The ref has to be more powerful than the players.
When neoliberal economists began dismantling the regulatory state under Ronald Reagan (a process that has continued without interruption under every president, Republican and Democrat, since), they insisted that they weren’t so much concerned with regulation, but rather, regulatory capture.
Today, the phrase “regulatory capture” gets thrown around by people of all political persuasions, and is understood in a colloquial sense, meaning something like, “a regulator who is beholden to its industry and therefor makes bad regulations that run counter to the public interest.”
But for the Chicago School of Economics — the laboratory where neoliberal capitalism was incubated and then unleashed upon the world — “regulatory capture” means something far more drastic.
For them, “regulatory capture” is a counsel of despair, a nihilistic belief that capture is inevitable, because “public choice theory” predicts that successful businesses will fight harder for regulation than the new market entrants they seek to exclude or the consumers they seek to rip off or harm with defective products.
Let that sink in for a moment: according to public choice theory, it’s essentially impossible for states to regulate firms, and any attempt to do so will result in “capture,” with big firms cementing their dominance by fusing with the state and using it to legitimize their unconscionable conduct.
For this theory to be true, states have to be weak: both in terms of power, and in terms of morals. This nihilistic theory of regulatory capture assumes that regulators are overmatched by firms, and that individual regulators will sell out when an industrialist starts waving around a sheaf of bills.
But of course, people have a whole spectrum of motivations, and if some people are corruptible, others are steadfast. The dogma of “incentives matter” elevates influence to certainty: “we have selfish impulses, therefore we are selfish, always.”
But as Yochai Benkler has pointed out, even the most Ayn Rand-poisoned stockbroker can be observed near the playgrounds of Wall Street, shouting at their toddlers, “Timmy, share!” No one wants to live with someone who acts as though human behavior begins and ends with “incentives matter.”
Rather than assuming that every regulator has a price, let us instead say that regulatory agencies — like other human institutions — are made up of people with different blindspots, weaknesses, strengths and non-negotiable principles.
To keep these institutions honest, we want to make them transparent and accountable, and — crucially — more powerful than the corporations whose conduct they are charged with overseeing.
Of all the regulations that were gutshot by Ronald Reagan and then double-tapped by the administrations that came after him, none is more consequential than antitrust.
During the trustbuster era, we treated corporate power itself as suspicious, irrespective of whether it was wielded beneficently or cruelly.
There was a good reason for this: if regulators are to keep corporations honest, they have to be stronger than those corporations. A referee can’t oversee a game where the players are powerful enough to ignore the ref’s calls.
Antitrust is the regulation that makes other regulations possible. If firms are allowed to form monopolies — and extract “monopoly rents” (the economists’ term for the massive profits companies can scoop up when they have no competition) — then they can use that cash to fend off attempts to regulate them otherwise. They can shrug off fines, or tie up regulators in endless court battles, or go on the influence-peddling sprees that lead to the capture that (ironically) the Chicago School warned us of.
Take IBM: when the DoJ took up IBM’s monopoly in 1970, the company was able to use its monopoly profits to fight them to a draw. Every year, for 12 consecutive years, IBM spent more on antitrust lawyers than the entire DoJ spent for all the antitrust lawyers working all the cases that the DoJ was pursuing. IBM literally outspent the US government.
After twelve long years — a quagmire known as “Antitrust’s Vietnam War” — IBM wriggled off the hook. They’d held out long enough to see the election of Ronald Reagan and the neutering of antitrust law.
Or take AT&T: from the first time the DoJ tried to break up Ma Bell until it finally succeeded, 69 years elapsed. Every time the DoJ got close to a victory, AT&T brought out its big guns — cronies from the Pentagon who lobbied on behalf of the Bell System, declaring it essential to American national security (talk about regulatory capture!).
The mistake was in letting these companies grow to the size they attained in the first place. Once they were too big to fail, they were too big to jail, and they were neither disciplined by competition nor regulation.
Even the most ardent small government type will admit that government has some role to play, even if it’s only enforcing contracts that are bargained for by independent, unregulated entities.
But “enforcing contracts” is exactly the kind of game that only works if the ref is more powerful than the players. If a corporation is permitted to grow so large that it can push the government around, then the government can’t be relied upon to step in when that company reneges on its bargains.
Anyone who lived through the rise of the massive, unaccountable, racist, torturing, spying, conquering post-9/11 security state should be suspicious of what Big Government can do. Government power is not a virtue in and of itself, and the more power we give the government, the more risk we run of state overreach.
But even if governments do nothing but enforce contracts, they still have to be bigger and more powerful than the largest companies and cartels.
This should be an area where good faith leftists and capitalist trufans can come together: making small government possible by banning big business.