Weekly philo of economics: a philosopher of science gets to work on nuclear power...and discovers regulatory capture

A creative philosopher of science (with HPS background), Susan Sterrett (author of a very entertaining book on Wittgenstein), has had a long standing interest in nuclear power design and licencings. On her blog she details her frustrating experiences with the NRC (Nuclear Regulatory Commission) and her efforts to question their findings; it is a bit hard to follow if you are interested in exact details, but in a way that adds to the experience. (Susan provides a link to another website that provides background.)

 For me the key line in her account is this: "By the year 2011, though, I no longer looked to the NRC as an effective regulator or enforcer."  What she describes is known among economists as regulatory capture which "occurs when a state regulatory agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating." I consider it the central problem in contemporary political philosophy (which often relegates it to a problem of application of no concern to the lofty, ideal theorist).

The idea behind regulatory capture was originated by the "Chicago" economist George Stigler (one of my main research interests) and developed by public choice economists. The idea (and Stigler's particular way of interpreting the so-called Coase-theorem) has been very effective in making economists worry not only about "market failure" but also about "government failure" (and undoubtedly helped shift sentiment in that discipline toward more pro-market in the second half of the twentieth century). Now, last week (in discussing the shared Weberian roots in cousins Hayek and Wittgenstein), I called attention to the importance of rule following. One way to think of regulatory capture is that the rules either get purely formal (hollowed out), subtly misapplied, or reinterpreted in favor of industry. (Sometimes they do not get followed at all, but that tends to be  basis for successful appeal to administrative judges.)  The Dutch economists, Willem Buiter, describes a version of this as "cognitive regulatory capture." [I think Buiter is too soft on the European Central Bank, which is way too reluctant to allow bank failure and thus continues to endanger the whole system, but about that another time.]

The problem is that when we are faced with phenomena that exhibit both market and government failure, what to do? When the so-called 'externalities' are small enough to ignore safely, the answer 'nothing' may well be satisfactory. (As the resident skeptic, anti-utopian on this blog I am fine with less than perfection.) But when they are really HUGE, systematic problems (nuclear power stations, global warming, financial crashes that wipe out people's pension plans/savings, etc) doing 'nothing' may sometimes be not only immoral (think of lots of genuinely innocent victims), but also (seriously)... imprudent.

Now in earlier blogging (here and here and for background here), I had called attention to how by regular, system-wide drilling (in conjunction, perhaps, with fairly simple instruments that allign incentives), one can develop a shared ethos of the members of an evolving, dangerous and complex system so that they care for the survival, if not flourishing of the system (which can still, of course, allow members of the system to suffer serious costs or worse). This is not utopia: the military, hospitals, flight crews (etc) all depend on training and regular drilling. To encourage drilling exercises is especially significant in systems where there is no shared ethos (or it reduces to "private gains, social cost!") I consider this the start of a response to situations in which there is both market and government failure.

A shared ethos does not, of course, always prevent the possibility of regulatory capture (which is a permanent temptation). But my proposal has two features that I did not recognize before: developing a shared ethos by way of regular drilling, does help members of the system spot regulatory capture at a relatively early age and it should make the bureaucratic system become more resilient against the temptations of (legal) corruption. Of course, drilling exercises can become formal, too, or an instrument of oppression/fear-mongering...