JAMES PERON: The dilemma of regulatory capture

Economics is really the science of how human respond to incentives. One result of this is that you can learn basic economic concepts almost anywhere, often without even realising it’s economics.

One of the prime television series in the US starting in 1960 was The Andy Griffith Show. The basic premise was that Griffith was a small town sheriff in the Deep South with a relatively laid-back “folksy” manner. 

While it didn’t even come close to depicting life as it was, it did have an episode that illustrated an important economic concept — though I doubt the scriptwriters had a clue they were doing so. 

A travelling salesman, Bert Miller,  played by Sterling Holloway, comes to Mayberry and is tired of resorting to door-to-door sales. He wants a more relaxed commercial life and starts hawking his goods on a stand on the sidewalk. He’s low-key about it, almost reluctant to sell goods for fear of seeming pushy.

But the owner of the local store, Ben Weaver, is outraged at the competition and wants the Sheriff to put an end to it immediately — even though it hardly poses a risk to his market share. Weaver storms into the Sheriff’s office demanding he shut down Bert’s stand immediately and permanently.

He starts quoting all sorts of regulations that he apparently got passed in previous years, criminalising street vending. He starts citing petty regulations and pointing out how Bert is in violation of them, such as requiring a roof over his point of sales.

Andy listens and sees a workaround — such as building a small roof over Bert’s stand. Weaver keeps searching the regulations to find others favourable to himself and detrimental to his informal competition. But with each violation Andy suggests a workaround.

This illustrates something market liberals call regulatory capture. What this means is once the regulatory system is established it tends to be captured by, and under the control of, the major players being regulated and used by them to stifle competition and cartelise, if not monopolise, the industry.

Left-wing historian Gabriel Kolko did a study of the regulatory state in the US and wrote: “It was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.” He wrote: “Regulation itself was invariably controlled by leaders of the regulated industry, and directed towards ends they deemed acceptable or desirable. In part this came about because the regulatory movements were usually initiated by the dominant business to be regulated.”

This tends to happen for a variety of reasons. One is that the regulatory system is of far more concern to those being regulated than it is to the rest of us. For instance, assume there is a product called a “blandbiz” that is produced by a handful of major companies. But there are also a number of blandbiz start-ups raising capital to produce a better version. The major producers start pushing the claim that without proper regulation the blandbiz can be problematic and consumers need protection.

The cost of regulatory compliance is easy for the established companies to pay but difficult for the upstarts. The regulations make it harder for the new competition to arise, protecting the big producers, not the consumers.

Our mythical blandbiz generates large profits for the big producers. But the typical consumer is only spending R200 a year on the product, although over a few million buyers it adds up for the producers. So when regulations are proposed the typical consumer has no interest in the debate; it would cost them more to lobby the political elite than the amount they spend on the produce. But the big producers have millions of rand at stake and will be heavily involved.

Another factor is that the regulatory system is inherently dominated by political incentives. Political parties and legislators are the one making the ultimate decisions and they want campaign contributions. The start-ups can’t match the donations of the major corporations, so they are ignored while politicians meet privately with the big producers.

Consider how Donald Trump threatens huge tariff taxes on products from Canada. Across the political spectrum economists and business point out it will be disastrous. They are ignored. But when the CEOs of the major automobile companies want to get his attention he happily talks to them and delays the disaster.

Even more bizarre is that the economic central planner for Trump, Elon Musk, is “cutting costs” but not touching the billions in contracts and subsidies his companies collect. The “regulator” appointed to cut costs is a direct beneficiary of these payments, and his payments aren’t touched.

The problem of regulatory capture isn’t just American, of course, it’s found in all countries. The fundamental problem is that politicians don’t care — they benefit from it.  

• Peron, author of several books including “Exploding Population Myths” and “The Liberal Tide”, is an associate of the Free Market Foundation.