Regulation theory

Introduction

Markets need rules. Regulation theory examines how societies create institutions that keep capitalism working, and how governments regulate private activity in the public interest, or fail to do so.

The French regulation school

• Founded by Michel Aglietta ('A Theory of Capitalist Regulation', 1976), with Robert Boyer and Alain Lipietz.
• Regime of accumulation: a stable pattern of production and consumption over a period.
• Mode of regulation: the institutions, norms and policies (wage bargaining, money, state policy, international regime) that keep a regime of accumulation stable.
• Fordism (mid-20th century): mass production, mass consumption, strong unions and the welfare state.
• Post-Fordism (from the 1970s): flexible production, globalization, weaker unions and a smaller welfare state.
• Crises occur when the mode of regulation no longer fits the regime of accumulation.

Economic theories of regulation

• Public interest theory: governments regulate to correct market failures such as monopolies, externalities (pollution) and information gaps.
• Capture theory (George Stigler, Nobel 1982): regulation is often 'acquired by the industry and designed and operated primarily for its benefit'.
• Sam Peltzman extended this, arguing that regulators balance the interests of producers and consumers to maximize political support.
• Responsive regulation (Ayres and Braithwaite, 1992): regulators should start with persuasion and escalate to sanctions as needed (the 'enforcement pyramid').

The regulatory state

From the 1980s, many governments privatized industries and created independent regulatory agencies. The state shifted from directly providing services to regulating private providers. Giandomenico Majone called this the rise of the 'regulatory state'.

Regulation in Pakistan

• Independent regulators include NEPRA (electricity), OGRA (oil and gas), PTA (telecommunications), PEMRA (electronic media), SECP (companies and capital markets), the State Bank of Pakistan (banking), the Competition Commission of Pakistan and DRAP (medicines).
• Challenges: political interference, weak capacity, capture by powerful industries, conflicting mandates, and delays in decisions, such as tariff determinations.
• Governments have at times tried to place regulators under the administrative control of line ministries, which courts and critics have challenged as undermining their independence.

Criticism

• The French school is abstract and focused on advanced economies.
• Capture theory may be too pessimistic; some regulators do protect consumers.
• Regulation can create red tape and opportunities for corruption.

Conclusion

Regulation theory shows that markets and states are not opposites: markets need regulation to work fairly, and regulators need independence, capacity and accountability to avoid capture.