The example of political feedback presented in 1.3 illustrated the point that government policy towards industry can only be understood if all the relevant interests are identified along with the instruments of political participation at their disposal. In the late 1960s and early 1970s when this positive approach to government policy was first discussed, one suggested outcome was that industry would ‘capture’ any administrative apparatus set up to regulate its activities.
When considering the regulation of an industry, Stigler (1971) asserted that ‘as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit’. This is the basic proposition of the ‘capture’ theory of regulation. Regulatory agencies are ‘captured’ by the industry they are supposedly regulating.
A group will invest resources in political activity (lobbying, advertising, demonstrating, voting) up to the point at which marginal benefits and marginal costs are equated. Such an approach implies, however, a great deal of cohesion among members of each group. The returns from political activity take the form of a ‘public’ or ‘joint’ benefit to group members and the classic problem of collective action, the ‘free-rider problem’, will often make group formation and cohesion extremely costly.
The costs of collective action will not be the same for all individuals and all groups. A number of factors might be expected to influence the ability of an interest group to set up and police an effective organization. The organization will be more effective:
The more significant (quantitatively) the potential returns per group member from pressure group activity.
The lower the information costs associated with determining the effects of government measures on group members.
The lower the costs of policing the activities of group members (and hence overcoming the free-rider problem).
Each of these factors, according to capture theory, will favour producer interests over consumer interests. Government policy may influence the incomes of particular industrial interests substantially, members of these industries will be well informed about the likely consequences of government action, and geographical concentration will reduce the costs of co-ordination and policing joint political activity. Consumer interests by contrast are frequently widely dispersed geographically, lack the information about the consequences (or even the existence) of government action, and are affected only to a small extent by each individual act of intervention. A tariff on a particular commodity, for example, may not greatly affect individual consumers. In total, of course, the cumulative consequences of a series of measures favouring particular producers may be extremely damaging to consumer interests, but the free-rider problem presents very serious difficulties for any attempt to construct an effective pressure group.
Although it may be admitted that consumer interests face particularly severe organizational problems, the capture approach to government-industry relations is oversimplified. In the first place if consumers are disadvantaged by a whole mass of regulations favouring numerous producer interests which have accumulated piecemeal over time, they are capable of voting for a radical attack on all such regulations in the hope of achieving an overall gain. Secondly, as we saw in our earlier example, in any given case, it is likely that more than one producer interest will be involved. Policy in these circumstances might be expected to strike a balance is between opposing groups.
US Trucking Regulation in the 1930s
The major interests involved here were the railways, agriculture, and the truckers themselves. Regulation involved restrictions on the weight of trucks. The use of increasing numbers of trucks in agriculture would imply support for a rather high weight limit from the agricultural interest. Railways would oppose the truckers and lobby for a low weight limit but opposition would depend upon the length of haul involved. If the average length of haul were relatively long in a particular State, the railways would not be so threatened by the advent of trucks and vice versa. In a statistical test evidence was indeed found that the longer the average railroad haul, and the larger the number of trucks on farms per 1000 of the agricultural labour force, the higher was the weight limit on trucks.
Source: Stigler (1971).
New Hospitals in the US
Before new hospitals can be built or new facilities can be added to existing ones, some States in the USA require that expansion plans should be approved by a regulatory agency. The agency must determine whether or not the proposed expansion fulfils a ‘health need’ in the area. This restriction on new entry will benefit existing hospitals in the State. The value of the regulation to established hospitals will depend on the strength of competition, and this will be related to the ‘occupancy rate’. In general the smaller the occupancy rate the more vulnerable is a hospital to competition. The organizational costs of obtaining ‘certificate of need’ regulation will depend upon the degree of concentration in the hospital industry. As concentration increases, costs of organization and lobbying will fall and a more effective pressure group is the result. Another important factor is the degree of political competition characteristic of the State. Politicians in States dominated by a single political party will supply regulation at a higher price than those in States where political control varies and hence competition is stronger. Thus the hypothesis can be tested that the probability of enactment of certificate of need legislation is negatively related to changes in occupancy rates, negatively related to political monopoly and positively related to a measure of industry concentration.
Source: Wendling and Werner (1980)
The rest of this Course considers in much more detail the nature and the significance to industry and the community at large of the more important bargaining ‘scenarios’ which emerge from government attempts to control industry. However, a necessary preliminary for that task is to have some knowledge of the place of government in the economy. This is the subject of the following Module.
