Regulation Without Romance

Public choice economics is not broadly understood, but we all need to reckon with it and teach its lessons time and again.

Public choice then came along and provided analyses of the behavior of persons acting politically, whether voters, politicians, or bureaucrats. These analyses exposed the essentially false comparisons that were then informing so much of both scientific and public opinion. In a very real sense, public choice became a set of theories of governmental failures, as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or, as I put it in the title of a lecture in Vienna in 1978, public choice may be summarised by the three-word description, ‘politics without romance.’
—James Buchanan

The public interest theory of regulation offers a lovely fairy tale: wise functionaries, armed with clipboards and rectitude, stand vigilant against corporate predators' rapacious appetites.

Consider the Food and Drug Administration (FDA), whose mandate is to protect us from tainted pharmaceuticals, or the Environmental Protection Agency (EPA), which ensures that chemical companies don't turn rivers into industrial sewers. This story assumes regulation exists primarily to shield consumers and workers from the harmful machinations of corporate profiteers—a premise so charmingly naive it deserves to be bronzed and displayed in the Museum of Political Economy.

Such comforting stories have been systematically demolished. That’s one reason Nancy MacLean wrote her abhorrent polemic, Democracy in Chains, after Nobel laureate James Buchanan’s death. The idea was to villainize the man but ignore his ideas. Purveyors of public choice economics commit the unforgivable sin of treating regulators as mere mortals rather than secular saints. Heretics such as Buchanan and writing partner Gordon Tullock dared to explain that civil servants are no angels, and like the rest of our species, are motivated by self-interest.

The term “public choice” can be confusing, but it is meant to contrast with private actors' choices. In short, choices made by public-sector actors and voters are influenced by favor seekers and greed as much as the choices of private actors. With public choice theory, we assume a heavy dose of self-interest along with any idealism.

Public choice economists champion what's known as “capture theory”—the idea that government regulations too often serve the firms they were set up to constrain. This can happen in conscious and unconscious ways.

Take the taxi medallion system that once strangled New York City transportation. Justified initially as protecting passengers from unsafe drivers and predatory pricing, it actually created a cartel so profitable that medallions (licenses) traded for over a million dollars each. The regulatory apparatus designed to protect consumers became the enforcement mechanism for an oligopoly that made taxi owners rich while leaving many riders stranded due to extractive rents.

Only the arrival of Uber and Lyft—operating initially in regulatory gray areas—exposed this decades-long scheme.

Competing firms, left to their own devices, may sometimes collude like gentlemen's club members to divide territory or fix prices over brandy and cigars. Yet they are typically prevented from achieving this cozy arrangement by a far more powerful force: the temptation to cheat on their co-conspirators. This is where capture theory reveals its dark genius. Rather than rely on honor among thieves, firms find they can outsource cartel enforcement to government officials.

Durable social regulation evolves when it is demanded by both of two distinctly different groups. 'Baptists' point to the moral high ground and give vital and vocal endorsement of laudable public benefits promised by a desired regulation. Baptists flourish when their moral message forms a visible foundation for political action. 'Bootleggers' are much less visible but no less vital. Bootleggers, who expect to profit from the very regulatory restrictions desired by Baptists, grease the political machinery with some of their expected proceeds. They are simply in it for the money.
—Bruce Yandle

Consider how established airlines once used the Civil Aeronautics Board not to ensure passenger safety, but to prevent upstart competitors from offering cheaper fares. The regulatory machinery, ostensibly protecting travelers from dangerous or unreliable service, functioned as a government-sanctioned price-fixing scheme that would have made John D. Rockefeller weep with envy. When airline deregulation arrived in 1978, fares plummeted and routes multiplied—proving that the previous decades of "consumer protection" had protected profit margins.

Even smaller firms pursue licensing requirements with the fervor of medieval guilds seeking royal charters. Occupational licensing—from hair braiding to flower arranging—has exploded across American professions, not because consumers demanded protection from rogue cosmetologists, but because existing practitioners discovered they could use state power to hobble their competition.

The result? Higher prices, reduced innovation, and barriers to entry.

The information asymmetries between regulators and the regulated create a perverse relationship. Regulatory authorities, despite impressive titles, invariably know less about an industry than the companies they regulate. They must rely on information provided by the very entities they're supposed to be policing, which is rather like asking bank robbers to design security systems. The firms, naturally, exploit this dependency with seductive skill, gradually convincing their overseers that what's good for the industry is good for America.

The pharmaceutical industry's influence over the FDA exemplifies this dynamic. Massive drug companies fund the clinical trials regulators use to approve their products, employ former FDA officials as consultants, and provide the technical expertise bureaucrats lack. The result is a regulatory process that creates massive barriers while maintaining the fiction of independent oversight.

Massive corporations benefit.

Public choice theorists claim that regulators are not immune to the baser motivations that drive the rest of humanity. Civil servants, despite their noble mission statements, seek personal benefit as much as abstractions like public welfare. This means they have incentives to grow their bureaucratic empires, increase their budgets, and expand their regulatory reach—objectives that align suspiciously well with the interests of the incumbent industries they regulate.

The Environmental Protection Agency, for example, has grown from a modest office into a regulatory behemoth employing thousands of people with advanced degrees and comfortable salaries. Each new environmental *crisis* justifies expanded authority and bigger budgets. Whether these expansions actually improve environmental outcomes becomes secondary to the expansion.

Lobbyists and special interests find remarkably receptive audiences, not because civil servants are corrupt, but because their institutional incentives reward cooperation with well-funded, persistent advocates. For example, a regulator who maintains good relationships with industry representatives finds his career prospects considerably brighter than one who adopts an adversarial stance.

Paging Dr. Gottlieb. Dr. Gottlieb to the pharma trough. Dr. Gottlieb to the pharma trough.

The regulatory process, when viewed through this unsentimental lens, resembles less a noble pursuit of the public good than a complex negotiation among competing interest groups. Firms manipulate regulations to disadvantage competitors, consumers organize to demand lower prices or product changes, and regulators pursue institutional interests in expanded influence and resources. The abstract goals of economic efficiency or internalized externalities—beloved by textbook economists—serve none of these interests, so they rarely become a priority.

Let’s not forget the net neutrality debates that have raged for over a decade. Internet service providers, content companies, and consumer advocates each wrapped their positions in noble rhetoric about innovation and fairness, while pursuing their obvious financial interests.

Big Tech stood to benefit at the expense of Big Cable’s customers.

The uncomfortable truth is that our regulatory apparatus, whatever its original intentions, has evolved into something its founders would barely recognize: a sophisticated system for converting political influence into economic advantage, wrapped in the comforting language of protection.

Understanding these dynamics is the first step toward developing institutions that might actually serve their stated purposes—or at least toward maintaining a healthy skepticism about their efficacy.