Economics & Corporate Law

Stigler and Regulatory Capture: A Skeptic Rejoinder to Sunstein’s Skepticism

Shivjeet Parthasarathy

George Stigler UChicago Cropped

The article is an analysis of Cass Sunstein’s criticism of George Stigler’s ‘rule’ of regulatory capture. The author argues that Cass Sunstein’s criticism of George Stigler’s Theory is subject to its own scrutiny due to a lack of concrete evidence and a perspective solely from the Global North.

Introduction

2021 marked the 50th anniversary of an influential economist, George Stigler’s seminal piece of work, “The Theory of Economic Regulation.” To honour this milestone of its namesake, the Stigler Centre for the Study of the Economy and the State at the Chicago Booth School of Business launched a series of articles (as part of a larger symposium on Stigler’s work), examining the legacy of the theory. Noted research fellows, economists, lawyers, and professors have contributed to the series of articles. One such contributor is the Harvard Law Scholar, and former Administrator of the White House Office of Information and Regulatory Affairs, Cass Sunstein. Prof. Sunstein’s article takes a skeptical approach to Stigler’s ‘interest-group theory’ of regulation and the notion that regulation is captured and designed for the benefit of the industry as a rule.

While Sunstein is known as the ‘Regulatory Czar’ and is certainly one of the foremost authorities in the field of regulation and regulatory theory, his article raises some eyebrows. In this article, I argue that even if Stigler is misplaced in noting that regulatory capture occurs, as a rule, Sunstein’s thesis would not be applicable carte blanche in decrying the ‘rule’. This is due to the fact that the argument contains many of the same problems that Stigler’s supposedly does, and also seems to speak from a perspective in the Global North. I will first deconstruct Sunstein’s argument, and then look at the way regulation operates in the South, to show that Sunstein might not adopt such a skeptic outlook if wider perspectives are considered.


Sunstein’s Skeptic Approach

Sunstein begins by laying out 7 examples of regulations he has had a hand in developing and uses this experience to note that Stigler’s claim of regulatory capture (the phenomenon when regulation is designed for the benefit of industry) is false. He credits Stigler with being cognisant of regulatory capture occurring but states that Stigler ought to have framed the argument in a less universal manner for it to seem more credible. Using another hypothetical of an environmental regulator passing regulation curbing air pollution, he argues that Stigler’s ‘general theory’ would not hold water, because one cannot say that the air pollution regulation was acquired by industry and operates for its benefit. Moreover, he again questions the generality of the theory by asking how often one can say this regulation operates for the benefit of the industry, if at all. Sunstein appears to be a proponent of the public interest theory of regulation-a school of thought that believes that regulation is to be developed in the public interest, and not for self or group interests. This requires a regulator who is transparent and trustworthy and does not operate with ulterior motives. He notes that in his experience with the regulatory mechanism, the regulator has thought these regulations were a good idea, and the subjects of regulation opposed the regulation. Speaking as a proponent from this school of thought, it is not unlikely to see discrediting of a proponent of capture theory. However, it is not as though Stigler was oblivious to the public interest theory of regulation. In his paper, he notes that regulation can either be actively sought by the industry or thrust upon it. Sunstein’s argument insinuates that Stigler’s work did not consider the fact that regulation can be done in the public interest, but it does not bode well when it is apparent that Stigler has acknowledged this fact and engaged with it in his work (though in a limited manner). Had the argument been that Stigler’s consideration of public interest regulation was limited, and thus his thesis is not completely representative of the regulatory landscape, it would have been better than insinuating a complete lack of consideration of the public interest.

Such a line of argumentation would also go towards helping his claim that regulatory capture does not happen as a rule. Throughout the piece, Sunstein goes on to call Stigler’s claim ‘false’, and goes to the extent of calling it a ‘fairy tale’ and a piece of ‘literature’. However, Sunstein provides very little evidence apart from the seven regulations he has been involved with and the environmental hypothetical. Merely because he provides some anecdotal evidence does not mean that these are the norms. It could very well be the case that in these instances the industry was forced with these regulations, but in other cases, the industries have lobbied and captured regulators. Sunstein’s claim can be attacked on the basis that it suffers from the availability and representative heuristic. Simply because these seven examples have been listed, one might think that regulation often occurs more in the public interest than in actuality, and might also think these are representative of the entire domain of regulation when they might not be. Without any concrete evidence, Sunstein’s article equally reads like a piece of literature, a narrative, just like what he accuses Stigler of doing (it’s exacerbated particularly towards the end with all of the fanciful rhetoric of ‘believing what you like’ and the Star Wars analogy which seems out of place).

