Law, Ma c T.
A icle
Unde s anding he ise o egula ion du ing he
p og essi e e a: Wha ole o Aus ian economics?
Essays in Economic & Business His o y (EEBH)
P o ided in Coope a ion wi h:
Economic and Business His o y Socie y (EBHS)
Sugges ed Ci a ion: Law, Ma c T. (2024) : Unde s anding he ise o egula ion du ing he p og essi e
e a: Wha ole o Aus ian economics?, Essays in Economic & Business His o y (EEBH), ISSN
2376-9459, Economic and Business His o y Socie y (EBHS), Rock o d, MI, Vol. 42, Iss. 2, pp. 99-119
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99
Essays in Economic & Business His o y
2024, 42 (2): 99-119
Published June 18, 2024
Unde s anding he Rise o Regula ion du ing he P og essi e
E a: Wha Role o Aus ian Economics?
Ma c T. Law, Depa men o Economics, Uni e si y o Ve mon , [email p o ec ed]
Abs ac
In his a icle I selec i ely su ey he economic his o y li e a u e on he ise o egula ion in
Ame ica du ing he P og essi e E a wi h he goal o iden i ying how his li e a u e is in o med
by Aus ian economic heo y, and how Aus ian heo y migh con ibu e o ou unde s anding
o he o igins and g ow h o he egula o y s a e. I a gue ha much o he li e a u e on he
o igins o P og essi e E a egula ion is consis en wi h he posi i e aspec s o Aus ian
economics, la gely because Aus ian heo y o e laps wi h public choice heo y, he analy ical
oolki used by mos s udies o he ise o egula ion. Howe e , he no ma i e implica ions o
Aus ian heo y ega ding he e iciency consequences o egula ion a e no always suppo ed
by he li e a u e on he P og essi e E a. I also discuss wo ways in which Aus ian heo y migh
add o ou unde s anding o he ise o egula ion du ing his pe iod. The i s conce ns he
dynamics o how egula ion e ol es. The second conce ns he ole o en ep eneu ship wi hin
he bu eauc acy in shaping he e olu ion and en o cemen o egula ion.
JEL Classi ica ions: B53, K20, K23, L51, N41, N42.
Key Wo ds: egula ion, economic his o y, poli ical economy, public choice heo y, Aus ian
economics, P og essi e E a.
Essays in Economic & Business His o y 42 (2) 2024
100
In oduc ion
The P og essi e E a wi nessed a massi e ans o ma ion o he ole o Ame ican go e nmen
in egula ing economic ac i i y. Be ween 1880 and 1920, local, s a e and ede al go e nmen s
in Ame ica began o egula e he quali y and sa e y o mea , in e s a e anspo a ion and
shipping, p oduc labels, he ad e ising and ma ke ing o goods and se ices, p o essional
s anda ds, he p ices ha public u ili ies cha ged o gas and elec ici y, as well as compe i ion
among i ms. Majo ede al egula ions enac ed du ing his ime include he In e s a e
Comme ce Ac (1889), he She man Ac (1890), a ious Mea Inspec ion Ac s (1890, 1891,
1906), he Pu e Food and D ugs Ac (1906), he Fede al Rese e Ac (1913), and he Fede al
T ade Commission Ac (1914). These laws as well as o he s spawned egula o y bodies like
he Bu eau o Animal Indus y, he In e s a e Comme ce Commission, he Food and D ugs
Adminis a ion, he Fede al Rese e Sys em, and he Fede al T ade Commission, agencies
ha had an endu ing in luence on he US economy h oughou he wen ie h cen u y. An
impo an ask o social science is o explain why go e nmen egula ion expanded du ing his
ime, and o analyze i s impac on he alloca ion o esou ces.
Economic his o ians o he P og essi e E a ha e ad anced wo b oad hypo heses o
explain he ise o egula ion du ing his pe iod. The i s , he so-called Public In e es Theo y
(PIT), posi s ha egula ion a ises o sol e ma ke ailu es (F ancis Ba o 1958; A hu Pigou
1920). Applied o he P og essi e E a, he PIT a gues ha echnological changes du ing he
la e nine een h cen u y ga e ise o la ge i ms wi h subs an ial ma ke powe as well as new
and un amilia goods and se ices abou which he e was asymme ic in o ma ion. Public u ili y
egula ions, ail oad egula ion, an i us legisla ion, mea inspec ion equi emen s, and ood
labeling laws we e enac ed o cu b he monopoly powe o la ge i ms and o educe
in o ma ional asymme ies abou he sa e y and quali y o goods and se ices. The second,
he Special In e es Theo y (SIT), a gues ha egula ion a ises o ad ance p i a e in e es s a
he expense o economic e iciency (Sam Pel zman 1976; Geo ge S igle 1971). SIT
p oponen s a gue ha he echnological changes ha ga e ise o la ge i ms and new
p oduc s du ing he P og essi e E a c ea ed winne and lose s, bo h o whom had an incen i e
o use egula ion o il he compe i i e playing ield in ways ha we e p i a ely bene icial bu
socially cos ly. Acco ding o his pe spec i e, ail oad egula ion, an i us , mea inspec ion,
and o he egula o y ini ia i es adop ed in his pe iod we e he p oduc o en -seeking by
special in e es s ha sough o use go e nmen o inc ease en y ba ie s and educe
compe i ion, ha ming o e all wel a e.
A leas in he mode n economic his o y li e a u e, bo h he PIT and he SIT iew
egula ion h ough he lens o public choice heo y: ac o s a e assumed o be a ional and sel -
in e es ed; he logic o collec i e ac ion a o s smalle , homogeneous g oups o e la ge ,
he e ogeneous ones; poli icians a e o e-maximize s who supply policy ( o example,
egula ion) in exchange o poli ical suppo ; and he po en ial o egula ion o ans e weal h
among g oups c ea es oppo uni ies o en -seeking.
1
Addi ionally, in bo h app oaches,
egula ion is an equilib ium ou come o changes in as es, echnology, and ins i u ions.
Howe e , he wo pe spec i es di e in hei no ma i e implica ions. Whe eas he SIT posi s
ha egula ion will end o educe e iciency (Pel zman 1976; Richa d Posne 1975; S igle
1971), he PIT akes he iew ha compe i ion among in e es g oups and poli icians will push
egula ion owa d imp o ing e iciency (Ga y Becke 1983; Donald Wi man 1989, 1995).
Mo eo e , while p oponen s o he SIT gene ally a gue ha he ma ke ailu es iden i ied by
he PIT a e adequa ely add essed by p i a e mechanisms o he cou sys em, he PIT a gues
1
The o iginal li e a u e on he PIT simply assumes ha go e nmen in e enes o sol e ma ke
ailu es, wi hou examining he unde lying incen i es o poli icians and in e es g oups (see, o ins ance,
Ba o 1958). Since his li e a u e is gene ally no his o ically in o med and iews egula ion as a deus
ex machina, I will no elabo a e on i .
Law: Aus ian Economics and P og essi e E a Regula ion
101
egula ion was he bes a ailable emedy o hese ma ke ailu es, gi en he ailu es o he
cou sys em and he impe ec ions o p i a e solu ions ha we e p e alen du ing he
P og essi e E a (Edwa d Glaese and And ei Shlei e 2003; Shlei e 2005).
Me hodologically, Aus ian economics and public choice heo y o e lap subs an ially
(Pe e Boe ke and Pe e Leeson 2004; Boe ke and Edwa d López 2002; Daniel Su e 2002).
Much o he economics li e a u e on egula ion in gene al, and P og essi e E a egula ion in
pa icula , is he e o e compa ible wi h impo an aspec s o Aus ian heo y. Con e sely,
schola s wo king wi hin he Aus ian adi ion ha e also con ibu ed o ou unde s anding o
he ise o P og essi e E a egula ion in ways ha a e complemen a y o mo e mains eam
s udies (see, o ins ance, Jack High and Clay on Coppin 1988, and Mu ay Ro hba d 2017).
2
Aus ian heo y, howe e , is dis inguished om he mains eam li e a u e by a g ea e
app ecia ion o disequilib ium and he dynamics o egula ion, analyzing no only how
egula ion a ises, bu how i spawns new in e es g oups, who in u n push o mo e egula ion,
se ing in o mo ion a pa h-dependen p ocess o egula o y e olu ion.
3
Addi ionally, Aus ian
heo y places a g ea e emphasis on en ep eneu s, he pu pose ul, indi idual p oduce s,
poli icians, and bu eauc a s who disco e p o i oppo uni ies and use hei unique knowledge
o exploi hem. Mains eam app oaches, in con as , a e la gely silen abou disequilib ium,
dynamics, and en ep eneu s, ocusing ins ead on he in e es g oup p essu es ha gi e ise
o he adop ion o pa icula egula ions and he s a ic gains and losses implied by hese
policies.
This a icle is s uc u ed as ollows. I begin wi h a b ie discussion o changes in he
na u e o he Ame ican economy and go e nmen du ing he la e nine een h cen u y wi h he
goal o iden i ying ac o s ha made he P og essi e E a conduci e o he eme gence o
egula ion. This is ollowed by a selec i e su ey o he li e a u e on P og essi e E a
egula ion, using he PIT and SIT as o ganizing amewo ks.
4
I a gue ha much o his
li e a u e, which is based hea ily on public choice heo y, is consis en wi h he posi i e
implica ions o Aus ian heo y. Howe e , he no ma i e implica ions o Aus ian heo y a e no
always suppo ed by he li e a u e on P og essi e E a egula ion, which some imes inds ha
egula ion imp o es economic e iciency. I hen iden i y wo a enues h ough which Aus ian
heo y migh add o ou unde s anding o he ise o egula ion. The i s conce ns he dynamics
o how egula ion c ea es new in e es g oups, and how he g ow h o new in e es g oups
shapes he pa h o egula ion. The second is he ole o en ep eneu ship wi hin he
bu eauc acy, and how en ep eneu ial bu eauc a s in luenced he adop ion and e olu ion o
egula o y policy. This is ollowed by a conclusion.
2
In ac , many economis s who ha e s udied P og essi e E a egula ion iden i y wi h bo h public
choice and Aus ian app oaches.
3
A dynamic app oach o he s udy o egula ion ha conside s he pa h-dependen na u e o
his o y is also a cha ac e is ic o he new ins i u ional app oach o economic analysis. See Douglass
No h (1990) o ins ance.
4
This su ey will ocus on h ee egula o y a eas ha we e o signi icance du ing he P og essi e
E a, namely, ood and d ugs egula ion, animal disease con ol and mea sa e y, and ail oad egula ion.
