Regulatory Capture in Product Markets and the Power of Business Interests

This article explains pervasive regulatory failure, lagging productivity, and the corporate capture of policy and policymakers as possibly unintended, but not unpredictable, outcomes of the New Zealand Treasury’s radical adoption during the 1980s of public choice and Chicago school doctrines. With deregulation and a limited role of government written into statutes and embodied in regulatory practice, the pathologies identified and described by Buchanan, Tullock, Stigler and their collaborators became more, rather than less, prevalent in the New Zealand regulatory landscape. Privatisation opened the way for looting; the Commerce Act and new regulatory guidelines enabled rather than blocked anticompetitive practices and monopolistic renttaking; relaxed oversight meant that foreign direct investment became more extractive and less productive. From relatively inclusive politics and strong regulatory enforcement, New Zealand shifted towards more extractive institutions and weaker regulation. As a result, market power is exercised by the current business and financial elite in ways that have worsened wealth and income distributions, imposed deadweight burdens (both static and dynamic) on the economy, and now confront policymakers with roadblocks to achieving more inclusive institutions and pursuing a ‘wellbeing’ agenda.

The Economic Origins of Entrenched Judicial Review

This article proposes a new explanation for the origins of entrenched judicial review, or judicial review supported by supermajority constitutional amendment requirements. The explanation is based on ex ante levels of economic inequality: Where economic inequality is higher, economic elites have more to lose from the advent of majority rule. These elites will have both greater incentives and greater ability to resist or check institutions responsive to popular majorities. We may then be more likely to see the adoption of less democratically responsive institutions, like entrenched judicial review, where more unequal wealth and income distributions are threatened by majority rule. The theory is consistent with the qualitative historical record from several former British colonies, including that of the United States. It also finds considerable support in an econometric analysis of the presence of entrenched judicial review in the first year of continuous democracy for those former European colonies that had become democracies by 2008, where pre-independence European mortality rates are used as a proxy for pre-independence economic inequality. These findings suggest that the adoption of entrenched judicial review in democracies may have been motivated at least in part because of its anticipated protection for higher levels of economic inequality.