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Archive for October 31st, 2007

Deep Capture – Part I

Posted by J on October 31, 2007


In 2003, Situationist Contributor David Yosifon and I published an article (“The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture,” downloadable here) that introduced to the law-review literature many of the insights and arguments on which this blog is premised and upon which an emerging mountain of legal scholarship is based.

Since The Situationist came online in January, I have been asked numerous times by readers who are unfamiliar with that body of work just what is meant by the term “deep capture.” This series of posts is my attempt to answer that question by relying on existing work. Although “deep capture” has been defined and illustrated in several more recent articles, I thought it was fitting to excerpt portions of “The Situation” to provide the original description and definition of the concept as well as some of the basic evidence that David Yosifon and I first offered.

This post begins with the concept of “shallow capture,” which will provide a starting point from which subsequent posts in this series can build and draw contrasts. (Situationist artist Marc Scheff is providing the remarkable images at the top of each post in this series.)

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“One cannot mention regulatory agencies without adding the observation that, of course, such agencies are likely to be ‘captured’ by the interests they are supposed to regulate. To suggest that matters are any different from this is to mark oneself as hopelessly naïve, or even disingenuous.”

–James Q. Wilson

The basic story of regulatory capture has become so well known–indeed, such a truism–that we think it appropriate to begin as Steven Croley began his recent retelling: “You’ve heard all of this before.”

Because no one wants us to rehearse the details yet again, and because we also value efficiency, we will base our introductory overview on the brief rendition offered by an extremely credible source. In his Memoirs of an Unregulated Economist, George Stigler describes how he came to the work central to his winning the Nobel Prize in Economics. According to Stigler, prior to his work, academic economists writing about state policies commonly offered their advice on “what [the government] should do, or refrain from doing.” They published their normative conclusions naively believing that governments, charged with enhancing the public welfare, would readily heed sound prescriptions. But after “two centuries” of being disregarded on issues like free trade, Stigler and a few other economists came to believe that government officials were not very interested in the “truths” of economics. It was time to “undertake the different and more fundamental task of explaining what states actually do, of discovering what are the forces that determine which policies will actually be adopted by a government.”

Stigler began that undertaking (much of it with co-author Claire Friedland) by examining “the actual effects of economic regulations.” By understanding the effects of regulation, he believed he could infer something about the forces that created the regulation. Through empirical testing unlike any that had previously been conducted, he discovered that several prominent regulatory policies of the 1960s–including the regulation of electricity rates and the SEC’s “elaborate review of the prospectuses for new security issues”–were not having the effects or yielding the benefits that ostensibly motivated them. To be sure, the regulations were creating benefits. The problem was that those benefits were accruing to the wrong recipients. For instance, the beneficiaries of electricity-rate regulation were large commercial customers instead of con-sumer households. Additionally, the effect of the SEC reviews was to inhibit competitionStigler Memoirs and raise the public’s costs.

From these and similar findings, the now-dominant conception of regulation emerged: the “general theory of the behavior of governments” is that “groups possessing political influence use the political process effectively to increase their incomes.” According to the “economics of regulation,” as this approach was initially dubbed, causal relationships and the direction of influences are the reverse of what had been supposed. The seemingly autonomous administrative agency is, upon inspection, captured, and the seemingly constrained industries are liberated and enriched. Consequently, the industry tail wags the regulatory dog. As Stigler laments, “no matter how disinterested the goal of public policy, the policy is bent to help politically influential groups at the cost of the less influential.” And the problem is not just that for every winner, there are losers–the real kicker is that the winners often win less than the losers lose. Regulation is, in a word, inefficient.

The finding that industries tend to benefit from regulation led to another question for Stigler: “Why are some industries and activities regulated by the state, and not others?” One of the most significant developments that emerged from this dismal perspective on regulation was a set of insights regarding the sources of political influence–or, as we would put it, power. As Stigler recounts, economists could explain, for example:

[W]hy smaller groups do better than large in the political arena. [First, t]he smaller group is more cohesive: It is easier to organize the small group, collect funds for lobbying, and keep it informed. There are only about 70,000 beekeepers concentrated in a few western states (yes, there is a federal program for them) but millions of occasional consumers of honey. And secondly, it pays each member of a small group to invest resources in politics, because the payoff will be larger. Each beekeeper gets hundreds of times as much out of the federal program as each taxpayer loses.

Such insights regarding how groups of individuals could effectively coordinate their behavior in pursuit of common interests were more the product of some of Stigler’s contemporaries than of Stigler himself. But before leaving our discussion of Stigler, a few observations are in order regarding his important contributions.

Look carefully at the structure of Stigler’s work–at least as we have summarized it. Stigler was challenging a long-held conventional wisdom that governments and their agencies create beneficial regulations. Underlying that conventional wisdom was the supposition that regulatory processes were fair and that regulators were dispositionally motivated to serve the public interest. Stigler’s challenge to those suppositions was initiated by his discovery that, in fact, a sanguine view of our regulatory institutions had no empirical basis and that, if anything, those institutions’ actions were counterproductive to their espoused goals. To explain the phenomenon, Stigler looked to the outside influences on regulators and described how different groups were able to exert power over the regulators. Thus, Stigler contested the reassuring conventional wisdom that our institutions are neutral and well-functioning and rejected the idea that the stated goals of regulators are controlling. He did so by downplaying dispositional factors and emphasizing situational factors. By taking situation seriously, he raised the issue of power inasmuch as situations are largely defined by allocations and dynamics of power. As Stigler and many others writing in this area have taken for granted (without ever actually using the term), power is central.

In this way, Stigler’s work on the economics of regulation provides a paradigmatic example of power economics. We believe that [our thesis] finds confirmation in the fact that Stigler and other economists stopped there–[it helps explain] why, in other words, neoclassical economics has not evolved into to power economics and why capture theory has not evolved into deep capture theory.

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Part II in this series  (available here) will describe an historical example of “deep capture.”  For a collection of previous Situationist posts discussing or illustrating deep capture, click here.

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