Regulatory Capture

Regulatory Capture - Why you can't get ahead

What is the link between requiring licensing for a profession and environmental requirements to start and run a mine? Two words.

Regulatory capture.

Just because a businessman participates in a capitalist system, does not mean he is a capitalist. The virtues of capitalism, free markets with perfect competition, which enhances consumer welfare, and a rising tide that lifts all boats, are celebrated by people who compare economic systems - like capitalism and socialism - with each other. However, it is anathema to the business owner, who ideally wants to dominate the market, and doesn’t care if he does it fairly or unfairly.

It’s the same thing with unions in America. They are hostile to automation and productivity improvements if it means reducing jobs - see the longshoremen union. American unions have been standing in the way of progress, perpetually fearful of what happens when technology makes them redundant, like Luddites. 

Nobody likes competition, especially when one is on top of one’s industry. Companies work on climbing the ladder, then destroying the ladder underneath them once they reach the top. This is disrupted by creative destruction in capitalism, which is often the greatest and worst thing about capitalism, because it makes new things out of nothing, yet it destroys jobs and livelihoods. Everyone looks out for their own interest, and it is in the interest of people to engage in regulatory capture.

Sometimes regulatory capture is partially due to a real concern. 

We cannot have unlicensed lawyers or unlicensed doctors creating practices. Medicine and law are practices that society chose that amateurs need not apply. These two industries are critical, because people’s lives and property are at stake. However, it is known how these industries are prone to regulatory capture. The regulatory cost of these requirements are high. Hiring a lawyer, whether on contingency or through your own pocket, is expensive. The cost of receiving treatments for procedures are very high, as well as the cost of doctor’s visits and medical services. Insurance obscures the price, but insurance premiums are high, again due to the high amount of regulations on insurance companies.

Another example: environmentalism and resource extraction. Environmentalists want to restrict damages to the environment from resource exploitation. However, this restricts businesses to rise up and compete with existing resource extractors, because the existing resource extractors can afford the environmental assessments and required cleanup, as well as the regulatory permitting necessary to prospect, exploit, and close a mine. The small guy is shut out.

Regulatory capture even works for things where lives aren’t at stake. Places where you need a license to become a barber raise salaries and costs of haircuts, versus places that don’t and are more competitive with easier entry and exit requirements. Unionized employees often make more than non-unionized employees - raising costs of business and reducing consumer welfare through higher costs. Licensing requirements for businesses increase costs, reduce competitiveness, and reduce the ability of businesses to compete.

How can individuals and small businesses fight against encroaching regulation?

Don’t be on the wrong side of regulatory capture. If you are a startup and the industry is starting to be more heavily regulated, you will need to make a decision and choose to either pivot, or focus on compliance so you stay in the game. To figure out what the right answer is, you should probably make a list of pros and cons, and go with the path that seems more palatable. Small businesses have the advantage of being nimble and can change paths on a dime, so use that advantage to be creative.

Travel to a lightly regulated place. Sometimes, if you are pursuing a dream that has true potential, you may have to move to a more amenable jurisdiction to work on your business. Is it too costly to start a bank in America? You should go to the Caribbean, it is far easier to start a bank there than in the US. Some countries are better for crypto regulations. Some businesses are not welcome in certain jurisdictions. You have to go where you are welcome.

Learn to delegate. When dealing with enhanced regulations and continual march of credentialism, you have to be able to commit an employee to deal with these things, or even request an outside contractor to deal with regulatory burden. Whether that is a lawyer to draft legal and compliance documents, or an accountant to comply with tax regulations, you need to free up time to focus on your critical mission - growing and developing your business.

Focus on following the rules when you have to, but don’t be so rigorous in grey areas. We advocate you follow all laws, regulations, and ethical guidelines. But you don’t have to follow established conventional methods all the time. Sometimes it takes changing the rules of the game in a new way to create a successful business without focusing on a favorable regulatory environment.

Innovate rapidly. You have to focus on staying ahead of regulation by transforming the rules of the industry by your work. Change the rules of the game. Doing business in a new way is the best path to success when regulations are heavy. By outperforming old ways of doing business, regulatory capture is impossible as the business cycle through creative destruction destroys old ways of business in favor of new ways of business.

To close, regulatory capture is a major challenge for small businesses and individuals wishing to develop their career journey. Learning to either take advantage of regulations or change the system so you don’t have to worry about that issue is the best way to solve the issues that come with regulatory capture.

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