In a thoughtful recent debate over reforming the federal court system, students on both sides struggled to address how best to protect people from and “punish” large corporations.
The negative explained that without the current system of class action lawsuits, people would have only federal regulatory agencies to protect them from abuse by large corporations.
To some extent, there are good reasons to suspect the motives and agendas of federal regulatory agencies. Since the 1960s economists have documented various shortcomings of federal agencies, including the problem of “regulatory capture.” Over time, federal agencies tend to be “captured” by the industries they are supposed to regulate.
Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal 1971 article, “The Theory of Economic Regulation,” he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession. It has now become the mainstream view.
This entertaining Commanding Heights segment looks at an example of regulatory capture with the Civil Aeronautics Board (CAB), which had been “captured” by U.S. airlines like Pan American, whose interest was higher prices and less competition. 1.14 – Airline Deregulation
Regulatory capture isn’t the only problem with federal regulatory agencies. An earlier post discussed federal agencies as problematic executive/legislative hybrids wishing to run their own judicial proceedings as well (Should Federal Agencies Run Their Own Court Systems?).
Regulatory agencies are nowhere authorized in the Constitution. Instead they emerged much later as politicians wanted new ways to advance progressive era reforms. As U.S. industry developed larger and larger firms to build and run railroads, oil drilling and processing, steel making, chemicals, meat-packing, dairy, auto manufacturing and other large industries, progressive era critics argued that union and government power needed to expand to protect suppliers, workers, and customers.
However, early federal regulatory adventures weren’t encouraging. Online and in textbooks we learn (Wikipedia):
The Interstate Commerce Commission (ICC) was a regulatory agency in the United States created by the Interstate Commerce Act of 1887. The agency’s original purpose was to regulate railroads (and later trucking) to ensure fair rates, to eliminate rate discrimination, and to regulate other aspects of common carriers, including interstate bus lines and telephone companies.
Incentive and information problems are key to understanding why federal regulatory agencies are usually unable to accomplish the tasks assigned to them in enabling legislation. How can regulatory agencies tasked with setting prices for railroads, trucking firms or airlines discover the “right” prices, or “right” maximum or minimum prices? They could just guess what prices for goods and services would best protect the customers, or they could hire dozens of economists to create pricing models.
So if neither class action lawsuits nor federal regulatory agencies can be relied upon to protect people from abuse by large corporations, what are other options? How can consumers or employees protect themselves from, say, Walmart? An option for consumers is to not shop at Walmart, and workers can choose to not apply for a job there. The same strategies will work well for protection from McDonalds, Starbucks, Apple, Microsoft, Google, Amazon, Ford, General Motors, Toyota, Federal Express, UPS, Staples, Office Depot, Sears, Kohl’s, Exxon, and most other major U.S. corporations.
Such strategies don’t work as well for protection against Comcast or other local utility monopolies (government regulations limit most communities to a single monopoly cable, gas, and electricity company, based on the economic theory that they are “natural monopolies”).
Key for students struggling with mountains of articles and posts against large corporations is to get clear the difference between companies in open and competitive markets, and companies with “crony capitalism” relationships with government (regulations to protect them and/or subsidies to support them).
Market economists, along with Charles Koch, Bernie Sanders and others, share the view that politically-connected corporations are bad business for U.S. consumers, workers, and taxpayers.