Regulatory Capture is Impeding Innovation and Entrepreneurialism - Vision Series
Regulatory Capture is a A Net Negative to Society - here are potential solutions
This is part of our series called Vision Series, our vision and blueprint for what we think makes the most sense for better economic, financial and societal systems. We are focused in creating a suggested blueprint for the future. Much of the thought and research from this series comes from a series of discussions with the great finance blogger Charles Hugh Smith - see his blog and substack.
Today we focus on Regulatory Capture - what is it, where/why/how is it happening, why is it hindering economic development, in particular on innovation and entrepreneurialism - and most importantly - how can it be minimized or eliminated to help foster innovation and entrepreneurialism?
What is Regulatory Capture?
Investopedia defines it as:
“Regulatory capture is a process by which regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that an agency, charged with acting in the public interest, instead acts in ways that benefit incumbent firms in the industry it is supposed to be scrutinizing.”- source link
Regulatory Capture - Where, Why, How Happening?
Regulatory Capture is happening everywhere but especially where there is a representative form of democracy, and here is how. Special Interest Groups (SIGs) and lobbyists representing various organizations and companies give generous donations to politicians as the government’s representatives to help the politicians win elections or stay in political power, in exchange for signing regulations written by the donating organizations and companies. The regulations are written in a way which allows the organizations or companies to enhance or maintain their status politically, economically or geo-politically. In many cases, the regulations are written in such a way as to essentially to make it very difficult or to outright prevent new entrants into their market share of products/services - even though there may be some great new innovative or entrepreneurial initiatives by for example new companies or recent university graduates with great ideas.
Regulatory capture can lead to economic inefficiency and increased wealth inequality by distorting the market and regulatory environments in favor of powerful interests at the expense of competition, innovation, and the public. When industries exert influence over regulatory bodies, they may push for regulations that create barriers to entry, stifling competition. This results in monopolistic or oligopolistic markets, where a few dominant firms enjoy reduced competition. Without the pressure of competitors, these firms may not have incentives to innovate or improve efficiency, leading to market inefficiencies and higher costs for consumers.
An example of this would be The Federal Communications Commission (FCC), which regulates the communications industry in the U.S., has been accused of favoring large telecom companies like Verizon and AT&T. Critics argue that policies such as the rollback of net neutrality rules show the FCC siding with corporate interests rather than consumer rights. The revolving door between industry executives and FCC regulators further fuels concerns over regulatory capture.
Regulatory capture can result in resources being allocated toward companies lobbying for favorable treatment instead of productive investments. This diminishes overall economic output, as capital is not being used in its most efficient way.
Regulatory capture allows influential industries to secure favorable regulations that protect their profits and market positions. For instance, the financial industry benefited from deregulation and lenient oversight prior to the 2008 financial crisis, which allowed certain firms to accumulate vast wealth while the broader economy suffered (Business Inside). Wealth becomes concentrated in a few corporations or individuals who benefit from this unequal regulatory framework, worsening the income and wealth gaps.
Podcasts and Posts on Regulatory Capture
Here is a great podcast from FRA’s Roundtable Insight with Charles Hugh Smith, discussing regulatory capture and its effects:
And here is MUST WATCH/LISTEN podcast by The All-In Podcast with Bill Gurley - link here or below to watch/listen - this podcast will blow your mind:
Charles Hugh Smith has written excellent blog post on “The Bottomless Swamp of Regulatory Capture.” Some great points:
In the old days, warlords exacted tolls at bridges and on pathways. Today, parasitic corporations stripmine the public with cartels, quasi-monopolies, price-fixing and predatory pricing mandated by the government. Look no further than Americans paying 7 to 10 times more for insulin than the citizenry in other developed nations for an example of how modern-day parasites maximize profits while delivering no additional value for the predatory 7X cost.
Theoretically, democracies are supposed to limit the pillage, predation and parasitic exploitation of the public by warlords--oops I mean corporations. But democracy is in effect a wide-open auction of favors in which corporations bid for loopholes inserted in 700-page congressional bills, regulatory tweaks that favor their interests at the expense of competitors and innovators that might threaten their monopoly, etc.
The revolving door between government agencies and the corporations they regulate / fund is so well-greased that it's been normalized: ho-hum, another Pentagon official went to work as a lobbyist for a defense contractor, another bureaucrat retired and is now a lobbyist for Big Pharma.
