It's a Feature, Not a Bug: Revolving Doors and Capture in the Oil Industry

Steven Horwitz

I'm always happy to use my favorite phrase ("It's a feature, not a bug") to describe the problems of corporate-state entanglements, and this AP report, which details the incestuous relationship between off-shore gas and oil companies and the regulatory agencies responsible for overseeing them, provides an opportunity.  The revolving door here spins at least as fast as in the banking industry and with the same predictable problematic results, evidenced by the Deepwater Horizon disaster.  Like the financial crisis, rent-seeking and capture explain a lot.

Despite the hopes of those who think this can be solved, as the AP report suggests, by better ethics laws or hiring "better" regulators, the revolving door that leads to capture is not a "bug" but a feature - the private sector benefits from being regulated and will always push to be at the table and influence the process.

The problem is not regulatory or ethical, but institutional.  If you want to change the pattern of outcomes, change the rules.  The only possible way to end the corporate control over the state is to reduce the state's sphere of influence down to as little as possible and ideally nothing.  As long as there's the dead animal of the state (really: the citizenry) to feed on, the vultures of the private sector will keep showing up to get their share. 

 

Comments

[Richard Ebeling]

There is a long-standing peculiar and frustrating element when discussing the corruption and abuse between government regulators and private business, as Steve highlights in this example from the oil industry.

When the market advocate makes an argument such as Steve's, that the only long term solution to this problem is an institutional change that reduces and separates the role of government from the market arena, too often others will respond that such a policy option is "unrealistic" and "unworkable."

Therefore, the answer, such a person says, can only be MORE and heavier government regulation and control over the activities of private business.

That is, the "remedy" is considered to be more of the very politicization of the market place that has produced this problem in the first place.

When the market advocate replies that is is very likely to merely intensify the nature of the problem, the rebuttal is often an insistence that it just requires more stringent rules and "better" people in charge of the regulatory process.

When, once more, the market advocate responds by pointing out that more regulations will not change the incentive structures or human behavior (one is reluctant to use the more reasonable and accurate expression, "human nature"), the counter-argument frequently becomes, "Oh, you're just a dreamer if you think that unregulated free markets can work."

And from there the discussion just starts moving in circles. And this merry-go-round of economic policy argumentation has not changed, in its essence, for more than a century, now.

Richard Ebeling

[Daniel Kuehn]

The hard part, of course, is if you're not happy with a corner solution of any variety. And we know, of course, that most people don't like corner solutions (some certainly are quite comfortable with them).

Sure - if there's no government then by definition there can be no government cronies. The tricky thing is if we think the risk of some cronyism is worth the advantage of some intervention, and the extreme uncertainty surrounding all such assessemnts. We have pretty good solutions, of course:

- Constitutionalism: carefully demarcate the space appropriate for action and experimentation.

- Dispersed knowledge: don't put all your eggs in one regulatory basket, rely on market mechanisms, don't make allocative decisions when you can provide or elicit information for others to make those decisions, tax and subsidize don't cap or dictate

- Emergent order: don't invent sweeping solutions from scratch (this is a point that a lot of people who like the minarchist corner solution could think about much more deeply) - utilize and take lessons from evolved institutional frameworks and provide scope for future evolution

[Daniel Kuehn]

Another big obstacle is talking about "regulation" and "intervention" as if it were a cohesive thing and there weren't smart and dumb things you could do. Both sides do this, unfortunately.

When people say they want more or less "regulation" I never even know what that's supposed to mean.

A huge pet peeve of mine is when people list the pages of the U.S. code as if that's a metric for anything, or as if people are saying "you know - if we just write more regulations everything will be great". Who is saying that, exactly???

[Silvano Fait]

Yes, it's a feature. But as they capture the regulator, they can bribe a court or buy the legislative body of a miniarchic state. A "big player" potentially can hamper and harm the market almost always. Even in an anarchic context.

I'm a bit pessimist this afternoon...

[Jerry O'Driscoll]

The only thing to add to Steve's excellent analysis is the Hayekian knowledge problem.

Markets are themselves a system of regulating behavior. And not just with prices, but a host of non-price mechanisms.

Even if there is "market failure" (often asserted, but seldom proved), where do the political actors get the information to improve the situation?

[Bob]

Case in point:Disgraced Ex. Sen. Chris Dodd of "Friends of Angelo" shame made sure in authoring the Dodd/Frank Bill that the Motion Picture industry's movies were not traded in a proposed futures market. He was rewarded with the presidency of the Motion Picture Ass. of America. We should boycott all movies until he is forced to resign or is fired.

