Regulatory Capture

The theory of regulatory capture was set out by Richard Posner, an economist and lawyer at the University of Chicago, who argued that “Regulation is not about the public interest at all, but is a process, by which interest groups seek to promote their private interest ... Over time, regulatory agencies come to be dominated by the industries regulated.” Most economists are less extreme, arguing that regulation often does good but is always at RISK of being captured by the regulated firms.”

Richard Posner’s approach to regulation exactly echoes Chicago School’s traditional attitude to market economy. The Chicago School of Economics became famous with the theories of Milton Friedman, who had been influenced by the ideas of Hayek. Friedman and his colleagues in Chicago support the deregulation of market, free trade and retreat of state intervention. It was an assault on the macroeconomic assumptions of Keynes, which ended up as a thoroughgoing critique of antitrust law, administrative regulation, tax policy, trade and monetary theory. In brief, they support the theory of a competitive market as a regulatory system. Elsewhere Posner wrote that "The evils of natural monopoly are exaggerated, the effectiveness of regulation in controlling them is highly questionable, and regulation costs a great deal." According to the Chicago School of Economics, governments do not accidentally create monopoly in industries. Rather, they too often regulate at the insistence, and for the benefit of interest groups who turn regulation to their own ends. For them administrative regulation serves the regulated entities rather than the consumers.

The two slides of the powerpoint presentation of then NEDA Director General Romy Neri best exemplify what he was talking about in the Senate hearing where he testified on the ZTE deal. These slides were part and parcel of his inputs for the so-called Reform Agenda of the Arroyo Government.