Why is Regulatory Capture Important to Understand?

Most people agree it’s imperative for any entity initiating harm to face consequences. The disagreements tend to be about how.

Government regulation is currently the most used and acceptable method for attempting to hold businesses accountable. Unfortunately, this method, as we’ll talk about below, is highly susceptible to corruption. “Here, Mr/Ms. Politician, we’ve written regulation for our industry for you to enact in order to show your constituents you care about them. Also, here are some campaign contributions and you can count on more of our support for the next election.”

By way of clearing up two myths, we’ll gain a deeper understanding of regulatory capture:

(1) We do not have free market Capitalism in the United States. We have what some call Corporatism and others call Crony Capitalism.

(2) “Corporation” is a government-protected entity, so: removing government or removing government influence on the market means firms no longer have the following government-sanctioned benefits:

(a) Limited liability.

(b) Regulatory capture (where corporations write or influence regulation through bribery lobbying and revolving doors for CEOs/gov officials – to favor their company and make it hard for competitors and newcomers to enter the same industry). More on regulatory capture.

(c) Favoritism via government created laws.

(d) Favoritism via government granted contracts.

(e) Favoritism via government granted patents and copyrights.

(f) Tax breaks.

(g) Bailouts.

What about consumer protection?

Replace the “need” for government watchdogs. Think peer-to-peer review/reputation apps like Yelp and ConsumerReports.com, as well as how many others are including ratings in their apps, like AirB&B and Uber.

If you are looking for a restaurant, you may check Zagats, the Michelin guide, or a trusted newspaper restaurant reviewer. Who do you go to for movie reviews? For a hotel, perhaps you look on Tripadvisor, Oyster, AAA, or Fodors. If you are thinking of buying a car or appliance, you check Consumer Reports or web search for “Best 4K TV 2020” and you will see hundreds or thousands of reviews by independent entities. And there are many more out there.

Government regulations end up giving consumers the illusion of safety (Madoff is registered with the SEC so how bad could it be; this restaurant is inspected by the board of health so how bad could it be?) but sadly, the regulators often fail, because they have little or no competition or incentive. The more government enacts regulations, the more it crowds out entrepreneurs who might profit by providing useful and honest information to consumers. So instead of founding a Consumer Reports for health care or health insurance, smart people end up deciding to do something else with their time. Consumers don’t have to be experts; they just have to be able to consult an expert or aggregate their own experiences with those of others.