[Daniel Kuehn]

Jerry -
re: "Even if there is "market failure" (often asserted, but seldom proved), where do the political actors get the information to improve the situation?"

Not trying to attack you or anything - just trying to speak to the point. I think the point is if you think there's plausible evidence of a market failure it's usually biased in a particular direction. Pollution is almost certainly a negative externality. Vaccinations are a positive externality. There's no real question here. Just pushing it a little in the right direction is fairly clear cut, and I don't think anybody claims (none that I can think of at least) that political actors have information that the market doesn't have or can act with precision where the market can't. If addressing these issues required that sort of information, it wouldn't be a very robust solution. They can't act with precision - there's no price mechanism. That's precisely the problem, after all!

Too many people juxtapose addressing externalities with market allocation. I personally don't understand how you could address externalities through the political process WITHOUT the price mechanism, so I don't like this juxtaposition. You still have market allocation when you address externalities with a tax or a subsidy. Political action can't make allocative decisions. What it can do is mimic the inclusion of social knowledge (of subjective social costs and benefits) in the existing price mechanism. Do they know what that social knowledge is exactly? No, but (1.) that's why we have a democratic process to approximate it, and (2.) neither does the market, which is the whole problem with social costs and benefits in the first place!

It isn't a matter of "doing better than the market", it's a matter of understanding what knowledge the price mechanism is processing in a certain case and what kind of knowledge it isn't processing (namely, knowledge that's externalized by the property rights regime).

[Ashwin]

I'm not optimistic that there's any simple cure for cronyism. Mancur Olson said that laissez-faire is not dynamically stable i.e. given an extended period of stability, even a small-state free-market economy will eventually degenerate into cronyist sclerosis. It is not just a case of corporates taking advantage of the existing reach of the state to capture rents but corporates actively extending the reach of the state in a manner designed to produce rents.

I also used to think Olson's analysis was primarily relevant to democracies a la Jon Rauch's 'demosclerosis'. But I'm increasingly convinced that this is not the case - China is going through a textbook case of increased capture by special interests.

The crony capitalist nature of the US economy is responsible for the structural deterioration in the cyclical performance in the last few decades about which I write here http://www.macroresilience.com/2010/11/24/the-cause-and-impact-of-crony-capitalism-the-great-stagnation-and-the-great-recession/ .

[Mattheus von Guttenberg]

Vaccination might be a boon to myself as well as my family and close friends, but so is my wearing deodorant and pruning my flower bed by the garage. It certainly is the case that pollution is a curse upon many people, but so are using foul words and spreading venereal diseases. Where do you draw the line when deciding which to promote/curtail using political action?

Do you recall the conversation we had where we talked about non-market/non-state intervention? I have no problems with churches, art associations, book clubs, or charity drives giving money to promote my flower bed and deodorant expenses, but I do have a problem with the state doing it. And you know why.

[Troy Camplin]

Party of Steve's point is that regulations are necessarily made by humans for humans, within a social context. It is impossible to say that regulation X is objectively good or bad because 1) one cannot know enough to understand the full ramifications of the regulation, short-term or long-term, because the economy is too complex, and 2) there is always a player who is benefiting at the expense of others; usually the "seen" benefit over the "not-seen," with the "seen" being already-existing firms, and the "not-seen" being all the firms that could have come into existence, but which cannot because of the regulations in place which just so happen to create cost barriers to entry and thus just so happen to protect already-existing firms. Since objective knowledge is impossible, we are left with people using the system to benefit themselves at the expense of others. It may be impossible to say what most outcomes of a regulation may be, but we can definitely say that the fact that they raise the cost of entry means that fewer will be able to enter. That isn't a bug; it's a feature.

[Daniel Kuehn]

re: "Do you recall the conversation we had where we talked about non-market/non-state intervention? I have no problems with churches, art associations, book clubs, or charity drives giving money to promote my flower bed and deodorant expenses, but I do have a problem with the state doing it. And you know why."

When people recognize that we as humans solve problems outside the market with a variety of non-state, non-market institutions they begin to think more critically about what markets can do and what they can't - and they start to take questions of externalities, etc. more seriously.

I get the impression, though, that a lot of people say what you say here because they don't care what people do with their own money, but they still don't understand negative externalities as a coercion. Or perhaps they understand it, but in understanding it they recognize that they'd have to choose between coercions - negative externality or state remedy - and they don't want to be required to make that choice.

