result that close was probably susceptible to being determined by who controlled the wording of the ballot question and the use of official resources in campaigning.
Apparently A was put on the ballot by gathering signatures, and then B was put on with wording designed to counter to it. Apparently the organization’s leadership largely supported B. Those are great advantages for B, and it didn’t even get more than 3⁄5 of the popular vote.
Who could vote for A instead of B, when B is a vote for “the empowerment and equity of women” and ”...address[ing] the root causes of migration by encouraging sustainability, economic security, health and nutrition, human rights and environmentally responsible consumption”?
If the Sierra Club had the same impact as a national government’s environmental agency, there would probably be lobbyists for the Sierra Club too, and cushy jobs for ex-administrators.
The same argument applies to political leadership under representative democracy—people could just vote for someone better, or, say, vote for someone who will reform the regulators. Political leaders take advantage of things like group identification, imperfect information, monopoly power, and advertising budgets to keep the status quo intact under pretty much all normal circumstances. These options are also available for business leaders.
The same argument applies to political leadership under representative democracy—people could just vote for someone better, or, say, vote for someone who will reform the regulators.
Sure. There’s a few problems with applying the argument that way, though.
Regulatory bodies are not selected democratically.
Candidates (as done in the US) are very significantly vetted by non-democratic processes.
Once elected, until removed from office a vote is non-rescindable.
None of these three items are true of groups in competition with one another.
These options are also available for business leaders.
There’s no such thing as a perfect system anywhere, politically speaking. All we can do is attempt to mitigate the number of blatant problems and then work to maintain the standards of what we end up with. (Mitigate-then-suppress negative elements.)
While business leaders can do that sort of thing, it’s difficult for them to get away with it if there’s rigorous competition and strong disclosure. There are ways to achieve both of those items, but I haven’t mentioned them here because they’re only relevant if and only if we actually agree to investigate libertarian solution-spaces, as opposed to comparing ideal states of varying political agendas.
1) Indirect power over regulators is still power—if the consumers demand it, it will happen.
2) So are businesses. An equivalent in business would be the cost of entering the market that keeps small competitors out—this varies for different sectors, and is most visible in infrastructure-heavy businesses like water companies. Larger companies also get economies of scale that new ones can’t. The overall effect in both politics and business is a status quo bias.
3) This is a good point—I think the problem might be more about the time lags between promise, delivery, and evaluation. Some businesses do weakly exploit similar phenomena, but not nearly like politics. Still, a large private regulator would probably have more problems with this than current businesses. A similar, though weaker, effect might also be achieved in businesses by evading accurate evaluation, either through not releasing information, selective release of information, or just plain advertising.
I’m willing to discuss theoretical libertarian solutions, but if we just compare current government and business without solutions, I don’t see much reason why private regulators would be less corruptible than government ones. The remaining libertarian position is then that solutions to these problems would be much more effective for businesses than for governments.
1) Indirect power over regulators is still power—if the consumers demand it, it will happen.
The question isn’t of capacity but of magnitude of signal.
2) So are businesses. An equivalent in business would be the cost of entering the market that keeps small competitors out
Are you aware of just how many different regulations there are which create the effect of mitigating the presence of smaller businesses? Just one example; each and every employee costs a small business (under 50 people) something like 25-40% more (in the US) than it does a large corporation (over 1,000) in regulatory-burden-per-employee. There are also a number of diseconomies of scale which our current government scheme protects larger corporations from. Also, it’s largely a myth that economies of scale can only be achieved by larger corporations. Smaller businesses that focus on providing a widely-distributed product to a number of companies can create the same effect. Case in point: managed systems administration services firms. Why pay your own full-time employee when you can pay a company to provide a suite of employees who each specialize in their field, and only pay for the hours you really use (and thus get greater expertise at a quarter the cost?) And then there’s payroll companies; all they do is provide payroll. Again, economies of scale in the hands of smaller businesses.
A similar, though weaker, effect might also be achieved in businesses by evading accurate evaluation, either through not releasing information, selective release of information, or just plain advertising.
