Economic Regulation.

Prof. Bourbaki, TEN diagram, 2015 (derived from Callon et al., 1992)

 

The state – the machinery and power of the state – is the potential resource or threat to every industry in the society. With its political power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries. That political juggernaut, the petroleum industry, is an immense consumer of political benefits, and simultaneously the underwriters of marine insurance have their more modest repast. The central tasks of the theory of economic regulation are to explain who will receive the benefits or burdens of regulation, what form regulation will take, and the effects of regulation upon the allocation of resources. 

Regulation may be actively sought by an industry, or it may be thrust upon it. A central thesis of this paper is that, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit. There are regulations whose net effects upon the regulated industry are undeniably onerous ; a simple example is the differentially heavy taxation of the industry’s product (whiskey, playing cards). These onerous regulations, however, are exceptional and can be explained by the same theory that explains beneficial (we may call it « acquired ») regulation. 

Two main alternative views of the regulation of industry are widely held. The first is that regulation is instituted primarily for the protection and benefit of the public at large or some large subclass of the public. In this view, the regulations which injure the public – as when the oil import quotas increase teh cost of petroleum products to America by $5 billion or more a year – are costs of some social goal (here, national defense) or, orcassionaly, perversions of the regulatory philosophy. The second view is essentially that the prolitical process defies rational explanation : « politics’ is an imponderable, a constantly and unpredictably shifting mixture of forces of the most diverse nature, comprehending acts of great moral virtue (the emancipation of slaves) and the most vulgar venality (the congressman feathering his own nest). 

Why does not the powerful industry which obtained this expensive program instead choose direct cash subsidies from the public treasury ? The « protection of the public » theory of regulation must say that the choice of import quotas is dictated by the concern of the federal government for an adequate domestic supply of petroleum in the event of war – a remark calculated to elicit uproarious laughter of the Petroleum Club. Such laughter aside, if national defense were the goal of the quotas, a tariff would be a more economical instrument of policy : it would retain the profits of exclusion for the treasury. The non-rationalist view would explain the policy by the inability of consumers to measure the cost to them of the import quotas, and hence their willingness to pay $5 billion in higher prices rather than $2,5 billion in cash that would be equally attractive to the industry. Our profit-maximizing theory says that the explanation lies in a different direction : the present members of the refining industries would have to share a cash subsidy with all new entrants into the refining industry. Only when the elasticity of supply of an industry is small will the industry prefer a cash subsidy over entry or output. 

This question, why does an industry sollicit the coercive powers of the state rather than its cash, is offered only to illustrate the approach of the present paper. We assume that political systems are rationally devised and rationally employed, which is to say that they are appropriate instruments for the fulfillment of desires of members of the society. This is not to say that the state will serve any person’s concept of the public interest : indeed the problem of regulation is the problem of discovering when and why an industry (or other group of like-minded people) is able to use the state for its purposes, or is singled out by the state to be used for alien purposes. 

(…) 

The idealistic view of public regulation is deeply imbedded in professional economic thought. So many economists, for example, have denounced the ICC for its pro-railroad policies that this has become a cliché of the literature. This criticism seems to me exactly as appropriate as a criticism of the Great Atlantic and Pacific Tea Company for selling groceries, or as a criticism of a politician for currying popular support. The fundamental vice of such criticism is that it misdirects attention : it suggests that the way to get an ICC which is not subervient to the carriers is to preach to the commissioners or to the people who appoint the commissioners. The only way to get a different commission would be to change the political support for the Commission, and reward commissioners on a basis unrelated to their services to the carriers. Until the basic logic if political life is developed, reformers will be ill-equipped to use the state for their reforms, and victims of the pervasive use of the state’s support of special groups will be helpless to protect themselves. Economists should quickly establish the license to practice on the rational theory of political behavior. 

George J. Stigler, The Theory of Economic Regulation in Bell Journal of Economics, vol.2, iss.1, 1971, p.3-4 & 17-18. 

Merci à S.H.