This is clea ly no exhaus i e. Space cons ain s p eclude me add essing he ex ensi e li e a u e on
o he P og essi e E a egula ions like s a e-le el occupa ional licensing laws, s a e and ede al
ad e ising laws, s a e and ede al an i us egula ion, municipal and s a e public u ili y egula ion, and
s a e and ede al banking egula ion. While his is an omission, he b oad heo e ical amewo ks I
ou line he e—speci ically, he SIT and he PIT—a e applied in all hese s udies. Addi ionally, he
analysis o hese o he egula o y domains could po en ially bene i om he Aus ian insigh ha I
iden i y in his pape .
Essays in Economic & Business His o y 42 (2) 2024
102
US Economy and Go e nmen Du ing he La e Nine een h Cen u y
The la e nine een h cen u y was a pe iod o signi ican echnological and o ganiza ional
change in he US economy. Wes wa d mig a ion, he expansion o ag icul u al land, and he
mechaniza ion o a ming, d ama ically inc eased ag icul u al ou pu and a m labo
p oduc i i y. P oduc i i y inc eases in ag icul u e allowed labo o be ealloca ed o
manu ac u ing, con ibu ing o a ise in indus ial p oduc ion and u baniza ion. Technological
changes in manu ac u ing and he de elopmen o new and cheape sou ces o powe , in u n,
ga e ise o la ge i ms ha we e able o a ain signi ican economies o scale in sec o s like
i on and s eel.
5
The g ow h o la ge i ms was also acili a ed by he de elopmen o he US ail oad
ne wo k which expanded by leaps and bounds o e he cou se o he nine een h cen u y.
6
As
a consequence o compe i ion among ail oad lines, and be ween he ail oads and o he o ms
o anspo a ion (i.e. canals and wagons), anspo a ion cos s ell, allowing i ms o exploi
economies o scale. While i is impo an no o o e s a e he mac oeconomic impac o he
ail oad (Da id Donaldson and Richa d Ho nbeck 2016; Robe Fogel 1964), i s de elopmen
ne e heless in luenced he geog aphic dis ibu ion o economic ac i i y and he deg ee o
u baniza ion. By connec ing dis an egions o he coun y, he ail oad allowed goods o be
shipped be ween he in e io and he coas al ci ies, inc easing egional specializa ion and
u ban g ow h (A ack, F ed Ba eman, Michael Haines, and Robe Ma go 2010; Ho nbeck and
Ma in Ro embe g 2019; Sukkoo Kim 1995, 2000). Addi ionally, by acili a ing long dis ance
communica ion ( he eleg aph accompanied he ail oad), he ail oad con ibu ed o he ise
o he mode n mul iuni i m (Al ed Chandle 1977).
As a consequence o hese as well as o he de elopmen s, la ge mul iuni i ms in
indus ies like mea packing, ood manu ac u ing, and oil e ining g adually displaced smalle
local businesses (Kim 1999). These na ional mul iuni businesses de eloped new p oduc s
like ma ga ine, d essed bee , and canned oods ha we e sold o consume s along wi h long-
s anding, locally-p oduced goods like bu e , locally-slaugh e ed mea s, and esh ui s and
ege ables (Susan S asse 1989; James Young 1989). Meanwhile, he eme gence o chain
s o es and he ise o na ional newspape s and magazines changed he ways ha goods and
se ices we e ma ke ed o households (Kim 2001; God ey Lebha 1963; Daniel Pope 1983).
Ame ican go e nmen also expe ienced a quali a i e shi in he la e 1800s (S ephen
Skow onek 1982). Du ing he an ebellum pe iod, go e nmen in Ame ica was small and highly
decen alized. Regula ion o economic ac i i y was minimal and le p ima ily o local
go e nmen s and hei espec i e cou s. The limi ed adminis a i e unc ions o go e nmen
equi ed li le expe ise o specialized knowledge. Unde he spoils sys em, poli ical pa ies
assigned go e nmen jobs o wo ke s who we e selec ed p incipally on he basis o pa isan
loyal ies. A e he Ci il Wa , howe e , he locus o he egula o y ac i ism shi ed away om
locali ies owa ds s a es and he ede al go e nmen . As a esul o ci il se ice e o m, he
spoils sys em was elimina ed, and a me i -based, p o essionalized bu eauc acy g adually ook
o e go e nmen ’s adminis a i e unc ions, i s wi hin he ede al go e nmen , and e en ually
a he s a e-le el (Ronald Johnson and Ga y Libecap 1994; Ani udh Ruhil and Ped o Camões
2003). Inc easingly, “expe s”, o en wi h uni e si y deg ees, assumed impo an oles wi hin
his g owing cad e o go e nmen employees. Along wi h hese s uc u al changes came new
ideas abou he p ope ole o he s a e, and how go e nmen could be used o aid pa icula
in e es s ( o ins ance, a me s in dis ess) o o sol e socio-economic p oblems (Daniel
5
Fo a gene al o e iew o de elopmen s in ag icul u e and indus y du ing his pe iod see
chap e s 15 and 17 o Je emy A ack and Pe e Passell (1994) as well as A ack (1986).
6
The o al miles o ail oad ack in Ame ica inc eased om 30 in 1830 o 55,000 in 1870 o o e
160,000 by 1890. See A ack and Passell (1994, 429-430).
Law: Aus ian Economics and P og essi e E a Regula ion
103
Rodge s 1998). Acco dingly, changes in he Ame ican economic landscape du ing he la e
1800s we e accompanied by impo an changes in he na u e o go e nmen .