Which is why I included “strong disclosure” as a necessary element for a libertarian society. Personally I would see this done by a social campaign of vigorously restoring the belief in and appreciation for investigative journalism, and further by widely broadening the scope, scale, and definition of fraud-type crimes. (I would in fact make it a penalizable act to simply make a mistaken statement in a public venue, though I’d make it at most a misdemeanor whose penalty would be somehow tied to the monetary damages resultant to the statement, with a minimum of something like $20.00. This would breed a culture of desire for truthfulness. You can’t get around half-lies and the like—but you can impede them.)
but if we just compare current government and business without solutions,
Well, I’ll admit to having worded that poorly. I mainly meant that I didn’t want to go too far down that rabbit hole. :)
The remaining libertarian position is then that solutions to these problems would be much more effective for businesses than for governments.
People always tie libertarian solutions to businesses. Even libertarians do this. I don’t think that’s a sufficiently valid/viable solutionspace. Nonprofits, voluntary social collectives, and the like all deserve their place. For example; I think it would be interesting to see a “single-payer” system (for healthcare provision) which actually was four or five such systems initially, with people permitted to create their own if they so chose ‘later on down the line’. -- but with one caveat: short of creating your own system, once you contract with one it’s for life as term of the contract, barring violation of contract by the payer. I would love to see a social order where competing government structures could mutually overlap the same geography. (There are limits to this; property rights have to be monolithic since there’s only one 777 S 7th Avenue, Phoenix, Arizona.)
Yes, but the left (and the much of the right) doesn’t usually have much foresight about this happening. They can think through the negative consequences of deregulation, but typically not regulation or re-regulation. If I wasn’t clear, that’s what I was talking about. They always seem to propose another regulatory solution to regulatory capture without thinking about how this solution will keep from being captured.
(Also, I’m talking about the general public, not the political intellectuals who are typically much more sophisticated.)
I haven’t actually heard the term “regulatory capture” before, but the concept of big businesses owning regulators is a pretty universal rallying cry of the left.
“Regulatory capture” does not mean “the concept of big businesses owning regulators”. It is, rather, a specific proposed explanation for why this takes place, and why it is likely to take place: namely, people working for and invested in a regulated industry have a greater interest in the outcome of regulation than other citizens do, and therefore are likely to expend more effort to influence the regulators.
Notably, regulatory capture does not explain “big business owning regulators” in terms of the members of either big business or regulatory agencies being unusually selfish, evil, or corrupt individuals. It predicts that you can’t fix regulation by installing more honest or virtuous regulators, because the problem is structural rather than personal.
Here’s an example:
I, as a human citizen who likes breathing air without radioactive soot in it, have an interest in shutting down coal-fired power plants. However, the magnitude of my interest in shutting them down is much less than the magnitude of a coal plant employee (especially a well-paid one who is also a shareholder!) in keeping that plant running. Coal soot slightly increases my chance of lung cancer … but shutting down coal plants puts those people out of a job, which is much worse for them than the delta in lung cancer probability is for me. Therefore, any given “coal person” can be expected to spend much more effort on influencing regulators than I will. And if influence is proportional to effort, this means the EPA will tend to favor the views of the coal people and not my views.
However, that said, regulatory capture is part of a broader theory in political economy called public choice theory. And public choice theory has been criticized as not being very predictive; of not having very much in the way of empirical success. Beware the mind-killers, especially when they agree with you!
http://en.wikipedia.org/wiki/Regulatory_capture
http://en.wikipedia.org/wiki/Public_choice_theory#Criticism
That’s not how I was using the term. I was using it as a label for a fact—that over time, the industry being regulated by an agency tends to eventually take over that agency. Public choice economics, whatever it’s limitations, is trying to explain this fact. Note that my usage is consistent with wikipedia (link in parent and grandparent):
(emphasis mine)
It usually goes without saying, but we assume for such examples that the aggregate harm done over all parties is higher than the aggregate good.
The problem here is that the expected utility of acting against coal plants is too small to be worth doing at all. That is, once we solve microtransactions (in practice, rather than in theory), this problem may be much more tractable.
The problem here is that the only institution that does have an interest in the long-term health of the entire population and does have the ability to overrule the interests of the coal plant owners—the state—is crippled under a liberal democracy because its members only have an interest in being re-elected.