Non-state non-market institutions are usually successful at subsidizing positive externalities. Are there good examples of these institutions remedying negative externalities? I can't really think of any. You can pay a polluter not to pollute, but that's like paying off the mob not to beat you up. I'll have to think about that.

[Mattheus von Guttenberg]

but they still don't understand negative externalities as a coercion.

On the contrary Daniel, I think people who "say what I say" do realize that pollution is a violation of property rights - coercion by definition. The question is not whether pollution is wrong or bad, but how to fix it. Should it be done by the hand of an institution who necessarily coerces, or can it possibly be mitigated by market (and non-state) forces?

It certainly was in the past.

they'd have to choose between coercions - negative externality or state remedy - and they don't want to be required to make that choice.

You're presenting a false dichotomy fallacy. The choice is not between rampant pollution or the iron grip of the state. For some reason you have always refused to be open to the possibility that pollution can be dealt with the same way, for instance, automobile collisions are dealt with (another coercive act) - by voluntary (market) associations of insurance and arbitration agencies.

You can pay a polluter not to pollute, but that's like paying off the mob not to beat you up.

Why not define property rights more closely and settle the polluter/victim case in a court of law? Pollution is by definition a coercive act - but so is assault. Is the proper course of action to tax everyone with fists, or to find those that commit property damage with them?

[George Machen]

Definition — FUG: noun, a F_eature that would be called a b_UG, had not the sociopath programmers deliberately included it.

Common usage — "to Microsoft": "to FUG-up!"

If it happens once, it's a bug. If it happens twice, it's a feature. If it happens more than twice, it's a design philosophy.

[Daniel Kuehn]

re: "Should it be done by the hand of an institution who necessarily coerces, or can it possibly be mitigated by market (and non-state) forces"

And you know that you and I agree that a premium should be placed on non-coercive remedies. But what are these? Market solutions are problematic precisely because the externality emerges from a problem with markets (alternative property rights arrangements could emerge - but then we wouldn't have an externality!). I asked you what the non-state non-market options are. Any ideas? Ultimately many people just advocate doing nothing, and then proceed to accuse me of being coercive while ignoring the coercions they promote.

re: "For some reason you have always refused to be open to the possibility that pollution can be dealt with the same way, for instance, automobile collisions are dealt with (another coercive act) - by voluntary (market) associations of insurance and arbitration agencies"

Just to correct you - I've never refused to be open to these things.

re: "Why not define property rights more closely and settle the polluter/victim case in a court of law?"

I don't know. Why not? I'm all for that. Where there are options this is the ideal solution, is it not? Have I ever said otherwise? The only situations we really fight over are the situations where saying "just assign property rights" is easier said than done.

re: "Is the proper course of action to tax everyone with fists, or to find those that commit property damage with them?"

I could be missing something, but I think that first clause doesn't make any sense - what are you saying?

Policing is one thing - that ought to be done as a matter of justice. But guaranteeing justice isn't an allocation mechanism, Mattheus.

[Jerry O'Driscoll]

Daniel,

You need to read Buchanan's Cost and Choice.

It is not sufficient to identify an externality. You must demonstrate that, at the margin of decisionmaking, there is an externality. That is entirely different proposition. Merely observing "pollution" doesn't tell you whether agents have not already taken private actions to internalize the externality.

Using soap is a good example. There are great potential external benefits to my washing. But there are enough private benefits for most people that there is an "optimal" amount of cleanliness. No externality at the margin.

[Jonathan]

"The only possible way to end the corporate control over the state is to reduce the state's sphere of influence down to as little as possible and ideally nothing."

Wouldn't a change in limited-liability for corporations be another possible path? I realize this implies a restriction on the state, but it need not imply that the state's sphere of influence dwindle to nothing

[Daniel Kuehn]

Cost and Choice is an excellent book, and I understand there has to be an externality at the margin of decision making. I'm not sure how that changes my claim, though. Do we really talk about externalities where there is not an externality on the margin?

[Troy Camplin]

The problem with externalities lies in the fact of the subjectivity of values. The same amount of pollution will have a high negative externality for one, a low negative externality for another, and a positive externality for yet another. If a certain amount of pollution bother you more than it bothers me, by all means, feel free to sue -- but don't sue on my behalf, or pretend that you are doing me a favor when I could care less. When you do that, you are attempting to impose your values on me.