The PIT and he Rise o Regula ion
Acco ding o he PIT, egula ion is adop ed o sol e ma ke ailu es. Ma ke ailu es like
monopoly powe , asymme ic in o ma ion, and ex e nali ies c ea e a po en ially p oduc i e ole
o go e nmen (Ba o 1958). Gi en ha he la e nine een h cen u y wi nessed he expansion
o la ge, na ional i ms a he expense o small, local ones, as well as he in oduc ion o new
and un amilia goods and se ices, is i possible ha egula ion was adop ed o cu b he
ma ke powe o la ge i ms and educe in o ma ional asymme ies ega ding new p oduc s?
And gi en he changes in he na u e o go e nmen ha occu ed du ing his pe iod—in
pa icula , he ise o a p o essionalized ci il se ice wi h expe knowledge as well as changes
in a i udes abou he ole o he s a e—did go e nmen egula ion become a iable
mechanism o dealing wi h hese ma ke ailu es?
Ea ly schola ship, mos ly by his o ians, o P og essi e E a egula ion is somewha
consis en wi h his public in e es pe spec i e. These la gely na a i e accoun s a gue ha
he abuse o dominan posi ion by la ge i ms like S anda d Oil, he ail oads, and he la ge
mea packe s d o e he adop ion o laws like he She man Ac and he In e s a e Comme ce
Ac . His o ians wo king om his pe spec i e, some imes called he “P og essi e View”, ha e
also a gued ha he Pu e Food and D ugs Ac o 1906 as well as he Mea Inspec ion Ac o
1906 o we e adop ed o cu b ood adul e a ion and o ensu e he sa e y and quali y o mea
(John Hicks 1931; Geo ge Mowe y 1958; F ed Shannon 1945).
7
Howe e , hese accoun s do
no i nea ly wi hin an economis ’s concep ion o he PIT since he analy ical amewo k is no
explici ly one o e iciency. While conce ns abou , o ins ance, “monopoly abuses” o “p oduc
sa e y” play a ole in hei analyses, P og essi e View his o ians see poli ics as a s uggle
be ween “eli es” and “ he people” and egula ion as an a emp o cu b he economic and
poli ical powe o he eli es o e he people (John Higham 1965). Laws like he She man Ac ,
he In e s a e Comme ce Ac , o he Mea Inspec ion Ac a e pe cei ed by hese schola s no
p ima ily as mechanisms o educing ma ke powe o elimina ing in o ma ional asymme ies
(i.e. sol ing ma ke ailu es), bu as a means o es aining he poli ical powe o la ge
co po a ions.
Mo e ecen schola ship by economis s has a gued ha he ise o P og essi e E a
egula ions like s a e pu e ood egula ion, u h-in-ad e ising egula ion, occupa ional
licensing, and mea inspec ion, is consis en wi h he PIT (see, o ins ance, Zeynep Hansen
and Ma c Law 2006; Law 2003, 2006; Law and Kim 2005; Alan Olms ead and Paul Rhode
2015). These accoun s di e om he P og essi e View in he ollowing espec s. Fi s , in his
body o wo k, he public in e es is de ined in e ms o economic e iciency. Second, his
schola ship uses he amewo k o public choice heo y and iews egula ion as he p oduc o
sel -seeking beha io by o ganized in e es g oups who sol e hei collec i e ac ion p oblems
in o de o ob ain egula ion (Becke 1983). Thi d, while hese s udies ecognize he po en ial
o ma ke mechanisms and he cou s o sol e ma ke ailu es, hey a gue ha p i a e
solu ions we e, o a a ie y o easons, unable o wo k e ec i ely du ing his pe iod.
Regula ion may ha e been he bes a ailable mechanism a he ime o dealing wi h he
ma ke ailu es ha we e a ising in a apidly indus ializing and inc easingly u ban economy
whe e he cou s we e unwilling o punish la ge, poli ically powe ul manu ac u e s, and
7
A mo e ecen example o his app oach is Elizabe h Sande s (1999), who a gues ha ag a ian
in e es s in combina ion wi h o ganized wo ke s we e majo p og essi e cons i uencies in a o o
ail oad egula ion, an i us , and o he egula o y ini ia i es du ing his pe iod.
Essays in Economic & Business His o y 42 (2) 2024
104
chea ing on p oduc quali y was no easy o consume s o de ec (Glaese and Shlei e 2003).
8
Fou h, his body o schola ship is no me ely na a i e bu also a emp s o explici ly es he
PIT agains al e na i e hypo heses using da a. Finally, in some ins ances, he e is an a emp
o quan i y he bene i s o egula ion.
Conside , he ollowing examples as illus a ion. Law (2003) examines he adop ion o
s a e pu e ood laws, egula ions aimed a equi ing ood manu ac u e s o accu a ely label
hei p oduc s. Du ing he la e nine een h cen u y, ad ances in chemis y made i possible o
ood manu ac u e s o adul e a e (i.e. cheapen h ough he addi ion o impu i ies) hei
p oduc s in ways ha we e di icul o consume s o de ec (Jesse Pa k Ba e shall 1887;
Young 1989). This c ea ed a “lemons p oblem” (Geo ge Ake lo 1970) whe e asymme ic
in o ma ion abou p oduc quali y educed consume s’ willingness o pay o oods and esul ed
in adul e a ed p oduc s domina ing he ma ke . In such an en i onmen , manu ac u e s o
adi ional (i.e. non-adul e a ed) oods as well as consume s s ood o bene i om egula ion
compelling ood manu ac u e s o accu a ely label hei p oduc s. Repu a ion mechanisms
we e insu icien o induce manu ac u e s no o adul e a e hei p oduc s because ood
adul e a ion had become so sophis ica ed ha consume s could no easily de ec chea ing.
