“Regulatory capture” & perpetual costs of failures of political governance

“If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it.”
Woodrow Wilson (1913)

While economists credit George Stigler & Richard Posner with the concept of “regulatory capture” that explains how government agencies fail to serve the public interest, President Wilson made a clear statement of the problem much earlier.

The theory of regulatory capture is an answer to the question “who guards the guardians” is answered by the observation that the “gamekeeper turns poacher”. As an example of “regulatory failure”, it is one instance where government intervention leads to greater economic costs than benefits.

In particular, it describes an inherent tendency for regulatory agencies to be dominated by & act in the interests of the industries they regulate. The most vivid recent example is the coziness of Mineral Management Service of the US federal government with offshore oil-drillers like BP. As horrible as the consequences of the oil spills from the Deepwater Horizon might prove to be, its impact will be pale in comparison to monetary & environmental damage of government policies.

Much ire is being directed at BP or the oil-thirsty habits of US citizens & industry or indifferent regulators that might have been appointed by or employed by a particular political party.

However, it is a matter of incentives with both bureaucrats & politicians gaining personally from promoting the interests of powerful or rich individuals or industry groups. As such, political maneuvering allows pressure groups to divert resources that promote their own private interests.

One reason regulatory agencies act in the interests of the industries they regulate is that bureaucrats can leave government service & work for the firms they once had to oversee.

Woodrow Wilson clearly saw that big business loves big government & that big government loves big business.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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