As Douglass North, the dean of the historically-grounded "new institutional" school of political economy, has put it:
Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules.
Given the historical record, Mr North's principle would seem to be a necessary component of any theory of political economy sufficiently reality-oriented to be useful. I'd ask Mr Chait to consider that one may accept that regulation is not necessarily, or even usually, in the public interest while rejecting the absurd claim that no regulation, or no welfare program, is in the public interest.
Regulatory-capture denialism is especially notable when the matter at hand is the Washington-Wall Street nexus, as the case for a significant degree of coprorate control over financial regulation is extremely compelling. Indeed, that this revolving door is so well-trafficked constitutes perhaps the most impressive piece of evidence that financial regulators are too bound up socially, professionally, and ideologically with their regulatees to offer impartial oversight in the public interest.
Of course, financial markets are not the only ones largely regulated in the interests of dominant firms. Tim Wu's recent book, "
The Master Switch", relates the sordid history of anti-competitive regulation in communications and media:
The federal government's role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace. In the service of chain broadcasting, it wrecked a vibrant, decentralizes AM marketplace. At the behest of the ascendant radio industry, it blocked the arrival and prospetcs of FM, and then it put the brakes on television, reserving it for the NBC-CBS duopoly. Finally, from the 1950s through the 1960s, it did everything in its power to prevent cable television from challenging the primacy of the networks.
Time and again [the government] has stood beside concentrated power against the underdog at the expense of economic dynamism. Governments' tendency to protect large market players amounts to an illegitimate complicity, whether by reason of the firm's involvement in important government concerns..., or a general sense of obligation to protect big industries irrespective of their having become uncompetitive.
...
Whatever one's ideological predilections, perusing Mr Carney's archives ought to be more than enough to disabuse anyone of the belief that "regulations being turned into weapons of business power" is not a "major, reccuring problem".
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