The Metaphysics of Regulatory Capture

Stiglerian capture and corrosive cultural capture, its left-leaning parallel, are ostensibly symbionts, two attempts at identifying impediments to keeping markets competitive by preventing the regulated from dictating the rules of the game. Yet Stiglerian capture is too coarse to be generally true, and corrosive cultural capture cannot be empirically identified either. Karthik Ramanna responds to ProMarket’s Stigler 50 Years Later series. 

Editor’s note: In 1971, George Stigler published his article “The Theory of Economic Regulation.” To mark the 50-year anniversary of Stigler’s seminal piece, we are launching a series of articles examining his theory’s past, present, and future legacy. The series is part of the Stigler Center’s George Stigler 50 Years Later symposium. 

Reading the Stigler Center’s fascinating commemorative series of articles on capture prompted me to reflect on the potential weaponization of the term “capture” in a polarized professoriate. The commentators have included a distinguished panel of capture adherents and capture deniers—one might think we were engaged in a theological debate. 

Part of the issue is that the origins of economic capture theory are dubiously political. George Stigler was right-leaning, and his theory of capture came from a right-leaning environment that privileged markets and suspected governments. In fact, William Novak’s engaging intellectual history of “capture” suggests that this idea was well-understood long before Stigler, and that the (Second) Chicago School was less novel for “discovering” the capture threat than for mainstreaming the claim that the preferred way to address it was deregulation. The economic theory of capture, no matter how rigorously articulated and elaborately feted, was then subsequently used by the political right to delegitimize regulation in the general. Writing for the Heritage Foundation’s quarterly in 1987 on “The Benefits of Deregulation,” Murray Weidenbaum, for instance, cites capture theory as “intellectual support” for deregulation starting in the 1970s, also acknowledging the value of Stigler’s Nobel prize in that vein. 

The theory of corrosive cultural capture is a left-leaning response to traditional Stiglerian capture theory. It argues against the inevitability of Stiglerian capture (“strong capture”), which is sometimes caricatured as “bags of money” transfers from regulated to regulators; rather, in this theory, the regulators are corroded into thinking like (and doing the bidding of) the regulated through an indirect socialization process that is intentionally effected by the regulated. In extremis, corrosive cultural capture leads to deregulation in the whole, as the regulator puts itself out of business so that a monopolist can extract rents unfettered by bureaucrats. This theory is perhaps best articulated in the seminal 2013 book Preventing Regulatory Capture (across contributions by Daniel Carpenter, James Kwak, and David Moss), although its intellectual history predates Stigler and can be traced back to at least Antonio Gramsci’s notion of “cultural hegemony” and perhaps even Hegel’s discourse on “civil society.” Corrosive cultural capture is used by the political left to delegitimize deregulation in the general. Even Senator Elizabeth Warren (D-MA) has invoked the theory in criticizing corporate resistance to regulation.  

On one level, Stiglerian capture and corrosive cultural capture are symbionts, two attempts at identifying impediments to the same objective: keeping markets competitive by preventing the regulated from dictating the rules of the game. For instance, absent natural economies of scale, industry incumbents are well-served to engage in Stiglerian regulatory capture to erect entry barriers. Conversely, in industries with natural economies of scale, incumbents are better off engaging in corrosive capture to deregulate. But, for the Stiglerians, the solution to capture is always deregulation—a mathematically elegant static-equilibrium—and for adherents of corrosive cultural capture, the solution is continually developing checks and balances (i.e., new regulatory institutions) as old ones get corroded. 

In these differences of solutions, we can infer a more profound polarization between the capture camps. For the Stiglerians, “government is the problem”; for those sympathetic to corrosive cultural capture, competitive markets are not a primitive moral end for society, but simply one of many eudemonic channels, subservient to a democratic government that can and should dynamically moderate the scope of markets in society. 

Stiglerian capture theory, in its broad sense of “regulations benefit the regulated,” is too coarse to be generally true. This is because ideology, besides self-interest, motivates regulators. Joseph Kalt and Mark Zupan define ideology (for neo-classical economists) as “consistent sets of normative statements as to best or preferred states of the world.” Because of ideology, sometimes the regulators do what is in the public interest, notwithstanding the money in politics, thereby invalidating Stiglerian capture. But because of ideology, sometimes the regulators do the regulated’s bidding without the latter even having to (directly) ask. This case can be deemed cultural capture. 

Of course, teasing apart the cases where ideology implies cultural capture requires an understanding of what is in the public interest, which in turn requires a generally accepted ideology upon which to benchmark the actions of regulators. Good luck finding such an ideology in today’s polarized world! Even pro-industry behavior by tobacco-sector regulators cannot be seen as dispositive evidence of cultural capture, as Daniel Carpenter suggests, because some would argue that such behavior is simply motivated by libertarian ideologies of protecting smokers’  choices. So, when ideology motivates regulators, it is also liable to be called capture, just not Stiglerian capture but cultural capture. Which means cultural capture theory (whether of a corrosive deregulatory bent or otherwise) is too coarse to be generally true as well.

Stiglerian capture, when it can be robustly identified empirically, is corruption. Few capturers are that stupid. They often find subtler ways to make wealth transfers to regulators, which then evade attention from prosecutors and detection by econometricians. Which means Stiglerian capture is unmeasurable for most practical purposes. Ernesto Dal Bó’s 2006 review of the economic literature on capture reports no shortage of theoretical extensions to Stigler’s model and still finds the evidence “well short of abundant.” But, for the reasons given above regarding the paucity of unifying ideologies, corrosive cultural capture cannot be empirically identified either. 

I often wonder whether both Stiglerian capture and corrosive cultural capture are exemplars of the philosophical fallacy described by Russell’s Teapot. Writing in the 1950s on his skepticism about the existence of a god, Bertrand Russell said, “If I were to suggest that between the Earth and Mars there is a china teapot revolving about the sun in an elliptical orbit, nobody would be able to disprove my assertion provided I were careful to add that the teapot is too small to be revealed even by our most powerful telescopes. But if I were to go on to say that, since my assertion cannot be disproved, it is intolerable presumption on the part of human reason to doubt it, I should rightly be thought to be talking nonsense.” 

Stiglerian capture and corrosive cultural capture arguably make (metaphorical) assertions about undetectable teapots in solar orbit. But yet these concepts have endured, like human faith in god, albeit for not as long. Perhaps capture is the realm of the metaphysical, but perhaps these concepts endure because, at their core, they are common-sense propositions that align with our intuitions of how the world works.