What are the limits of regulation as a form of state power?

What is Politics?

What are the limits of regulation as a form of state power?

Abstract
Regulation does not fully live up to theoretical benefits (not as effective/ fully) just responds to economic and political events. Another chapter in state history. As such, perhaps state power is better served by a combination of regulation and new approaches: leads to other forms-nudge.

 

The theory behind regulation as will be presented here, was informed by the increasing influence of Neoliberalism and the New Right in the 1970s.

As Smith’s definition shows, after the shift away from the traditional form of bureaucracy, the purpose of introducing regulation is based in the belief that neutral professionals outside of government are better informed to ensure a fair and efficient distribution of resources when it comes to services and benefits. Therefore, regulation involves adapting the market framework in fields where real competition is absent for the government to indirectly exert control over behaviour.  Market-type contexts are achieved through implementing audits, targets and league tables, for example.

Rational choice ontology underpins the functioning of regulation as a form of state power. This is based on the idea that there is a knowable, discoverable absolute truth and that individuals act motivated by self-interest as they are utility maximizers. Therefore, incentive structures in line with “enoughmanship” are needed to enforce assumptions about how people will react and change behaviour according to an outcome-based contract.

Yet, incentives alone cannot secure compliance without an adequate system of supervision. This is better explained by the principal-agent theory. As it is the case in most market-type transactions, there exists an information gap between the party that seeks to enforce compliance (the principal) and the party intended to comply (the agent). The agent can easily exploit this gap in its favour, reaping the benefits of compliance (incentives) without actually complying with the Principal’s terms. This is why regulatory agencies are created: to ensure that a service or provision is being implemented for and by the agent, to a specific standard set by the principal.

In order to have a clearer understanding of the limits of regulation, it is worth taking a look at the main beneficial transformations that it is expected to deliver. Firstly is the reduction of state bureaucracy, as decisions are taken away from state officials and given to independent regulatory bodies. However, in reality, an elimination of bureaucracy is not always ensured and is instead pushed down the line, as later explained.

Another benefit of regulation is the increased independence and higher technical expertise provided by regulatory bodies. That is, regulation by specialists creates political independence as regulators become separated from government. Furthermore, by using individuals who are specialists in their given area, instead of state officials, the information that is provided is usually more accurate and precise. Regulatory bodies also ensure long-term commitments by continuing work regardless of changes in government.

Regulation is also an effective instrument for governments to show proactivity in addressing issues of public concern, such as those regarding public welfare. In fact, as regulatory bodies are deemed unbiased and independent,  they would prioritise the interests of the public over that of the government.

I want now to focus on regulation’s shortcomings. Consider regulation’s inevitable distributional effects. In order to best deliver unbiased regulation, the regulatory machine has to be organized around an operational system as rational as possible. This implies that behaviour and performance be easily measurable, almost scientifically. We call this, after Moran’s analysis of the new British regulatory state, ‘hyper-innovation’. Which does, in fact, fit with the principles of services marketization and rational-choice theory.

There are two main implications to consider. Firstly, that the universal measurability of outcomes is just an arbitrary assumption, a postulate. Here arise a question of reliability. Are arbitrary and universal parameters of evaluation a reliable instrument? Do they reflect the reality of particular cases and experiences? Secondly, perhaps most importantly, it is worth reflecting on how those parameters are set in the first place. Do regulatory agencies really live up the assumption that arms-length regulation is led by technical expertise alone?

In fact, as Moran highlights, the contemporary regulatory state has seen a surge in political influence, rather than its withdrawal. This is for two main reasons: in part because the old non-written rules of government have been overturned and now the formerly independent, technical and tradition-led civil service has been subjected to ministerial scrutiny; and ultimately because, as we saw earlier, the political pressure exerted on governments urging them to action does inform the way regulatory bodies shape their operations. (e.g. NHS organization; rail industry).

The other face of this approach to regulation is the dramatic expansion and capillarity of its remit: now areas of private life that had been previously barely touched by the presence of the state are the target of regulation (e.g. regulation of the familiar sphere when it comes to children welfare). This, it could be argued, represents in itself an extension of the state’s surveilling power.

When we attempt to appraise the efficacy of regulatory theory we find ourselves in front of a clash between theory and reality. Now, recalling what we just said in relation to the reliability of universal terms of measure, we can consider how outcome-based contracts might, in fact, be too narrow an instrument to ensure compliance by an agent. An agent might still slip through the artificially set measuring marks and therefore avoid compliance. This is what we refer to as agency loss.

Although regulatory agencies are intended to bridge the information gap that lies between the principal and the agent, the formal separation of roles that determines impartiality is not always guaranteed. We have mentioned how governments can politically inform regulatory bodies’ operations. But this can also take place at the opposite end, that of the agent. This is what we refer to as ‘regulatory capture’: the agent takes hold of the regulatory agency and shapes it according to his own interests. Again, Moran offers two UK examples. In the case of British Universities regulatory capture is the result of a mixture of an advantage in technical knowledge retained by the agent and the powerful influence of tradition, that is the long-established independence of UK universities; on the other hand, the considerable lead in technological expertise that the food industry can rely upon, allowed it to shape the terms of action of the UK Food Standard Agency on its own interests.

One of the claimed benefits of regulation, as mentioned above, is a considerable curb on state bureaucracy. Yet, bureaucracy is not reduced, just moved away from state’s direct control. In fact, effective regulation depends on one: adequacy of resources for enforcement and inducing compliance, second: on continuous information collection, which leads to more bureaucracy.

Besides the deviations between theory and practice of regulation, there are political implications to consider. One regards regulatory agencies’ legitimacy. Building on the ideas of increased independence and regulatory capture, to what extent are such regulatory bodies truly accountable? Further, this results the emergence of  “third party government”, that is third party regulatory bodies disposing of public funding while decision-making process becomes increasingly unaccountable.

In addition to this, according to Salamon: “Government increasingly lacks the authority to enforce its will on other crucial actors”. Seen from a different angle, we could say that the role of government has changed from doing to arranging and as a consequence it has given up considerable degrees of direct control. This can be understood both in terms of lost control over regulatory agencies, in presence of regulatory capture, and failure to ensure compliance, in the case of agency loss. This lack of enforcing power ultimately threatens governments themselves, as political pressure resulting from shortcomings in regulatory activity is nonetheless directed towards governments.

In a conclusion, regulation as a means for the state to ensure compliance is limited, as it doesn’t deliver certainty of outcome, as the limits we have highlighted have shown. We believe that behaviour-based contracts, such as those nudge theory relies on, could be implemented alongside regulation for a more effective degree of state power.

Bibliography

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Salamon, L. M. (2002) The Tools of Governance: A Guide to the New Governance. New York: Oxford University Press

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