Most people, if you asked them, would agree that corruption is a bad thing, and should be reduced or avoided. Most of them will not have heard about Regulatory Capture, though.

‘Regulatory Capture’ is the process by which an industry ‘captures’ the governmental bodies which are assigned to regulate that industry. It is generally thought to happen because of two factors:
– The people who are assigned to perform the regulatory tasks spend most of their time talking to people in the industry they’re regulating
– There are huge financial incentives for the industry to persuade the regulators to change the rules in their favour

These rule changes can take many forms. They can be laws, regulations, even constitutional changes.

The rule changes can diminish penalties, replace jail time with company-paid fines, make it more difficult for new competitors to disrupt oligopolies or monopolies, lessen oversight or protections against fraud, and many other forms.

The bribery or coercion of regulators can also take many forms. Most countries have rules in place which make it difficult to perform the obvious ‘money in brown paper bags’, but there are many other ways to induce regulators to rule* in your favour:
– Many industries have laws about the amount of time between when you can work in an industry and when you can regulate it (and vice versa), but this does not seem to have stopped anyone
– Many industry consortia write the regulations** which regulate them, so the regulator (who may feel overworked and underpaid) doesn’t have to spend the time to do so.
– Most people have family or other tribal associations of some sort. A spouse’s job has been suggested to influence even supreme court justices
– The politicians who are in charge of the regulators are often persuaded by campaign contributions
– Various illegal inducements such as drugs or ‘favours’
– Threats, extortion, etc. may also come into play

So, how do we solve this? The closest we seem to have come to this is an interlocking set of checks and balances, including freedom of speech, lobbying laws, freedom of information acts, and the occasional incorruptible investigator.

We haven’t solved this yet, and it might not be solvable, given the power dynamics. Next time, we’ll talk about some current and possible solutions.

*Ha!

**There is a lot to be said for including industry as major stakeholders when regulations are written, as for the same goal, there may be very different ways to implement them, which would have vastly different costs.