Beltzmann on Stigler on regulation

In 1971, Georg Stigler (Nobel 82) published “The Theory of Economic Organization.” Then, and even now, it has been common for economists and policymakers to view “regulation” as motivated by a pure, selfless public spirit that seeks nothing but the common good. Instead, Stigler analyzed regulation in terms of demand and supply of regulations. Sometimes the demand for regulation can be described as public enthusiasm, but other times it can be described as its own kind of idiosyncratic interest, such as when incumbents support regulations that will come after their competitors, or when property owners use regulations as a tool to keep anything from housing. High intensity to industrial plant to wind farm. Sometimes the provision of regulation could be described as a general ethos, but other times the regulations were part of a political process that involved behind-the-scenes deals and political pressures.

Furthermore, Stigler points out that it is not enough to look at the regulation when it was first enacted. Over time, regulated industries will have the strongest incentive to interact with regulators: with information, through lobbying, and even as a source of jobs for those who leave government service. Even if regulations were originally passed to impose restrictions on a particular industry, through a gradual process of “regulatory takeover,” existing industry members may gradually change regulations in a way that supports incumbents—at least for costs to consumers or disincentives for potential competitors.

None of this proves that regulation is bad, of course. But she made a convincing argument that regulation should not be assumed to be good, and instead should be analyzed in terms of costs and benefits, including who ultimately paid the costs and who got the benefits,

I’ve mentioned the intellectual legacy of this article before (for example, see Stigler’s “Economic Theory of Organization: Anniversary,” April 23, 2021). But the topic is worth revisiting, given that the October 2022 issue of general option He has published a symposium, six papers plus an introduction, on “Georg Stigler’s Theory of Economic Organization”. I was particularly impressed by an article by Sam Beltzmann, first a student and then a colleague of Stigler’s entitled “Stigler’s economic organization theory Fifty years later.” (I quote here from a freely available paper copy of the article.) Beltzmann writes:

I would argue that the enduring influence of Stigler, 1971 is more about the framing of the question than it is about the specific answer. … [T]The regulator arrested in 1971 is exaggerated, but very provocative. But without provocation, would we be here to celebrate the 50th anniversary?

Beltzman points out that at the time Stigler was writing his essay, Stigler often pushed the argument that the possibility of regulation deviating was in fact an immutable rule that regulation must necessarily deviate. Beltzmann tells the story this way:

Stigler gradually abandoned the ineffective regulator under the weight of the contrary evidence. But it took some work. I was a Ph.D. student during this transition. The topic of my dissertation was the effect of Federal Bank Deposit Insurance upon entering commercial banking (actually I needed an insurance grant to start a new bank). For half a year or so, I worked on my own, learning about history, collecting data, running regressions, and writing it all up for Stigler’s perusal. I could not avoid the conclusion that the regulation has greatly reduced the rate of entry into banking services. He had one comment: “That’s good for preliminary work. Come back in another 6 months with the correct answer.” Facts are stubborn. I’ve never been able to get the right answer, fortunately for me
He eventually acquiesced.

It should also be noted that at the time Stigler was examining these issues in the 1960s, a lot of government regulation was focused on regulating prices and entry requirements in airlines, trucking, railroads, electricity production, professional licensing, and other areas. It seems reasonable to me that as the government sets prices and conditions of entry, the chances of regulatory control over time could go up. But the 1970s saw the emergence of a different kind of organizational structure, one focused instead on health, safety and the environment. writes beltzmann:

Pickup theory seems to fit some notable cases, such as Stigler’s motivating examples of truck regulation and occupational licensing. However, issues that were not easily addressed by an exception “as a rule” quickly emerged. … We also have a belated 20/20 view of the spread of “social organization” that was underway when Stigler (1971) appeared. Environmental regulation is perhaps the most prominent example. Others include the safety of workers, their pension insurance and the safety of consumer products. By some measures, this organizational expansion was, and remains, historically unprecedented. Social organization usually cuts across many industries. These industries have always resisted. On the other hand, deregulation of industries such as transportation and stockbroking emerged in the late 1970s amid significant industry resistance. And then we recently had the ‘reverse takeover’, where the industry is created by the regulator – like in renewables, biofuels and the like. None of these developments seem to have been contemplated by capture theory.

However, Peltzman also points out that even regulations that may equilibrium have positive effects on health or safety can have anti-competitive trade-offs. The FDA requires new drugs to be proven safe and their effects have high financial and administrative costs, which large, established companies can handle much better than small innovators. The Dodd-Frank financial reforms of 2010 focused on making banks safer by creating a set of rules with high financial and administrative costs, which in turn led to the exit of many smaller banks.

Thus, Beltzmann insists that Stigler’s broader insights remain relevant, but they offer a less authoritarian interpretation. Stigler wrote in a 1971 article, “…as a rule, regulation is acquired by industry and designed and operated primarily for its own good.” Peltzman offers this paraphrase:

The distinction I want to make is between creation (the “earned” part of Stigler’s famous quote) and production (design and operation) of regulators. Even occasional history indicates that these often respond to different political forces and interest groups. In particular, industry often – perhaps fundamentally – resists the establishment of regulation. The affected industries resisted the consumer reforms of the Progressive Era, and the New Deal labor and social organizing reforms of the 1970s. But once faced with the reality of regulation, industry interest usually plays a prominent role in what these agencies do.

Below is a table of contents file general option Seminar, although a library subscription is required to access the articles. However, Blitzmann’s article is available as a working paper:

  • “Georg Stigler’s Theory of Economic Organization at the Age of Fifty–An Introduction to a Special Topic” ed Diana W. Thomasand Michael D. Thomas
  • “Theory of Economic Organization” 50 Years Later” ed Sam Beltzman
  • “George J. Stigler’s Theory of Economic Organization, Bootleggers, Baptists, and the Rebirth of Public Interest Determinism,” By Bruce Yandel
  • “Regulatory Takeover and Intervention Dynamics: The Case of Quebec and Ontario Power Utilities to 1944,” by German Pelzel, Rosolino A. Candela, and Vincent Jeluso
  • “The Economic Theory of Organization and Inequality” ed Dustin and Colin O’Reilly’s Room
  • International Organizational Diversity Over 50 Years: Political Entrepreneurship Within Financial Constraints Vlad Tarko and Ryan Saffner
  • “Regulation, Competition and Social Control of Business” ed Diana W. Thomas and Michael D. Thomas

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