My husband and I met in a course about the economic effects of government regulation, so it has been a subject near and dear to our hearts. We learned about regulatory capture, or “producer protection” as our economics professor termed it. Every year our professor reread Gabriel Kolko’s book Railroads and Regulation to refresh his thoughts on this matter. Kolko, who taught at our university, was a socialist. Our professor was a Milton Friedmanite, yet he and Kolko found common ground in the evidence that producers act in their own best interests by aligning themselves with government regulators. It’s not such a stretch for the public to understand the motivation, particularly when it comes to railway barons. What is hard for us to swallow is that government agencies have willingly allowed themselves to be captured when it comes to regulatory approval of drugs. See my previous blog post on the FDA and Merck.
Government regulation of railways, according to Kolko, was exactly what the railways wanted. I am reminded of the Uncle Remus story where Brer Rabbit pleads repeatedly with Brer Fox that he can kill him, thrash him, do whatever, but please, please, please do not to throw him in the pawpaw patch. Naturally, Brer Fox is tricked by thinking that doing what Brer Rabbit is pleading not to do will really “fix” him. He throws him in. Brer Rabbit reminds Brer Fox as he scampers away that he was born and bred in the pawpaw patch and the pawpaw patch is exactly where he wanted to be.
More about regulatory capture below and at Wikipedia.
Regulatory capture occurs when a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.
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. Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at “capturing” influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.
Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. Often cited articles include Bernstein (1955), Huntington (1952), Laffont & Tirole (1991), and Levine & Forrence (1990). The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers.
The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever.