Regulatory capture – definition and meaning

Regulatory capture occurs when a government’s regulatory agency, which was created in the public interest, ends up advancing the political or commercial concerns of the very people, companies or entities it is supposed to be regulating. Regulatory capture, in the world of government monitoring, is like when the gamekeeper turns poacher, or at least, assists the poacher.

Regulatory capture is a form of government failure. Government failure, also known as non-market failure, is imperfection in government performance. Regulatory capture is a form of rent-seeking – trying to get a larger slice of a market’s total wealth without creating any additional wealth for that market.

When regulatory capture exists, the interest of political groups or companies become more important than those of the public, which leads to a net loss to society.

Regulatory captureIf you are having problems because the wolves keep eating the sheep, perhaps setting up an agency might help protect those sheep. However, you have a problem if the only individuals qualified to become agency members are also wolves.

To define captured agencies refers to the government agencies that suffer regulatory capture.

How pervasive is regulatory capture?

Regulatory capture theory was set out by Prof. Richard Postner, an American jurist and economist, who is a Senior Lecturer at the University of Chicago Law School and also a judge on the US Court of Appeals for the Seventh Circuit in Chicago.

Prof. Postner argued:

“Regulation is not about the public interest at all, but is a process, by which interest groups seek to promote their private interest… Over time, regulatory agencies come to be dominated by the industries regulated.”

While warning that there is always a risk of regulatory agencies being captured by the very firms that they are supposed to be policing, the majority of economists’ views are less extreme than those of Prof. Postner.

Why does regulatory capture occur?

According to public choice theorists, individuals and groups with high-stakes interest in the outcome of a specific policy or regulatory decision will naturally focus their energies and resources in trying to obtain the policy outcomes that best suits them, while the rest of society – members of the public – each with only a minuscule individual stake in the outcome, are likely to ignore it completely.

Regulatory capture - unrolling and rolling up the carpetWhen regulatory capture occurs, agencies may find themselves chasing their own tails, running in circles, and sometimes even backwards. Riddled with conflicts of interest, they no longer accomplish what they were set out to do – to protect members of the public (consumers).

Regulatory capture occurs when the actions of individuals, companies and interest groups are successful at ‘capturing’ influence with regulatory agency staff or commission members.

The probability of regulatory capture is a risk which all agencies are exposed to because of the very nature of their **environment. This suggests that all regulatory agencies should be shielded from outside influence as much as possible.

** In the pharmaceutical and medical world, for example, the regulatory agencies – such as the FDA in the US, the MHRA in the UK, and the EMA in the European Union – are staffed with experts in their field. This means that they must have worked in medicine and/or the pharmaceutical industry – the very environment they are supposed to be policing. Industry lobbyist know these experts very well – they all come from the same place.

‘Captured agency’ worse than no agency

An alternative, say many critics, is not to create the regulatory agency in the first place, then the risk of regulatory capture is reduced to zero. In most cases, a captured regulatory agency is worse for the overall good of society than no regulation at all – as soon as the industry is in control of the regulatory agency, it has the power of government.

The more transparent agencies are, the less effective are the effects of capture. However, even **transparency and press freedom are often not enough.

** Transparency refers to the extent to which any entity makes all data about it readily available to stakeholders and/or citizens in general.

In a World Bank Policy Research Working Paper – ‘Small is Beautiful, at Least in High-Income Democracies’Alexander Hamilton writes that according to recent evidence, even in the world’s wealthiest democracies with high levels of media freedom and transparency, the more complex and extensive regulatory environments are associated with greater levels of corruption, including regulatory capture.

Regulatory capture - they are all the same peopleWhen the employees who are in the industry, its lobby groups, and its regulatory agency are all the same people, the likelihood of regulatory capture existing is enormous. However, if as in the image above, the FDA wants top experts, there is only one place it will find them – within the industry.

In an article deposited in – The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture – Jon D. Hanson, Alfred Smart Professor of Law at Harvard University, and David G. Yosifon, Associate Professor of Law at Santa Clara University, write about the possibility that powerful economist interests not only capture legislatures and regulators, but also journalism, universities and popular culture.

In an article published in Deep CaptureCapture Explained – Patrick Byrne writes:

“If Hanson is right, the success of the Law & Economics movement in US law schools is less a function of its theoretical strength than it is a function of the fact that it favors elites, a number of whom have funded conferences, journals, professorships, and even law school buildings, in order to allow a shoddy theory to emerge as though it were the winner in a neutral marketplace of ideas.”

Prof. Milton Friedman discussing government regulations:

In this YAF TV video, Prof. Milton Friedman says: “Government regulation is always undertaken to benefit consumers. It is always undertaken under pressure from the producer – and it ends up having the opposite effect. This is the law of unintended consequences – the law that is intended to benefit consumers will end up benefiting producers.”