Actually I think the state’s interest in the long-term health of the population isn’t really an enduring feature, its more of a plausibly useful strategy.
A state can reasonably defined as a local monopolist of violence, generally speaking its long term interest is basically to maintain that monopoly. There are imaginable scenarios where this involves hurting the long-term health of its entire population if say the result makes the population more docile or if they improve rent extraction that the state needs to maintain its monopoly ect.
Its even possible to imagine stable states that hurt the long-term health of their citizens so much that they die too fast for fertility to compensate, or rather infertility rates rise until they are sub replacement. Since its easy to import new workers (who may or may not be citizens). The obvious example of this seems to be places where the state relied on the slave owning class and the nature of the work produced by the slaves was so demanding it required constant new imports to maintain populations. A hypothetical (or so I hope) example would be a state using dietary and industrial regulations to ensure that the population as a whole was more docile than average due to hormonal and developmental changes while suffering greater infertility. The slow bleeding of citizens seem easy to replace with hard working first generation immigrants who might not be motivated to cause a fuss over any faults in the system because the system is overall much better than the one they came from.
I’m pretty sure public choice theory does not adopt the intentional stance with regards to institutions, and so does not assume that they have interests.
And yet I very rarely see progressives or socialists offer up any solution to that other than expanding the power of the regulators.
Well, there’s the obvious (though obvious != effective, of course) solution of making it even harder to get hired by a company that does work or the government after leaving a government job, and imposing stricter hiring rules on regulators. This is the idea behind rhetoric about “getting rid of the revolving door.”
Such a policy would require regulators to enforce, who would themselves be subject to regulatory capture.
The problem of regulatory capture has very little to do with regulatory-body agents and more to do with the governing body’s rules being set by the groups with the greatest interest in them: the groups governed.
“Regulatory capture” describes a state of affairs. If it just meant the basic incentives common to all regulation ever, it would be a useless term. And it causes harm not based on the basic incentives just sitting there, but based on a specific state of affairs existing. To prevent the harm, therefore, anything will do as long as it stops a harmful state of affairs from happening.
The thing is, there are methods of establishing regulatory bodies that do not create a governing body beholden to the entities regulated. Consider the Sierra Club, for example; they regulate environmental impact but don’t answer to the corporate interests they oversee/certify, but instead to their shareholders/members directly.
Remember that time someone gave the Sierra Club a bunch of money, explicitly so they would drop opposition to immigration from their platform, and they did?
Nope, they didn’t. The Sierra Club never, ever supported immigration restriction; the one time it came up on the ballot, it was voted down by a ratio of 3:2. (By, yes, the Club members in an election, not the Board of Directors.) Election results here.
From 1989 to 1996 the position was that immigration should be “stabilized”- i.e. reduced to the level where the entire US’s population does not grow. In 1996 the position was changed to neutrality; from 1998 to the present the club has been split on whether or not to oppose immigration (with the majority favoring neutrality).
I assume that any result that close was probably susceptible to being determined by who controlled the wording of the ballot question and the use of official resources in campaigning.
Apparently A was put on the ballot by gathering signatures, and then B was put on with wording designed to counter to it. Apparently the organization’s leadership largely supported B. Those are great advantages for B, and it didn’t even get more than 3⁄5 of the popular vote.
Who could vote for A instead of B, when B is a vote for “the empowerment and equity of women” and ”...address[ing] the root causes of migration by encouraging sustainability, economic security, health and nutrition, human rights and environmentally responsible consumption”?
Applause, applause.
Here
If the Sierra Club had the same impact as a national government’s environmental agency, there would probably be lobbyists for the Sierra Club too, and cushy jobs for ex-administrators.
Unlike a centralized agency if the Sierra Club fell to that sort of behavior its membership base would move on to other groups.
The same argument applies to political leadership under representative democracy—people could just vote for someone better, or, say, vote for someone who will reform the regulators. Political leaders take advantage of things like group identification, imperfect information, monopoly power, and advertising budgets to keep the status quo intact under pretty much all normal circumstances. These options are also available for business leaders.
Sure. There’s a few problems with applying the argument that way, though.
Regulatory bodies are not selected democratically.
Candidates (as done in the US) are very significantly vetted by non-democratic processes.
