Regulatory Capture: The Dangers of Friends as Regulators

Table of Contents

Regulatory Capture

What is Regulatory Capture?


Regulatory capture or capture theory refers to the economic theory that proposes how industries or special interests “capture” agencies charged with regulating their actions. Regulatory entities that have come under the influence of the industry they oversee are known as ‘captured agencies.’

If captured, governing personnel end up advocating for the corporations and industries they should be regulating. Market competition and innovation, for example, may fall to the wayside. That equates to higher prices for the same ‘ol goods and services.

The advancement of the interests of few instead of the many has been called ‘client politics.’ This includes pork barrel politics (taxpayer funds being used for public projects that benefit the legislator and their community) and earmarks. Regulatory capture often leads to the prioritization of the 1%’s moneyed interests at the expense of us, the 99%. 

In essence, regulatory capture can allow for industries and major corporations to create artificial barriers to entry, stifle competition, break free markets, and unethically maximize profits through methods such as price fixing.   

The Zero Theft Movement works to eradicate the rigged parts of the U.S. economy in order to allow the ethical parts to thrive. Regulatory capture can have significant consequences, especially if our government’s operating as a corporatocracy. In this article, we will examine how capture theory can explain the widespread and harmful effects of a controlled government.

Types of Regulatory Capture

Two basics forms of regulatory capture exist: 

  • Materialist capture, or financial capture, refers to when the captured regulator acts based on self-interest. Bribery, PAC donations for slush funds, dark money campaign contributions, the desire to maintain government funding, and so on. Materialist capture often involves some degree of corruption.  
  • Non-materialist capture, or cognitive/cultural capture, happens when the regulator begins to think similarly to the regulated industry. This can either happen due to lobbying by the industry or when a former employee of the regulated industry, due to their technical expertise, is appointed to be a regulator. 

It bears mentioning that some academics argue that materialist capture does not count as regulatory capture. That it’s straight corruption or control. Scott Hempling, adjunct professor at Georgetown University Law Center, published an article arguing that “Regulatory capture is characterized by the regulator’s attitude, not the regulated entity’s actions. A regulator is “captured” when he is in a constant state of ‘being persuaded’: persuaded based on a persuader’s identity rather than an argument’s merits.”

Overlap can exist between the two forms, especially when considering what’s known as the revolving door of politics. Wherein regulators/legislators essentially exchange jobs with those who worked in the regulated industry. But the intent behind the regulator’s actions differentiates the two forms of capture.

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The Origins of Capture Theory 

University of Chicago economist and 1982 Nobel Laureate George Stigler first proposed and outlined capture theory in the early 1970s, in his seminal essay “The Theory of Economic Regulation.

Industries and individuals, in essence, stay vigilant, monitoring new policies and regulations in the pipeline that might negatively affect their bottom line. These parties have high-stakes interest in these matters, and will focus their efforts and funds to ensure they achieve a favorable outcome. Naturally, this has led to corporations spending billions of dollars every year on lobbying alone. Stigler found that individuals, even though they might get personally affected by a bill (e.g. funding for the development of clean, reusable energy sources), did not have the interest in and/or the money to influence regulatory bodies. 

In Stigler’s essay, he brings up his famous example of the competition between truck and train transportations in the U.S. during the 1930s. He collected empirical data that strongly suggested that on short transport routes (where trucks proved much faster and efficient than trains) more stringent weight restrictions had been established. Having folded under the political pressure from the wealthy and powerful railroad owners, the regulators had rigged the game against the truck transportation industry. 

Regulation vs. Deregulation

Believe it or not, corporations often want regulations—regulations that benefit them, to be exact. 

For example, Emory University’s Corporate Governance and Accountability Review published an article entitled “Thick as Thieves? Big Pharma Wields its Power with the Help of Government Regulation.” The article discusses how much influence Big Pharma has throughout the health industry and government by virtue of its profits.

“Given its mega-profits, Big Pharma has become known for its ability to wield political and social influence over its stakeholders, including the federal government and its agencies, healthcare systems, insurance firms, medical practitioners and administrators, hospitals, and consumers. Big Pharma has become one of the most profitable industries in the U.S., with 25-30% net margin profits (2016), rivaled largely by accounting, legal, and investment services, along with leasing operations and dentists (in 2017). The industry has so much power that it has actually shaped how Western medicine and its citizens think about their health and well-being. Pharmaceutical companies strategically produce what increases earnings for their shareholders.”

Richard A. Posner, the most cited legal scholar of the 20th century, wrote about railroad regulations, one of the original cases where established industry players favored certain controls: “The railroads supported the enactment of the first Interstate Commere Act, which was designed to prevent railroads from practicing price discrimination, because discrimination was undermining the railroads’ cartels. American Telephone and Telegraph pressed for state regulation of telephone service because it wanted to end competition among telephone companies.”

You can see established tech corporations seeking particular regulations. Or when the financial industry finds regulations too strict, they will lobby hard to get specific restrictions eased. It’s not so simple a matter as regulation or no regulation; corporations (as expected) want regulations that benefit them. The issue regulatory capture raises is, are regulators and legislators protecting free markets and the public interests, or are they helping corporations maintain control?

How Can Regulatory Capture Occur? 

1. Pay to Play, Facetime, and Asymmetric Information

In the current U.S. system, the better-financed political candidate wins 91% of elections. So it shouldn’t come as a surprise that elected officials spend 30-70% of their time in office fundraising (per the good people at RepresentUs). 