All this grift, graft, predatory pricing, price-fixing and parasitic monopolizing costs the public and the economy dearly. Funding that could have been invested productively to serve the common good is sluiced into the private accounts of politicos, fixers, lobbyists, billionaires and other "shareholders" (i.e. the top 0.1%) where it piles up as dead capital, unavailable for any purpose other than the further maximization of private gain by any means available, which of course is led not by innovation but by regulatory capture, as innovation is risky while regulatory capture is like shooting fish in a barrel.
There is a systemic cost to the predation of regulatory capture: stagnation, decay and collapse. Bleed the productive populace dry and stifle competition to maximize private / corporate gains, and you end up hollowing out your economy and society, with easily predictable consequences: the parasites expire with the host.
See also a related blog post from Charles Hugh Smith - link here.
Some other related podcasts as well:
How Regulatory Capture is a Net Negative to Society (28:34 min)
Michael Douville and I discuss: 2008 Redux? Warning! (19:42 min)
What can be done to Minimize or Eliminate Regulatory Capture?
Here are some processes or positive ideas that can help minimize or eliminate regulatory capture:
Regulation Prohibiting Regulatory Capture
Of course, the easiest and most direct way is to outlaw the practice of regulatory capture altogether. This would be very difficult to do as it would require the very lawmakers that are being manipulated through regulatory capture in the first place to write a prohibiting regulation - the organizations and/or companies involved in the regulatory capture would take actions not allowing this to happen.
Regulatory Review Process
A process that could help in the right direction would be involving the major auditing firms like EY, Deloitte and KPMG to conduct a government-wide regulatory review process of all regulations:
eliminating duplicate regulations
eliminating outdated regulations
eliminating regulations written for the purpose of or resulting in regulatory capture
optimizing overlapping regulations
eliminating, minimizing or rewriting regulations prohibiting or making it difficult to promote innovation and entrepreneurialism
To some extent, a new department to be created in the United States called the Department of Government Efficiency (DOGE) may implement some or parts of this suggested regulatory review process.
A Smaller and Limited Form of Government
A smaller government, with fewer regulatory agencies, is less susceptible to regulatory capture, as there are fewer opportunities for industries to influence regulators. Limited government corresponds to limited regulations. In theory, limited regulations would reduce the ability of large corporations to use regulations to block competitors and entrench themselves into monopolistic positions, thus fostering more competition, innovation, and efficiency. By encouraging open markets and competition, smaller businesses can thrive without the burden of regulations that benefit only well-established players.
The new President of Argentina, Javier Milei, is a proponent of this approach of limited government - he is in the process of cutting government expenses and eliminating many government departments and ministries.
Direct Democracy
Direct democracy we think is another great suggestion that can be done to help minimize or eliminate regulatory capture. Direct democracy means that there is minimal or non-existent representative democracy, so there are limited or no elected representatives who could be subject to be legally influenced by SIGs or lobbyists. In other words, the citizens vote directly on proposals, questions or referendums. In another podcast with Charles Hugh Smith, direct democracy is discussed and could be implemented as follows:
Only confirmed and vetted citizens of a country can be eligible to vote;
Citizens can vote if they pass two exams, one on economics and one on economics history - thereby educating the citizen to not vote for free handouts or reckless government spending programs. Representative democracy has morphed into a “vote for me and I will pillage the public treasury and give you all these things for free.”
This system of direct democracy is similar to Switzerland’s current referendum setup. Citizens can vote on say - Do you want to go to war with CountryX? - then directly voting as - “No” or - Do you want to spend money on this program? - then directly voting as - “No”. No involvement or influence of an elected representative making the decisions. Direct democracy can be implemented through online applications or through secure cellphone or laptop technologies, with strong authentication - very common and easy to do in today’s digital world.
Disclaimer: This information and material contained in this post is of a general nature and is intended for educational purposes only. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. This post does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Furthermore, this post does not endorse or recommend any tax, legal, or investment related strategy, trading related strategy or model portfolio. The future performance of an investment, trade, strategy or model portfolio cannot be deduced from past performance. As with any investment, trade, strategy or model portfolio, the outcome depends upon many factors including: investment or trading objectives, income, net worth, tax bracket, suitability, risk tolerance, as well as economic and market factors. Economic forecasts set forth may not develop as predicted and there can be no guarantee that investments, trades, strategies or model portfolios will be successful. All information contained in this post has been derived from sources that are deemed to be reliable but not guaranteed.