Reflections on Regulatory Capture

by Carl Stoll

It seems to me that the late lamented Milton Friedman (and the instigator of the whole meme -- George Stigler) made a mountain out of a molehill when he denounced regulatory capture. His argument is that the very creation of a regulatory body induces a process whereby the regulatory body is captured by the businesses it is supposed to regulate. Thus the theory of regulatory capture serves as a weapon of deregulation. "Don't regulate! It's useless! Before you know it the regulated will become the regulators."

However I oppose to this reasoning the following: If regulatory capture were such a foregone conclusion, then I wonder why the financial bigwigs made such long faces about the prospective appointment of Elizabeth Warren to a position where she was well placed to kick them into shape. It would seem that regulatory capture is by no means an automatic process, a foregone conclusion, but instead relies crucially on which specific people run the regulatory bodies --- are they pimps for the regulated industry or not? And Elizabeth Warren is decidedly no pimp for Wall Street -- this is euphemistically formulated thusly: "She has no industry experience, alas!" ie. she's not part of the old boy network. 

Secondly, the theory of regulatory capture could be generalized to encompass the whole of government -- e.g. there's no point hiring traffic policemen because the drivers will bribe them; there's no point trying to collect taxes because people would evade them, there's no sense establishing mandatory military service because the prospective recruits would dodge the draft. So ultimately the theory of regulatory capture, which presents itself as a practical methodology to avoid onerous regulation, proves to be an argument against government itself. Milton Friedman meets Bakunin.