To return to Stigler’s essay, he asserts, “Unfortunately virtue does not always command so high a price. If the representative denies ten large industries their special subsidies of money or governmental power, they will dedicate themselves to the election of a more complaisant successor: the stakes are that important […] A representative cannot win or keep office with the support of the sum of those who are opposed to: oil import quotas, farm subsidies, airport subsidies, hospital subsidies…”

These unfortunate realities that lawmakers and corporations often exploit in our current Pay to Play system have, at the very least, allowed lobbyists backed by big money to buy as much facetime with politicians as possible. Some officials have even commodified access, giving meetings to those who can donate big sums of money.

The issue comes in the form of straight-up corruption (purchasing votes, for example) and asymmetric information. In the case of asymmetric information, legislators and regulators do not hear all sides of the argument (maybe they do not care to in the first place), making major decisions based solely on biased data and evidence provided by corporate lobbyists. 

2. Regulatory capture cannot be prevented as the Public Sector Struggles to Keep Up

Often lacking the financial resources of the companies and industries they oversee, regulators often cannot compete in number and quality of personnel. The wealthy and well-connected can hire the best and most-proven lawyers and lobbyists to defend their efforts to break free markets. Furthermore, financial incentives and rewards provide added motivation for those working in the private sector, while regulators risk their chances of reelection by safeguarding the interests of the public. 

Anything for a better bottom line, the extra buck. That’s how many major corporations where corporate crime is not only normalized but also praised.

Potential Examples of Regulatory Capture

Fracking in Pennsylvania

The oil and gas industry has long had an influence in Pennsylvanian politics, often receiving criticism for its revolving door. It wasn’t until early 2020 that the Forty-Third Statewide Investigating Grand Jury decided stricter regulations on ‘fracking,’ a form of unconventional drilling that brought explosive returns, were necessary. The Grand Jury discovered counts of negligence in the government despite the sickness (‘frack rash’) that was occurring as a byproduct of the drilling for shale gas. 

In the executive summary of their report, they state:

“We are aware that unconventional drilling brings significant economic benefits. But if the activity is to be permitted, it still must be regulated appropriately, in ways that prevent reckless harms. Instead, we believe that our government often ignored the costs to the environment and to the health and safety of the citizens of the Commonwealth, in a rush to reap the benefits of this industry.”

With the OPEC embargo in the 70s, much of the oil and gas industry has operated as a cartel. ZTM thinks this is a prime area for economic rigging to occur. Take a deep dive into this economic sector and learn what the public has discovered about this industry.

2008 Financial Crisis and Capture Theory

A tragedy, the 2008 financial crisis ruined many American lives, causing irreparable financial and psychological damage. And because of regulatory capture, bankers managed to get away scot free, with millions lining their bottomless pockets.  

Professor of Law at Georgetown University A.J. Levitin writes:

“…the [Office of the Comptroller of the Currency (OCC)], Office of Thrift Supervision (OTS), and the Fed all saw themselves as advocates for the banking industry, rather than as regulators of the industry. This problem manifested itself in the lead up to the crisis, as the other bank regulators not only fought for lower capital requirements in Basel II, but also refused to get tough with their regulatory charges and enforce predatory lending laws. During the crisis, regulatory capture manifested itself with regulators looking out for their pet institutions…”

The regulators had their roles completely wrong. Here, the catastrophic effects of the revolving door and capture theory manifest in full force. The public suffers while the crony capitalists and corrupt officials skip away on weekend vacations, arm in arm. If anything, the regulators acted as lobbyists with a significant boost in power (considering they could determine the regulations themselves).

Regulatory Capture, does it lead to the economy getting rigged?

Regulatory capture remains a difficult issue that creates troubling conflicts of interest within our government. The public, however, needs big money out of politics completely, otherwise we will continue to have to bear the brunt of unethical money-making practices involved in the rigged economy.

Higher wages, better living conditions, we will get to actually enjoy the trickle down effect of the ever-increasing GDP by eliminating economic rigging. With actual free markets secured, competition will ensure that we get the best services possible for the best prices. 

We could live in such a society, but we need you to help expose the bad actors , who will undoubtedly go to extreme lengths to protect their unethical profits. 

Explore the Problem Hierarchy

We have primers on potential problem areas of the economy. Before you start voting, it’s important you get a basic understanding of the issues at hand, so you can be as helpful as possible to other community members. Take a few minutes and come prepared.

Serve your fellow citizens as a citizen investigator

The success of our movement rests in your hands, the leaders willing to dedicate time to conduct investigations into potentially rigged areas of the economy. Lead the movement and help create an ethical economy. 

Heroism made easy

Twenty minutes! That’s all the time you need to contribute to our effort. Just review a proposal and vote. Our reports will only gain legitimacy and power with your contributions.

Commitment to nonpartisanship

The rigged layer causes all of us to suffer, regardless of our political allegiances. If we wish to eliminate rigged economy theft, we have to set aside our differences and band together against crony capitalists and corrupt officials. 

Beyond Regulatory Capture…

An educated public is an empowered public. 

We regularly publish educational articles on just like this one on regulatory capture. They teach you all about the rigged layer of the economy in short, digestible pieces. 

Standard Disclaimer

The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.   

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.