Regulatory Capture

In April 2010, the Deepwater Horizon drilling platform exploded, killing eleven workers and releasing nearly five million barrels of oil into the Gulf of Mexico over the following months. A federal investigation found that the Minerals Management Service (the US agency responsible for overseeing offshore drilling) had accepted meals, gifts, and in some cases illegal payments from the companies it regulated. Safety records had been falsified and inspection reports had been rubber-stamped. The Obama administration responded by abolishing the agency and dividing its responsibilities between three new ones.

The Minerals Management Service was a textbook example of what the economist George Stigler described in 1971 as regulatory capture: the process by which a regulatory agency comes to serve the interests of the industry it regulates rather than the public it was created to protect. Stigler’s argument was not that regulators were necessarily corrupt. It was that the incentive structures surrounding regulation systematically favor industry over the public. A change in environmental rules might be worth hundreds of millions of dollars to a handful of companies, which gives those companies powerful reasons to invest in influencing regulators. Each individual citizen is only slightly harmed by any given regulatory failure, so over time, the better-organized and better-funded side wins.

The revolving door accelerates the process. Regulatory agencies typically recruit from the industries they oversee, because industry employees have the technical expertise the government needs. Those same employees know that their next job may be back in industry, often at a salary much higher than what government pays. If you assume rational self-interest, the consequences are predictable.

The 2008 financial crisis resulted partly from regulators failing to challenge instruments that banks had designed and then lobbied to keep beyond regulatory reach. Alan Greenspan, former chair of the US Federal Reserve, testified before Congress in 2008 that he had found “a flaw” in his belief that banks would self-regulate to protect their own interests. The financial industry had colonized its regulators through what they called “cognitive capture”: regulators came to think in the same terms, share the same models, and accept the same assumptions as the banks they oversaw, without anyone needing to be paid off.

The tech industry is evolving in the same way. Platform regulation is technically complex, and the agencies developing it, such as the Federal Trade Commission in the US and the European Commission’s technology directorate, are chronically understaffed relative to the companies they oversee. The industry employs more lawyers, economists, and lobbyists than any regulator can afford (although it would be more accurate to say “than any government is willing to spend”). Former platform executives populate regulatory bodies, former regulators hold senior positions at tech companies, and the revolving door spins on.

This matters for AI regulation in particular. The companies most capable of advising governments on the risks of AI are also the ones with the clearest interest in ensuring that regulations are toothless. But capture is not inevitable. Food safety regulation in Sweden, South Korea, and Singapore has remained relatively insulated from industry control. The difference appears to lie in three factors: sufficient public attention to maintain political accountability, career paths that do not run primarily through the regulated industry, and enough institutional resources to support genuine technical independence. All of them require active maintenance and a belief that business exists to serve the pubilc, not the other way around.

see the whole series · email me

Freudenberg2011

William R. Freudenburg and Robert Gramling: Blowout in the Gulf: The BP Oil Spill Disaster and the Future of Energy in America. MIT Press, 2011, 9780262015837.

JohnsonKwak2010

Simon Johnson and James Kwak: 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Pantheon Books, 2010, 9780307379054.

Lewis2010

Michael Lewis: The Big Short: Inside the Doomsday Machine. W. W. Norton, 2010, 9780393338829.

Michaels2008

David Michaels: Doubt Is Their Product: How Industry’s Assault on Science Threatens Your Health. Oxford University Press, 2008, 9780195300673.

Stigler1971

George J. Stigler: “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science, 2(1), 1971, 10.2307/3003160.

Wu2010

Tim Wu: The Master Switch: The Rise and Fall of Information Empires. Knopf, 2011, 9780307390998.