Once elected, until removed from office a vote is non-rescindable.
None of these three items are true of groups in competition with one another.
There’s no such thing as a perfect system anywhere, politically speaking. All we can do is attempt to mitigate the number of blatant problems and then work to maintain the standards of what we end up with. (Mitigate-then-suppress negative elements.)
While business leaders can do that sort of thing, it’s difficult for them to get away with it if there’s rigorous competition and strong disclosure. There are ways to achieve both of those items, but I haven’t mentioned them here because they’re only relevant if and only if we actually agree to investigate libertarian solution-spaces, as opposed to comparing ideal states of varying political agendas.
1) Indirect power over regulators is still power—if the consumers demand it, it will happen.
2) So are businesses. An equivalent in business would be the cost of entering the market that keeps small competitors out—this varies for different sectors, and is most visible in infrastructure-heavy businesses like water companies. Larger companies also get economies of scale that new ones can’t. The overall effect in both politics and business is a status quo bias.
3) This is a good point—I think the problem might be more about the time lags between promise, delivery, and evaluation. Some businesses do weakly exploit similar phenomena, but not nearly like politics. Still, a large private regulator would probably have more problems with this than current businesses. A similar, though weaker, effect might also be achieved in businesses by evading accurate evaluation, either through not releasing information, selective release of information, or just plain advertising.
I’m willing to discuss theoretical libertarian solutions, but if we just compare current government and business without solutions, I don’t see much reason why private regulators would be less corruptible than government ones. The remaining libertarian position is then that solutions to these problems would be much more effective for businesses than for governments.
The question isn’t of capacity but of magnitude of signal.
Are you aware of just how many different regulations there are which create the effect of mitigating the presence of smaller businesses? Just one example; each and every employee costs a small business (under 50 people) something like 25-40% more (in the US) than it does a large corporation (over 1,000) in regulatory-burden-per-employee. There are also a number of diseconomies of scale which our current government scheme protects larger corporations from. Also, it’s largely a myth that economies of scale can only be achieved by larger corporations. Smaller businesses that focus on providing a widely-distributed product to a number of companies can create the same effect. Case in point: managed systems administration services firms. Why pay your own full-time employee when you can pay a company to provide a suite of employees who each specialize in their field, and only pay for the hours you really use (and thus get greater expertise at a quarter the cost?) And then there’s payroll companies; all they do is provide payroll. Again, economies of scale in the hands of smaller businesses.
Which is why I included “strong disclosure” as a necessary element for a libertarian society. Personally I would see this done by a social campaign of vigorously restoring the belief in and appreciation for investigative journalism, and further by widely broadening the scope, scale, and definition of fraud-type crimes. (I would in fact make it a penalizable act to simply make a mistaken statement in a public venue, though I’d make it at most a misdemeanor whose penalty would be somehow tied to the monetary damages resultant to the statement, with a minimum of something like $20.00. This would breed a culture of desire for truthfulness. You can’t get around half-lies and the like—but you can impede them.)
Well, I’ll admit to having worded that poorly. I mainly meant that I didn’t want to go too far down that rabbit hole. :)
People always tie libertarian solutions to businesses. Even libertarians do this. I don’t think that’s a sufficiently valid/viable solutionspace. Nonprofits, voluntary social collectives, and the like all deserve their place. For example; I think it would be interesting to see a “single-payer” system (for healthcare provision) which actually was four or five such systems initially, with people permitted to create their own if they so chose ‘later on down the line’. -- but with one caveat: short of creating your own system, once you contract with one it’s for life as term of the contract, barring violation of contract by the payer. I would love to see a social order where competing government structures could mutually overlap the same geography. (There are limits to this; property rights have to be monolithic since there’s only one 777 S 7th Avenue, Phoenix, Arizona.)
Yes, but the left (and the much of the right) doesn’t usually have much foresight about this happening. They can think through the negative consequences of deregulation, but typically not regulation or re-regulation. If I wasn’t clear, that’s what I was talking about. They always seem to propose another regulatory solution to regulatory capture without thinking about how this solution will keep from being captured.
(Also, I’m talking about the general public, not the political intellectuals who are typically much more sophisticated.)