Toward a New Theory of Regulation: Point of Departure

Over the last fifty years, the prevailing assumptions about the role, power, and limitations of American government have undergone a dramatic transformation, at first in the academic worlds of economic and political theory, and then in the broader polity. In the immediate aftermath of the New Deal and the victories of World War II, Americans generally possessed optimism regarding the potential of the state to resolve pressing collective economic and social dilemmas, and to improve the lives and destinies of the population it governed. Imbued by this optimism, the most distinguished leaders in economics turned their research agendas to the flaws and failures of the market as an organizing principle of economic and collective life, and thus sought to identify how government could overcome these failures, and so advance the common good.

Yet the 1960s and early 1970s ultimately proved to be a high tide of both the regulatory activism that followed and what critics retrospectively termed the “public interest” school of economics. By the time that Vietnam and Watergate had combined to heighten popular skepticism about government, a new and extremely influential approach to the study of government had emerged in the academy—“public choice” theory. Its adherents raised potent challenges to a slew of regulatory initiatives, contending that previous theorists of market failure and regulatory redress had failed to develop a cohesive theory of politics to support their conclusions regarding the economic role of government. Public choice theorists instead viewed political actors—voters, politicians, and bureaucrats—as identical to the economic actors postulated in classic economic analysis.

Accordingly, they argued that politicians attempted to maximize their own utility or income, with no attention to any concept of the “public good.” Now, the emphasis was placed on government failure, not market failure, particularly the potential for electoral outcomes that fail to reflect the informed preferences of a majority of voters and for corruption of the regulatory process.

Once again, as earlier in the century, American politics followed the paths indicated by emerging consensus within the academy. By the late 1970s and early 1980s, opinion-makers and political elites had become far more pessimistic about the capacity and potential of government, with profound implications for economic policy-making in a host of contexts.

Through the subsequent decades, this suspicion of the state continued to permeate American politics—at virtually all levels, and in both parties—at the same time as it largely retained its preeminence within the academy. The notable success of the conservative movement has been rooted in and facilitated by this paradigm shift, as has the paucity of innovation and policy ideas within American liberalism. As liberals have discovered to their chagrin, advocacy for even the most cogent and compelling policy innovation becomes exceedingly difficult when political discourse presumes that government is the problem—that public policy simply does not represent a valuable instrument for the resolution of problems that extend beyond the capacity of individuals or private organizations to address. The contrast with the dynamic of politics during the 1960s is stark, and that contrast in no small measure reflects the equally momentous, though perhaps quieter, shift in academia—particularly the economic theorization of a dangerous and potentially predatory state.

This earthquake at the foundations of American politics constitutes an extraordinarily powerful example of the political potency of academic ideas, of how pivotal academic theories can structure the very manner in which we imagine, analyze, and ultimately make use of governmental power. The near-pervasiveness of this influence, the extent to which it has come so thoroughly to permeate policy debates and the structure of policy discourse, accounts for the remarkable fact that it occasions so little public comment.

“Public interest” and “public choice” are hardly household concepts that pepper political conversation around the dinner table or the water cooler. Yet the New Frontier of 1960 and the Contract with America of 1994, the political offspring of their lesser-known academic progenitors, proved to be milestones in U.S. politics, shaping the terms of political debate for a generation. They serve as compelling evidence that beneath the surface, the story of the recent evolution of American government is fundamentally the story of the evolution of ideas about government. Public choice became such a powerful conceptualization of American policy-making as quickly as it did because it offered an apparently cohesive set of answers to the dilemmas posed by the mid 1970s—the materialization of more substantial global competition, the pinch of stagflation, the emergence of the Rust Belt. Now, the United States faces a new set of economic, social, and environmental challenges—global warming, entrenched economic inequality, conflicts of interest that threaten confidence in the financial markets. These challenges require collective solutions, but no such solutions will find sufficient political support unless the country embraces a new approach to political economy.

“Point of Departure…” is adapted from Jessica Leight’s “Public Interest and Public Choice” working paper draft, March 2007.