Addi ionally, as no ed ea lie , he cou sys em was an ine ec i e a ena o punishing
manu ac u e s. S a e egula o s, who we e ained chemis s, had a compa a i e ad an age in
success ully de ec ing adul e a ion and punishing i ms ha ailed o label hei wa es
accu a ely. Acco dingly, in a ious s a es, a poli ical coali ion o conce ned consume s
(pa ially spea headed by he g owing home economics mo emen ) and manu ac u e s o
adi ional oods u s success ully sough s a e-le el pu e ood laws ha equi ed accu a e
labeling o p oduc ing edien s (Lo aine Swains on Goodwin 1999). Using da a on ood p ices
and ood consump ion a he s a e le el, Law (2003) inds ha he e idence is mo e consis en
wi h he PIT han wi h o he possible hypo heses o egula ion. Addi ionally, he adop ion o
egula ion a he s a e-le el is posi i ely co ela ed wi h p oxies o he p esence o adi ional
ood manu ac u e s and conce ned consume s.
Olms ead and Rhode’s (2015) mas e ul accoun abou he Bu eau o Animal Indus y’s
e o s o ensu e he sa e y o mea is also consis en wi h he PIT. Founded in 1884, he
Bu eau o Animal Indus y (BAI) was an o ganiza ion wi hin he US Depa men o Ag icul u e
ha was cha ged wi h p e en ing diseased animals om being used as ood. P io o he
c ea ion o he BAI, he quali y and sa e y o mea p oduc s was egula ed by a mix o s a e
laws and cou ulings. Con lic s among s a e laws, as well as ambigui y in cou ulings abou
li es ock inspec ion, ga e ise o a si ua ion whe e i was possible o anche s, shippe s, and
mea packe s o pass along diseased mea . Addi ionally, epu a ion mechanisms we e
insu icien o police quali y. The majo mea packe s, no wi hs anding hei subs an ial
in es men s in sunk capi al which, heo e ically, should ha e ensu ed quali y, equen ly sold
diseased mea . Since he links be ween animal diseases and human heal h we e poo ly
unde s ood, consume s could no easily ell i hey had been sold mea om a sick animal.
A e decades o scien i ic in es iga ion, and bu eauc a ic lobbying o s onge ede al
egula ion, he BAI success ully e adica ed a numbe o li es ock diseases ha po en ially
a ec ed humans, including bo ine ube culosis, Texas e e , and hog chole a. Olms ead and
Rhode show ha he ne bene i s o he BAI’s egula o y e o s—which in ol ed con olling
he anspo a ion o animals ac oss s a e lines as well as o expo , unde mining s a e
au ho i y, and condemning p ope y wi hou compensa ion—we e o e whelmingly posi i e.
Fo ins ance, he au ho s es ima e ha he bene i - o-cos a io o elimina ing Texas e e was
be ween 9 o 1 and 20 o 1, while he a io o elimina ing oo and mou h disease was as high
8
Legal his o ians a e o he iew ha la e nine een h cen u y cou s we e ine ec i e a bi e s o
jus ice, and ha hei judgemen s we e o en sub e ed by poli ically powe ul business in e es s. See
Law ence F iedman (1985), Mo on Ho wi z (1992), and Duane Lockha d and Wal e Mu phy (1992).
Law: Aus ian Economics and P og essi e E a Regula ion
105
as 40 o 1. Gi en ha i is unlikely ha hese gains could ha e been achie ed wi hou he BAI,
Olms ead and Rhode’s case s udy is suppo i e o he PIT in e p e a ion o he egula o y
s a e.
The SIT and he Rise o Regula ion
Acco ding o he SIT, egula ion is he p oduc o lobbying by special in e es s who seek o
use he s a e o shi en s o hemsel es, gene ally a he expense o economic wel a e. Since
S igle (1971), economis s ha e ecognized he po en ial o egula ion o es ablish en y
ba ie s ha aise p ices and p o i s o incumben i ms. The SIT he e o e ocusses on he
po en ial o egula ion o gene a e p i a e bene i s o ce ain g oups, and he misalloca ion
ha esul s om his en -seeking ac i i y.
His o ians like Gab iel Kolko (1963, 1965) we e among he i s o a gue ha P og essi e
E a egula ion ep esen ed a iumph o special in e es s o e he public in e es . P oponen s
o his pe spec i e, some imes known as he “Re isionis View”, a gued ha laws like he
In e s a e Comme ce Ac , he Mea Inspec ion Ac , and he Pu e Food and D ugs Ac we e
adop ed no o help he gene al public, bu o bene i big business. In his classic s udy o he
ail oads, Kolko (1965) a gued ha he In e s a e Comme ce Ac (ICA) was adop ed o en o ce
a ca el ag eemen among he ail oads. In o he wo k, Kolko (1963) main ained ha he 1906
Mea Inspec ion Ac was adop ed a he behes o he la ge Chicago packe s, who wan ed o
enhance hei expo ma ke s h ough manda o y go e nmen inspec ion. Re isionis accoun s
o P og essi e E a egula ion a e he e o e consis en wi h cap u e o he egula o y appa a us
by la ge indus ial i ms ha used he coe ci e powe s o go e nmen o ad ance hei own
in e es s.
