Starting in the 1970s, neoliberalism and deregulation began to rear their head, leading to the rollback of government under Thatcherism and Reaganism. But the origins of these movements have been de-historicized, and a better appreciation of these movements, as viewed through Stigler’s 1971 paper, can help us demystify this often politically-charged debate. Stigler cuts this false binary by showing that regulation was often cynically utilised by industries to garner unfair and uncompetitive advantages.
In 2021, ‘regulation’ often resembles a Rorschach test. To the political right, it is a futile mechanism that deters business, whereas on the left it reigns in evil corporations. But 50 years ago, George Stigler provided a provocative analysis of regulation, whereby ‘regulation is acquired by the industry and is designed and operated primarily for its benefit.’
A half-century ago, the regulatory landscape of the United States was drastically different, with various regulations appearing absolutely baffling. From 1938 to the 1970s, the US civil aviation authority did not give approval to a single new flight route. In banking, the FDIC’s rules restricted new banking entrants by 60% (per regression analysis), thus protecting incumbent banks. Perhaps most comically, the trucking industry was so favourable to incumbents that, despite thousands of applications, the number of licensed carriers shrunk by a quarter from 1945 to 1965.
Why was this? The answer, according to Stigler, is relatively simple: ‘every industry or occupation that has enough political power to utilize the state will seek to control entry.’ Why bother competing when the government (whose greatest power is ultimate coercion) can do it for you?
Standard Oil-esque monopolies were illegal, so businesses had to find new ways to seek advantages (albeit at the cost to the consumer), and regulation provided the perfect avenue.
According to Stigler, there are four ways by which industries use regulations to their own benefit:
Direct subsidies
Onerous requirements for new entrants (as was done in trucking, banking, and airlines)
Encouraging complimentary goods and discouraging substitutes (for example the butter industry supported the bread industry while discouraging the upstart margarine industry)
Price fixing (more difficult, as this requires public support)
Stigler’s theory, while economic, is also intensely political. Essentially, he has a Schumpeterian political viewpoint, whereby competing interest groups use their influence to secure political office and enact favourable legislation for their patron (voter or industry or otherwise).
Why don’t people revolt against this? Because of the mismatch between politics and economic life. In economies, one only ‘votes’ on what they buy, but in politics actions affect everyone, due to the coercive nature of the states. The result is increasing information asymmetries: whereas politics encompasses more issues every year, the average voter has less proportional knowledge because their knowledge of politics does not increase at a proportional rate.
In short, in politics, people just aren’t as informed, because ‘information must be sought on many issues of little or no direct concern to the individual,’ whereas when one buys something, they know much more about it.
Stigler’s paper was a Zeitgeist of the time. Stigler’s contemporaries would go on to be luminaries in the ‘neoliberal’ and libertarian movements – e.g. Milton Friedman and Robert Nozick – which provided much of the intellectual heft behind the Reagan-Thatcher movement. This neoliberal wave swept the Western world, helping to break up unions, usher in financialization, and enabled what some might call the ‘Final Wave’ of globalization.
Of course, not that one can blame this all on Friedman, or Nozick, or Stigler. Stigler had valid critiques, and his understanding of regulation as a form of soft state capture can be helpful as we, in the 21st century, try and define the increasingly fraught question of where does the state stop, and the market begin? And how do we best serve ‘the people’ with regulation that is not only fair but effective? I don’t think Nozick knew the answer (nor does he claim to), but the question remains 50 years later, which makes his thinking on the issue all the more worthy of revisiting.
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