Regulatory Capture for Dummies

Over the last year or so, deregulation has become something of a dirty word even though there hasn’t really been much deregulation of anything since the ’90s. Even people who one would normally expect to support free-market ideas have been lulled by the siren song of the statists. Of course it doesn’t help that statists have hijacked terms like deregulation and used them to mask giving special favors to special interests who donate lots of money to them.

During this time, I’ve grow quite sick of explaining the technical differences between actual deregulation and regulatory capture. Likewise, as a libertarian/borderline anarchist with virtually no representation in government, it’s quite annoying to be blamed for said government’s actions. It’s doubly annoying when otherwise intelligent people somehow manage to confuse libertarianism and anarcho-capitalism with corporatism and fascism just because all use words like “deregulation” in one way or another.

Yes. I’ve actually talked to people who think like that. And, yes, that’s people, as in, plural.

As such, I’ve decided to write a simple explanation of regulatory capture to link to in the future instead of wasting breath and keystrokes to explain it over and over and over. Here it is:

Regulatory Capture for Dummies

or: How I Learned to Stop Hating Freedom and Love the Dollar


Imagine you run a small business which sells widgets. You have one other competitor, who we’ll call Bob, that sells twice as many widgets as you do. You’re not all that worried about it though because you’re planning to release a shiny new widget with an extra gizmo and racing stripes next week which will earn you some of his market share.

Now imagine that I’m a grumpy old Senator who decides to regulate your industry because I’m sick of the damn kids using their newfangled widgets on my lawn, have been told the competition between you and Bob is “unfair” by people who don’t make widgets, or whatever.

Now imagine that my idea of regulation involves grabbing both of you by the throat and squeezing gently so that the lack of air makes it harder (or impossible) for you to make widgets. Naturally, I’ll shout that I’m doing it “for the children” while you struggle for air.

Example 1:

If I release both of your throats and walk away so that you can both go back to making and selling widgets, that’s deregulation. Simple, isn’t it?

Example 2:

Seeing as Bob was selling twice as many widgets before I started choking you both, Bob has more money, so he pulls out $100 and sticks it in my pocket. You can call this a license fee, a tax, a campaign contribution, or a bribe if you like. But either way, I let go of Bob and keep choking you.

I’ll then use a photo of Bob being released (which is conveniently cropped to keep your choking out of the frame..) and use it in a campaign ad highlighting my “free-market” record. You probably won’t feel very deregulated, but, hey, when have pesky things like facts ever mattered in politics?

After seeing Bob released to much fanfare, you might start digging around in your pockets, or waving a cup at “investors” walking by on the street, in order to find the $100 fee/tax/bribe thingy so that you can get back to work and/or breathing regularly. However, while you’re trying to come up with the money, Bob is out selling widgets to his customers and yours. He’s also selling them at a higher price since he no longer has your competition.

Now imagine that just before you finally raise enough capital from your pockets or from people passing by, Bob stops by with a big roll of cash he just made selling widgets. Bob sticks another $100 fee/tax/bribe in my pocket, plus an extra $50 campaign donation, and asks me to crack down on those “dangerous” unlicensed widget makers.

Which, of course, means you.

In turn, I squeeze your throat harder. Only this time I use a video of your face turning blue in a campaign ad behind a talking point of how I’m “pro-business” because I saved Bob’s company from the “unfair competition” of unlicensed widgets. And how I “protected the children” from your “dangerous” product.

That’s regulatory capture. See the difference?

(Oh, yea, and assuming you eventually come up with the $100 license fee/tax/bribe before you suffocate, well, now Bob’s prices will collapse since you will now make more product than there is demand and you’ve got a lower price. Due to the rapid expansion of his business while you were choking, I will now deem him “too big to fail,” take 40% of your profits, and give it to him as a bailout.)


Now replace you and Bob in the above scenarios with car companies, investment banks, etc.., or even GSEs like Fannie Mae. Think of all the so-called “deregulation” which gave them special exemptions them to do things which would have gotten you thrown in jail for fraud.

Does that sound like a libertarian free-market where anybody can compete to you?

Or does it sound like an elite group of corporatist oligarchs have essentially bought the state and used its lethal, coercive force– the “..or else!” which stands behind all regulation –to choke their competition?

Regardless of whether you actually agree with me that freedom in the marketplace is a good thing, if you came to the conclusion that choking people on behalf of special interests isn’t exactly free anything, you might understand what it feels like to be a libertarian these days..