Brief book review – Government and Markets: Toward a New Theory of Regulation

Edward J. Balleisen and David A. Moss (Eds), (paperback version: 2012), Cambridge University Press, 559 pages

Government and Markets: Toward a New Theory of Regulation, edited by Professors Edward Balleisen (Duke University) and David Moss (Harvard Business School), brings together 16 essays on market regulation and the economics of regulation by leading regulatory scholars. The book seeks to understand whether, where, why, and how traditional understandings of market regulation and the economics of regulation need to be updated and made fit for the 21^st century.

The essays all move well-beyond the traditional critiques of government regulation that pointed at inefficiencies, simplistic models of capture, and a need for deregulation. They are critical to the regulatory ideas that became in fashion in the 1980s and 1990s (including public choice and neoclassical economic theories of regulation). Yet, rather than doing away with these existing foundations, the authors “try to strengthen and add to it, fixing a few cracks and building on from there” (p.3).

In the section on “beyond market failure”, authors explore, among others, why the traditional self-interested, welfare-maximizing, rational actor model, that underpins so many neoclassical economic theories of regulation, often does not hold in practice. Using insights from the behavioural sciences and sociology, the authors suggest expanding these economic theories with a more realistic model of human behaviour that embraces our ‘irrational’ behaviours and the evidenced human desire for social justice.

In the section on “beyond the economic theory of politics”, authors explore, among others, how and why capture theories of regulation (the idea that regulators are often captured by and bend to the will of vested interests) have a fragile empirical evidence base. That is not to say that vested interests do not try to capture regulators, but the process in the real world is often more complicated than how it is traditionally pictured. The authors suggest complementing existing capture theories with recent findings on collaborative governance and cooperation that may help to make regulatory systems and processes more democratic and resilient.

Finally, in the section on “beyond command and control”, authors explore, among others, to what extent deregulation and privatization have achieved its desired results. They provide nuanced studies that look beyond the direct (often positive) outcomes of deregulation and privatization and draw our attention to unanticipated consequences. For example, the bankruptcy of several privatized airlines in the United States in the early 2000s “provided the opportunity to eliminate fixed-benefit pension obligations. The costs of change were borne by the Pension Benefit Guarantee Corporation [a publicly-funded, government organization] and, more importantly, by organized labor” (p.535).

The impetus of the book was the financial collapse of 2008. Yet, being in the middle of a global health crisis (and possibly at the dawn of a globally financially challenging time) it again makes for good reading for both supporters and opponents of public choice and economic theories of regulation.

Disclaimer

In these brief book reviews, I discuss classic and contemporary books that make up the canon of regulatory scholarship. I focus on their central guiding idea or core notions and aim to keep the reviews to around 500 words. Unfortunately, this implies I must sacrifice a considerable amount of detail from the books reviewed.