What Does 'Regulatory Capture' Mean to Business and the Economy?

James Ledbetter:

What Does 'Regulatory Capture' Mean to Business and the Economy?: In recent months, the idea of "regulatory capture" ... has been enjoying its star turn. ... Earlier this year, the Government Accountability Office revealed that it had (at the urging of two members of Congress) begun investigating whether the New York office of the Federal Reserve is too close to the financial institutions it is supposed to regulate. This is, apparently, the first GAO investigation of its kind. ...

For all the ubiquity of charges of capture, however, it can be difficult to grasp exactly what capture is, or how serious a social and economic problem it represents.

As it is commonly used, "capture" seems malleable enough to fit into the worldviews of both the left (evil corporations outfox, outspend, and manipulate regulators) and the right (state regulation is harmful to businesses). And yet, historically, capture theory embodies a more collusive view of the relationship between government and enterprise. Classic capturists argue that ... businesses accept regulations because they ultimately help improve profits. ...

Intuitively, though, we know that not all regulation benefits companies. ...

Some scholars are urging that we rethink the entire idea. A 2013 essay by William Novak, a law professor at the University of Michigan, ... accepts that regulatory capture exists, but he offers two refinements... One is that capture may be more likely among "vertical" regulators--those who enforce rules within a single industry, such as trucking--than among "horizontal" regulators, those whose mandates apply broadly across society, such as the Environmental Protection Agency or the Occupational Safety and Health Administration.

The second is that ... it is far from proven that regulators are any more prone to it than other institutions. The financial crisis ... was a regulatory failure, to be sure. But, as Novak said in an interview, "entire sectors of the government became enamored with financial interests, including Congress."

And thus, if we intend to tackle the problem of capture, we need more precise definitions and measurements. There is a risk of either weakening regulations that genuinely protect the public, or allowing some incumbents to continue their unearned free ride and squash disrupters. ...