[Daniel Kuehn]

Troy -
Well, you're between a rock and a hard place. The producer of the externality is attempting to impose his values too. Your point is right of course, which is why its only defensible to try to publicly address very broad ranging externalities that you can convince a democratic polity to care about. But the path you take is just as riddled with the imposition of values on others as the path I do.

Trust me - I would love an out. I would love to be able to be a libertarian. I would love it just not to be a problem. I would love the government to be the only coercive game in town so that the answer would be easy and I can just be a libertarian. That would leave me considerably less to sift through. But I can't force the world to be that convenient - there's going to be a lack of clarity and there's going to be coercion no matter what we do.

[Jim Rose]

where else do you expect people to get a job?

unless you are wlling to pay people a lot of money to take up a new career and new occupation, people will move to private sector jobs that reward the skills they btained in government.

[David Johnson]

A cute cartoon sums it up: http://i.imgur.com/O1Bgj.png

[Troy Camplin]

Actually, I am not between a rock and a hard place. There is a perfectly reasonable solution that has nothing to do with government imposing its values on everyone. I do not think the government is the only answer, or the best answer, to solve the problem. It is possible to solve the problem of negative externalities through the use of lawsuits. If you have a person who is convinced that your pollution is imposing on his property rights, then he can certainly sue for damages -- and he should get those damages. I am against government restrictions on lawsuits precisely because they (purposefully?) undermine this process. The role of lawsuits is to reduce negative externamities and to create a real cost on errors. The only laws you have to have in place for this system to work are those protecting property rights and making the initiation of force and fraud illegal. With those in place, and a legal system that respects equality under the law, and you have the solution to negative externalities without having a bunch of do-gooders more interested in power than actually doing good foisting their values on everyone else. You may not be able to completely do away with the incursion of others' values on yourself and others, but you can certainly minimize it by getting government out of the business of imposing values and replacing it with the above system.

[Stephan Kinsella]

Steve, not sure I see how this is like the banking industry. The state has nationalized the minerals under the outer continental shelf (OCS) by fiat, much like they expropriated the airwaves in the early 20th century. On private land in the States, landowners own it and lease the oil & gas to companies. Why is "regulation" or "oversight" needed here? In the OCS the feds are the landlord. Why they are not blamed for the oil spills of their tenant, BP, is a mystery. In any case, the corruption the article points out, as far as i can see, are on the state's side: the inspectors have conflicts of interest. I don't see how this is corporatism. At most the corporations are rationally trying to protect themselves from regulation by the state. Why does the state have a right to regulate them at all? The state ought to privatize the OCS, get out of leasing altogether, and get out of regulating companies in the first place.

[Troy Camplin]

It's corporatism by default. The state owns the land, gives permission to corporate cronies to drill on it, etc., thus benefiting particular corporations they choose over others. Each greases the palm of the other.

As for the banking money, don't they use government money? Etc., as above.

[Stephan Kinsella]

Troy,

Everyone uses government money. That does not make them as bad as the banksters.

The state does not just "give permission" to "cronies" to drill--it negotiates leases with companies that have the expertise, and takes a hefty cut. The oil & gas companies have to pay a huge cut of their sales to the state-landlord, just as they do when negotiating with private surface owners of private lands. What are they supposed to do--not lease from the feds because this is "unfair" to others who do not lease from the feds? In any case, I did not see this criticism made of the upstream oil & gas companies in the linked article--its main focus was how the state's regulators tend to have conflicts of interest. (as far as I could tell; the piece somewhat rambled)

[Troy Camplin]

The point is that you have to play the game according to the rules of the rule-makers. You are naive if you think the negotiations are purely -- or even primarily -- economic. Cronyism plays a huge part. A higher bid from a political contributor will get the bid over a lower one from someone who isn't a big contributor. Friends and relatives get the inside scoop. Everyone knows that. Getting a voice in the wording of regulations is all part and parcel of this system.

[Travis]

One problem with this discussion is that it treats the "market" as though it is an entity capable of purposeful action. As Mises said, only individuals are capable of purposeful action. Markets do not fail. Individuals in the market setting fail. We do not have market solutions. We have solutions by individuals in the market setting.

Read Cordato for an excellent answer to externalities.

[Troy Camplin]

Almost by definition Austrian economists reject the idea that the market is capable of purposeful action. However, teleological language is very easy to fall into, I'm afraid.