Friday, October 10, 2014

Check Valve Regulation

On those few, wonderful occasions I've been blessed with the simultaneous company of Pete Boettke and Mike Munger, the talk inevitably drifts to basketball. But before that, the topic of unicorns often arises. Taylor Davidson discusses just such an instance.

"Regulatory capture" is what economists call the phenomenon of industry insiders and their regulatory authorities merging, usually to the benefit of the large, well-heeled industrial players. To regulate an industry, you have to know something about it. The best way to know something about it is to work in it. So (according to a high-ranking financial services insider I know, who shall remain anonymous here), the typical career path of senior executives at big Wall St. firms is to work a nickel on the floor, go do a dime working your way through the middle ranks at the SEC or whatever (it is vitally important that you rubber-stamp your way through your tenure), then slide back over for the management track at either your original firm or a boardmate's. Bingo-bango, that's the game as she is played. Innocently, I might add. Regulators require expertise to regulate effectively. There are no college courses you can take that will teach you to be an effective regulator; it is a vocational skill requiring huge amounts of tacit knowledge. Only in the fever dreams of academics could there be strict partitions between an industry and its regulatory authority.


Unless there are no large firms. A regulator can't look forward to a cushy sinecure when none are available. Uber disrupts regulatory capture. So the next step then to answer Lynne's question is to consider what the Uber of grid transmission would look like. Imagine using the blockchain to allocate power delivery. Gone would be the days of an operator sitting at a panel fiddling with voltage dials. Instead, it'd be distributed software on a shared network. The purpose of a regulatory authority (if there's need for one at all) would be to vet code before it's released. 

It's too early to tell whether the sharing economy will be any more euvoluntary than the one we've already got. But it seems likely that the competition it produces will erode the propensity for rent generation and capture inherent in industries rife with natural monopolies. It's a breeding pen for unicorns. 

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Do you have suggestions on where we could find more examples of this phenomenon?