George J. Stigler
The University of Chicago
The potential uses of public resources and powers to
improve the economic status of economic groups (such as industries and
occupations) are analyzed to provide a scheme of the demand for
regulation. The characteristics of the political process which allow relatively
small groups to obtain such regulation is then sketched to provide elements of
a theory of supply of regulation. A variety of empirical evidence and
illustration is also presented.
The state - the machinery and power of the state - is
a potential resource or threat to every industry in the society. With its power
to prohibit or compel, to take or give money, the state can and does
selectively help or hurt a vast number of industries. That political
juggernaut, the petroleum industry, is an immense consumer of political
benefits, and simultaneously the underwriters of marine insurance have their
more modest repast. The central tasks of the theory of economic regulation are
to explain who will receive the benefits or burdens of regulation, what form
regulation will take, and the effects of regulation upon the allocation of
resources.
Regulation may be actively sought by an industry, or
it may be thrust upon it. A central thesis of this paper is that, as a rule,
regulation is acquired by the industry and is designed and operated primarily
for its benefit. There are regulations whose net effects upon the regulated
industry are undeniably onerous; a simple example is the differentially heavy
taxation of the industry’s product (whiskey, playing cards). These onerous regulations,
however, are exceptional and can be explained by the same theory that explains
beneficial (w may call it “acquired”) regulation.
Two main alternative views of the regulation of
industry are widely held. The first is that regulation is instituted primarily
for the protection and benefit of the public at large or some large subclass of
the public. In this view, the regulations which injure the public-as when the
oil import quotas increase the cost of petroleum products to America by $5
billion or more a year-are costs of some social goal (here, national defense)
or, occasionally, perversions of the regulatory philosophy. The second view is
essentially that the political process defies rational explanation: “politics”
is an imponderable, a constantly and unpredictably shifting mixture of forces
of the most diverse nature, comprehending acts of great moral virtue (the
emancipation of slaves) and of the most vulgar venality (the congressman
feathering his own nest).
Why does not the powerful industry which obtained this
expensive program instead choose direct cash subsidies from the public
treasury? The “protection of the public” theory of regulation must say that the
choice of import quotas is dictated by the concern of the federal government
for an adequate domestic supply of petroleum in the event of war-a remark
calculated to elicit uproarious laughter at the Petroleum Club. Such laughter
aside, if national defense were the goal of the quotas, a tariff would be a more
economical instrument of policy: it would retain the profits of exclusion for
the treasury. The non-rationalist view would explain the policy by the
inability of consumers to measure the cost to them of the import quotas, and
hence their willingness to pay $ 5 billion in higher prices rather than the $
2.5 billion in cash that would be equally attractive to the industry. Our
profit-maximizing theory says that the explanation lies in a different
direction: the present members of the refining industries would have to share a
cash subsidy with all new entrants into the refining industry[1]. Only
when the elasticity of supply of an industry is small will the industry prefer
cash to controls over entry or output.
This question, why does an industry solicit the
coercive powers of the state rather than its cash, is offered only to
illustrate the approach of the present paper. We assume that political systems
are rationally devised and rationally employed, which is to say that they are
appropriate instruments for the fulfillment of desires of member of the
society. This is not to say that the state will serve any person’s concept of
the public interest: indeed the problem of regulation is the problem of
discovering when and why an industry (or other group of like-minded people) is
able to use the state for its purposes, or is singled out by the state to be
used for alien purposes.
The idealistic view of public regulation is deeply
imbedded in professional economic thought. So many economists, for example,
have denounced the ICC for its pro-railroad policies that this has become a
cliché of the literature. This criticism seem to me exactly as appropriate as a
criticism of the Great Atlantic and Pacific Tea Company for selling groceries,
or as a criticism of a politician for currying popular support. The fundamental
vice of such criticism is that is misdirects attention: it suggests that the
way to get an ICC which is not subservient to the carriers is to preach to the
commissioners or to the people who appoint the commissioners. The only way to
get a different commission would be to change the political support for the
Commission, and reward commissioners on a basis unrelated to their services to
the carriers.
Until the basic log
of political life is developed, reformers will be ill-equipped to use the state
for their reforms, and victims of the pervasive use of the state’s support of
special groups will be helpless to protect themselves. Economists should
quickly establish the license to practice on the rational theory of political
behavior.
[1] The domestic producers of
petroleum, who also benefit from the import quota, would find a tariff or cash
payment to domestic producers equally attractive. If their interests alone were
consulted, import quotas would be auctioned off instead of being given away.