I do not want to imply that all is rosy in my recent articles regarding regulation. Since the Reagan Presidency, the Law and Economics movement and the Public Choice school have dominated the intellectual argument regarding pollution prevention and control, worker safety, and consumer rights and, in tandem with increasing numbers of conservative judges have pushed regulatory law and practice in unprogressive, laissez faire directions.
Rescuing Regulation, a recent bookby Reza R. Dibadj1, makes a compelling, reasoned measured case for a change in environmental (and other) regulatory policies. The book defines regulation as “direct public intervention into private contractual arrangements.” The author proposes some regulations that target sectors, while others concentrate on groups such as consumers, stockholders or employees. He takes on both sides of the regulation debate, arguing the usefulness of regulations and the need for them to make economic and social sense.
Dibadj states that there are historically three common failings of markets that regulations address: badly-behaving concentrations of economic power (especially natural monopolies and oligopolies), externalities and inequalities of information between negotiating parties. These are all systemic problems with markets – they are not going away anytime soon. Dibadj then argues that industry, consumer, and other regulations are not only necessary for these traditional failings, but also for two other reasons, both common justifications of regulatory actions; equitable redistribution and social paternalism. The author outlines a good case for efforts to combat abusive market behavior, advance social justice, look out for employees and stockholders, and protect the environment.
The book is well structured around answering the following big questions:
- What was the original case for regulations?
- Why and how were these justifications trashed?
- What’s the regulatory status quo in America today?
- Is conventional economics right in its critique of regulations?
- What reform agenda and design principles follow from new theoretical approaches and studies in economics?
- How can we create better regulatory law that is more in accord with current technological, economic and social realities and passes the tests of logic and feasibility?
- How should we reform our regulatory institutions?
Reza Dibadj does an excellent job in tackling all these questions. His writing is clear and he establishes the necessary context for understanding his answers. His critiques of Law and Economics and Public Choice thinkers are compelling on their empirical grounds alone, citing past and recent research which negates their predictions. For example, Dibadj points out that real voters, consumers, and investors do not behave like the mathematical assumptions underlying neo-classical microeconomics or possess the pure rent-seeking motives that Public Choice theorists posit. Studies also suggest that a number of features of New Economy industries (high fixed costs, network effects, path dependence2) encourage economic concentration, increasing economies of scale and scope, and even predatory practices in some firms. These conventional theories also do not explain recent bad behavior by Enron and others.
But Dibadj also makes a number of persuasive conceptual and logical points that savage the underlying assumptions of Public Choice and neo-classical economics, such as: downplaying transaction costs, disregarding distributional issues, ignoring initial entitlements (some market participants are rich, others are poor), exalting the private sector over the public, et cetera. He even uses recent studies in behavioral economics to outline a good case for new approaches that entail some needed paternalism.
However, the author does not call for a return to old ways of regulating. The entire process requires some simplification and better focus on what’s doable and less costly. Privatized or deregulated industries still require oversight, transparency measures and appropriate staffing, both in skills and numbers. These precautions will guard against regulatory scandals such as the savings and loan debacle while providing a logical, achievable framework for ensuring that industry growth does not come at the expense of the public good.
Dibadj believes governments should take measures to restore the standing and importance of regulatory policies and of the staff who enforce them. These reforms require a restatement of the idea of the “public interest” that promotes social justice.
This book is a useful work for diagnosis and reform. A reviewer summarized his assessment when he stated that this book “shows, with great power and effect, that the rational school is empirically unsupported, conceptually flawed and normatively wrong headed.”
This is a fine book.