Independent regulators and the evolution of economic thought
Independent regulatory agencies first emerged in the USA in the Progressive Era, as a result of the replacement of litigation by regulation. Like other reforms in the same period, this one was meant to reduce the power of Robber Barons and achieve efficiency gains. The damages produced to the public interest by large corporations were too heavy to be left to litigation that was easy to capture by large interests. More or less at the same time, economic theory developed models of normative welfare economics, where benevolent planners were supposed to fix market imperfections, that is cases where markets are not guaranteed to deliver efficiency. An analogy to traditional welfare economics was the public interest theory of regulation. This traditional normative theory in economics in general was criticized by the public choice school of Buchanan, Tullock and Niskanen, under the reasonable argument that it was inconsistent to assume that market agents were selfish and instead planners had the interests of overall society in mind. The analogue of this theory in regulation was the capture theory of Stigler and other scholars of the Chicago School. The first criticisms of independent regulatory agencies were inspired at least in part by this school of thought. In the recent past, like in general economics, there is some consensus that neither the public interest theory nor the capture theory completely explain the facts, and that is why we have seen the development of the new economic theory of regulation (Laffont and Tirole and authors in the same tradition) and new institutional theories of regulation (Williamson and Spiller among others). But since departures from efficiency can hardly be explained only by information asymmetries or transaction costs, behavioral economics in general and in regulation in particular have contributed even more recently to explain phenomena that were difficult to capture only under the assumption that everybody is rational. And I will suggest in a presentation in Corsica this week that it would be inconsistent to assume that only market agents, and not policy makers, are affected by bounded rationality.