A la ge body o schola ship by economis s also a gues ha egula ion was adop ed o
bene i p i a e in e es s. Howe e , hese s udies di e om he Re isionis View in se e al
impo an espec s. Fi s , like he mode n PIT s udies men ioned ea lie , he SIT analyzes
egula ion h ough he lens o public choice economics, which iews egula ion as an
equilib ium ou come in a poli ical ma ke place whe e o ganized in e es s mus o e come hei
collec i e ac ion p oblems in o de o lobby success ully o policy. Second, schola s wo king
in his ein a e mo e nuanced in hei iden i ica ion o he winne s and lose s o egula ion. In
pa icula , unlike he Re isionis View, he mode n SIT app oach acknowledges ha he
bene icia ies o egula ion need no be la ge indus ial i ms. Small i ms, o en he lose s o
echnological and o ganiza ional change, ha e an incen i e o seek egula ion ha il s he
compe i i e playing ield back owa ds hemsel es (Donald Boud eaux and Thomas DiLo enzo
1993; Boud eaux, DiLo enzo, and S ephen Pa ke 1995; DiLo enzo 1985; Ru h Dup é 1999;
Thomas Ross 1986; Alex Taba ok 1998). Indeed, mo e o en han no , he bene i s o
egula ion a e sha ed among mul iple in e es g oups, who o m a winning coali ion in a o o
egula ion (Thomas Gilligan, William Ma shall, and Ba y Weingas 1989; Libecap 1992).
Thi d, he mode n SIT akes a s and on he economic e iciency consequences o egula ion.
In pa icula , i a gues ha egula ion ha ms wel a e and ha he ma ke ailu es ha egula ion
was aimed a co ec ing we e ei he absen o adequa ely add essed by he p i a e sec o
wi hou egula ion.
9
Finally, mode n SIT s udies o egula ion, like mode n PIT s udies, o en
combine na a i e and s a is ical e idence.
Gilligan e al.’s (1989) analysis o he o igins o he ICA u nishes an example o his
app oach. As discussed ea lie , he US ail oad ne wo k g ew subs an ially du ing he
9
Fo ins ance, Libecap (1992) posi s ha he la ge mea packe s had no incen i e o sell diseased
mea because o hei la ge in es men s in sunk capi al, while DiLo enzo (1985) a gues ha since he
p ices o many indus ial p oduc s we e alling du ing he la e nine een h cen u y, he e is no e idence
ha la ge i ms we e exploi ing hei monopoly powe . Dominick A men ano (1982) belie es ha he
en o cemen o an i us law has his o ically ha med economic e iciency.
Essays in Economic & Business His o y 42 (2) 2024
106
nine een h cen u y. While he expansion o he ail oad educed anspo a ion cos s o e all,
no all g oups bene i ed. In pa icula , while long-haul a es ell, due o compe i ion among he
ail oads as well as wi h canals and wagons, ail oads we e able o cha ge nea -monopoly
p ices on sho -haul ou es. This si ua ion p o oked eac ion among a me s in pa s o he
Midwes and in he wes e n egions o s a es like New Yo k and Pennsyl ania, who did no
bene i om compe i ion among long-dis ance ail oad lines, and he e o e paid high p ices o
ship hei p oduc s o eas e n ma ke s. Se e al s a es enac ed laws egula ing ail oad a es
in he 1870s and 1880s in esponse o poli ically-in luen ial a ming in e es s ha wan ed o
cu b he monopoly powe enjoyed by ail oads o e sho -haul ou es (Ma k Kanazawa and
Roge Noll 1993). The ail oads, in u n, challenged he cons i u ionali y o s a e-le el ail oad
a e egula ion, claiming ha i iola ed he comme ce clause o he Cons i u ion. In Munn s.
Illinois, he Sup eme Cou in 1877 upheld he au ho i y o s a e go e nmen s o place “di ec
bu dens” on p i a e p ope y “a ec ed wi h a public in e es ”. Howe e , he au ho i y o s a e
go e nmen s o egula e ail oads engaged in in e s a e ade was na owed in 1886 by he
cou ’s decision in Wabash, S . Louis & Paci ic Rail oad Company s. Illinois, which uled ha
only he ede al go e nmen had he au ho i y o place “di ec bu dens” on in e s a e comme ce
(A ack and Passell 1994, 658).
Lobbying o ail oad a e egula ion he e o e g a i a ed o he ede al le el. While, as
no ed ea lie , schola ship by his o ians has ocused on ei he a pu e public in e es o pu e
indus y cap u e explana ion o he ICA, Gilligan e al. (1989) a gue ha he ICA was he
p oduc o p essu e om mul iple in e es g oups. Acco ding o hese au ho s, he ICA was no
me ely an a emp o educe he monopoly powe o he ail oads (as P og essi e his o ians
ha e a gued). No was i pu ely a mechanism o en o cing a ca el among he ail oad
companies (as Kolko belie ed). Ins ead, Gilligan e al. (1989) show ha he ICA was designed
o placa e wo poli ically powe ul in e es g oups: sho -haul shippe s (i.e. a me s who did no
bene i om compe i ion among long-dis ance ail oad lines) who sough lowe sho -haul
a es, and he ail oads hemsel es, who wan ed egula ion o acili a e collusion o e long-
haul a es. Gilligan e al. (1989) demons a e ha he bicame al na u e o Cong ess, in
pa icula he need o ob ain majo i ies in bo h he House and he Sena e, combined wi h he
con igu a ion o in e es s in he wo Cong essional chambe s, equi ed ha ail oad egula ion
ad ance he in e es s o he sho -haul shippe s as well as he ail oads.