It is of course possible, and important to acknowledge, that Stigler’s claim no longer holds good in the 21st Century, and Sunstein is completely correct in saying that Stigler was wrong. Institutions and practices do develop over time, and the processes put in place nowadays are bound to be tighter than when Stigler wrote his essay, meaning that regulatory capture might not be so widespread as before. However, a better approach would have been to consider these temporal developments and create a more balanced argument. Particularly when he does credit Stigler with being on the right path with his theory, rephrasing his argument to say that this is no longer valid today, would have been much better than to simply dismiss it out of hand.

What is also important to note, is that while Sunstein is vociferously arguing that regulation is done in the public interest, it certainly is not a position that is infallible. While Stigler’s argument might not be a universally applicable rule, his argument is still more likely to hold true rather than the notion that regulation is done in the public interest. The public interest theory has been criticised on various grounds. The theory has been faulted due to the lack of a common understanding of what ‘public-interest’ means, doubts as to the impartiality, competence, and efficiency of regulators, and the notion that the theory greatly underscores the influence of political powers in the regulatory process.

On the ground, we can see how regulatory capture plays out. Sen. Elizabeth Warren has written about how frequently lobby groups representing interests of Wall Street and other major industries have met with, and submitted comments to regulators disproportionately more than other public interest groups, prior to the passage of regulations. Sen. Sheldon Whitehouse notes that many catastrophic events such as the BP Deepwater Horizon oil spill, the Sago Mine Explosion, and the global financial crisis of 2008 have all occurred due to lax regulatory policies, caused by capture. Richard Epstein posits a slightly different but equally relevant view-regulatory capture is widespread, but it is largely done by public interest groups such as environmental groups, disability groups, and civil rights organisations. What all of this points to is the fact that the system is not impenetrable, and is vulnerable to capture on various fronts. It becomes difficult to see regulation being enacted in the public interest when it is known that regulators regularly collaborate with the regulated.

Even if it is not the industry that is capturing regulators, the fact that regulation can succumb to various interests simply shows that Stigler’s claim is largely relevant, and regulation is done for private interest. This becomes important when designing regulation because public interest is a meaningless phrase thrown around. It is used as a catchall phrase and understandings of what public interest is varies across different actors (an environmental group is likely to have a different conception compared to a disability rights group), creating skepticism around the use of this phrase. If regulations were to clearly define the purpose, the subjects to be regulated, and goals sought, only then will it boost transparency and public confidence in policy domains, and dispel some degree of skepticism. With this understanding of how variable public interest is, the skepticism around actually envisioning public interest in the creation of regulation, and how pervasive capture can be, it is inaccurate to posit that regulation happens solely for the public good.


Regulation in the Global South

The other limb of my criticism is the fact that Sunstein speaks from the perspective of the Global North. The US has a very robust system with strong regulatory practices, and a strong culture of regulation, characteristic of regulatory states in the Global North. The same cannot be said for countries in the Global South.

Navroz K. Dubash and Bronwen Morgan note that regulatory agencies in the South begin as relatively hollow shells and are filled in with expectations, norms of practice, and rules of operation and procedure as time passes. However, filling these shells becomes difficult due to the competing goals of efficiency and redistribution. Given that many countries in the South prioritise redistribution rather than efficiency, there is more political involvement even in the regulatory regime, contrary to the goal of arm’s length involvement. The tensions between the competing goals are exacerbated due to low access levels to services, financial, technical, and institutional dysfunction of regulators, and a messy political landscape, all of which mean notions of regulatory independence can disappear.

It is in this context that industry sees an opportunity to capture regulators and this means they can influence regulations that the regulator might not have ordinarily created. In the Indian context, there have been conflicts of interest raised between regulators and subjects in the food, telecommunications, pharmaceutical, and healthcare industries. When such collaboration rampantly occurs between the regulator and regulated, the ultimate welfare of other participants in society is affected and can exacerbate existing inequities in the Global South. To say, with this information, that all regulation happens in the public interest is widely incorrect, and Sunstein might not discredit Stigler had this approach been considered.

Conclusion

While Cass Sunstein is a scholar that all students of regulation must read at some point, this particular piece requires a little caution to be exercised. Like in any other domain with multiple schools of thought, proponents of one regulatory theory are bound to discredit and criticize others. While Sunstein’s criticism of Stigler might not be completely off the mark, it still lacks many important considerations. Sunstein’s consideration of public interest is myopic, as he only considers industry committing capture. Modern times see the prevalence of several lobby and activist groups that also influence regulation. When these elements are widespread in policy-making, each group vies for a piece of the pie. What then constitutes public interest?

Regulatory capture is here to stay, and only a broader understanding of the issue can help address it. Understanding that regulatory capture occurs not only by industry but also other interest groups and is commonplace in developing countries, shows how Stigler’s thesis still remains largely relevant today.


Shivjeet Parthasarathy is a fourth-year law student at the Jindal Global Law School, Sonipat.