Libecap’s (1992) s udy o he o igins o ede al mea inspec ion and an i us is ano he
illus a ion o he SIT app oach. Acco ding o Libecap, poli ical p essu e o mea inspec ion
and an i us eme ged in esponse o he consolida ion o he mea packing indus y in
Midwes e n ci ies like Chicago. As a esul o he in oduc ion o e ige a ed ail ca s, i
became possible o slaugh e mea in he Midwes and anspo bee ca casses (“d essed
bee ”) o eas e n ma ke s. This was signi ican ly cheape han shipping li e ca le o eas e n
ma ke s (Ma y Yeage 1981). A coali ion o in e es s, speci ically, ca le aise s in wes e n
s a es and local slaugh e houses in eas e n ma ke s, desi ed mea inspec ion and an i us
egula ion simul aneously. Ca le aise s wan ed mea inspec ion and an i us in o de o
coun e claims ha Midwes e n ca le we e diseased and o educe he pe cei ed monopsony
powe enjoyed by he la ge Chicago packing i ms, who we e among he la ges pu chase s
o li e ca le. Local slaugh e houses, meanwhile, sough he wo ypes o egula ion in o de
o subs an ia e hei claims ha “d essed bee ” was unwholesome, and o educe he ma ke
powe enjoyed by he la ge Chicago packe s. The cen aliza ion o he mea packing indus y
and i s e ec on he compe i i e playing ield he e o e con ibu ed o he nea ly simul aneous
eme gence o ede al mea inspec ion ( he 1891 Mea Inspec ion Ac ) and ede al an i us
egula ion ( he 1890 She man Ac ).
10
10
Along hese lines, We ne T oesken (2002) a gues ha he desi e o p o ec small, ine icien
i ms was a key mo i a ion behind Sena o She man’s ad ocacy o a na ional an i us law. S ock ma ke
Law: Aus ian Economics and P og essi e E a Regula ion
113
his s udy, Law (2006) inds ha , al hough he Pu e Food and D ugs Ac was di icul o en o ce
h ough he cou s, he ledging FDA was qui e success ul in helping i ms imp o e he
eliabili y and sa e y o hei p oduc s.
22
In pa icula , by o e ing echnical assis ance o ood
manu ac u e s in ways o educe spoilage, and p o iding hem wi h quali y ce i ica ion
se ices, he young FDA le e aged i s ea ly-es ablished expe ise in ood chemis y o ob ain
egula o y compliance om ood p ocessing and manu ac u ing i ms e en hough i was a
e y small, budge -cons ained agency. I is signi ican ha his “ad iso y app oach” o
egula o y en o cemen was no speci ied by he Pu e Food and D ugs Ac (i.e. no hing in he
law equi ed he agency o o e ad iso y se ices o i ms in he way o echnical assis ance
o quali y ce i ica ion). Ra he , i was an agency inno a ion, an example o bu eauc a ic
en ep eneu ship buil upon he FDA’s science-based epu a ion. In his se ing, he FDA’s
e o s o en o ce a law designed o educe in o ma ional asymme ies in he ma ke o oods
bene i ed bo h p oduce s and consume s o manu ac u ed oods u s and played an impo an
ole in imp o ing he epu a ion o canned and p ocessed oods in he US. Had he agency
been less en ep eneu ial and mo e cons ained in i s en o cemen ole o me ely p osecu ing
iola o s in he cou s, i is doub ul ha i would ha e been as success ul ob aining egula o y
compliance om indus y.
O cou se, he e is no gua an ee ha en ep eneu ship on he pa o he bu eauc acy
will lead o benign ou comes as iden i ied by Ca pen e (2001), Law (2006) and Olms ead and
Rhode (2015) in he case o he ood and d ugs egula ion o egula ions ega ding animal
disease con ol and mea sa e y. In o he domains, o ins ance an i us , egula o y
en o cemen may ha e had nega i e consequences o economic wel a e (A men ano 1982),
indica ing he Aus ian iew ha bu eauc a ic managemen will misalloca e economic
esou ces. Wha hen accoun s o bu eauc a ic successes o he ea ly FDA and he BAI? One
possible explana ion is ha egula o s a he ea ly FDA and BAI ac ually possessed a
compa a i e ad an age in knowledge p oduc ion and in o ma ion du ing his ime. Misean and
Hayekian a gumen s abou he ine i able ailu e o go e nmen planning es on he
assump ion ha p i a e ac o s possess in o ma ion and knowledge ha go e nmen ac o s do
no . This assump ion may no be alid in hese speci ic cases since, as no ed ea lie , bo h he
ea ly FDA and he BAI we e on he cu ing edge o knowledge p oduc ion abou sani a y
p ac ices in mea packing and quali y con ol in ood manu ac u ing. Acco dingly, u u e
analyses o bu eauc a ic beha io should ake se iously he Aus ian insigh ha access o
speci ic knowledge is essen ial o a ional economic calcula ion, wi hou making he Aus ian
assump ion ha only p i a e ac o s can possess his knowledge.
Ano he explana ion o he success o hese agencies may be ha hey we e ela i ely
insula ed om poli ical in luence. The e is a adi ion in public adminis a ion ha a gues ha
go e nmen agencies wo k bes when hey a e “abo e poli ics”.
23
One mechanism h ough
which agencies gain independence is h ough a epu a ion o expe ise o p o essionalism.
Poli icians may ind i ha de o meddle wi h egula o s who ha e a epu a ion as expe public
se an s in a gi en policy domain. The his o y o ood and d ugs egula ion and mea
inspec ion sugges s ha he ea ly bu eauc a s a he FDA and BAI had success ully cul i a ed
his epu a ion h ough hei en ep eneu ial ac i i ies as coali ion builde s, which may ha e
a o ded hem he au onomy o ac on hei specialis knowledge wi hou ha ing o be oo
conce ned wi h he poli ical consequences.
24
An impo an ask o u u e schola s is o iden i y
22
As men ioned ea lie , en o cemen o he Pu e Food and D ugs Ac was ini ially es ed in he
Bu eau o Chemis y, an agency wi hin he US Depa men o Ag icul u e.
23
Ga y Mille (2000) and Mille and And ew Whi o d (2016), o ins ance, a gue ha he
e ec i eness o bu eauc acy equi es i o be insula ed om poli ical in luence.
24
Ca pen e (2010) a gues ha he FDA’s epu a ion o scien i ic expe ise, which i ca e ully
cul i a ed o e he cou se o he wen ie h cen u y, enabled he agency o wield conside able powe
Essays in Economic & Business His o y 42 (2) 2024
114
how bu eauc a ic expe ise, knowledge, en ep eneu ship, and he o e all poli ical
en i onmen in e ac o shape he e ec i eness o bu eauc acy and i s impac on economic
ou comes in o he egula o y domains.
Conclusion
This a icle selec i ely su eys he economic his o y li e a u e on he ise o egula ion in
Ame ica du ing he P og essi e E a wi h he goal o iden i ying how his li e a u e is in o med
by Aus ian heo y, and how Aus ian heo y migh con ibu e o a deepe unde s anding o he
o igins and g ow h o he egula o y s a e. I a gue ha much o he exis ing li e a u e on he
o igins o P og essi e E a egula ion is consis en wi h he posi i e implica ions o Aus ian
economic heo y. Aus ian economics complemen s and o e laps wi h public choice heo y,
he se o analy ical ools ha unde lies mos o he mode n economic his o y li e a u e on he
ise o egula ion. Addi ionally, a la ge body o schola ship, aking i s cue om he special
in e es heo y o egula ion, a gues ha P og essi e E a egula ion bene i ed p i a e in e es s
a he expense o economic wel a e. This no ma i e iew o egula ion is sha ed by Aus ian
heo y, which a gues ha egula ion, by eplacing he decen alized decision-making o he
p ice sys em wi h cen alized and hie a chical con ol, dis o s esou ce alloca ion and ha ms
e iciency. Whe he o no P og essi e E a egula ion was a ne posi i e o nega i e o
economic pe o mance is ul ima ely an empi ical ma e , o which he e idence emains
mixed. Mo e de ailed empi ical s udies o he impac o egula ion on economic ou comes ha
ake accoun o he impe ec ions o al e na i e solu ions o ma ke ailu e—whe he p i a e,
cou -based, o egula o y—a e he e o e needed o a comple e assessmen o whe he he
no ma i e implica ions o he Aus ian iew a e suppo ed.
I iden i y wo a eas in which Aus ian heo y migh add o ou unde s anding o
P og essi e E a egula ion. The i s conce ns he dynamics o egula o y e olu ion. An
impo an insigh om Aus ian heo y is ha egula ion, once enac ed, will acili a e he
o ma ion o new in e es g oups, who, in u n, will demand u he egula ion. Gi en ha much
o he egula o y appa a us c ea ed du ing he P og essi e E a emained in place h oughou
he wen ie h cen u y and e en beyond, an impo an ask o u u e schola s is o use hese
insigh s o analyze he e olu ion o egula ion o e ime. The second deals wi h he ole o he
bu eauc acy, in pa icula , he impac o en ep eneu s wi hin he egula o y bu eauc acy.
Mains eam economic heo ies o bu eauc a ic beha io a e insu icien ly nuanced o accoun
o he expansion o egula o y au ho i y o e a wide ange o egula o y domains du ing he
P og essi e E a. In pa icula , hey a e unable o accoun o how bu eauc a ic en ep eneu s
we e able o build poli ical coali ions and exploi hei expe ise o shape he p e e ences o
hei poli ical mas e s and he o ing public, and how hese egula o y en ep eneu s
con ibu ed o he g ow h and en o cemen o egula ion. A ca e ul analysis o he bu eauc acy
ha akes se iously Aus ian insigh s ega ding en ep eneu ship, in o ma ion, and knowledge
p oduc ion has he po en ial o gene a e impo an insigh s ega ding he successes and
ailu es o egula ion in Ame ica’s pas .
Acknowledgemen s
I am e y g a e ul o Ma k Billings, Daniel D’Amico, Adam Ma in, Nicola Tynan, Judge Glock,
Samuel DeCanio, and an anonymous e e ee o hei incisi e commen s and sugges ions.
o e he Ame ican pha maceu ical indus y, and con ibu ed o he FDA becoming he mos powe ul
egula o y agency in he wo ld.
Law: Aus ian Economics and P og essi e E a Regula ion
115
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