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Regulation is the eﬀort to shape signiﬁcant institutions—industry, universities, immigration—to serve some social concerns that might not be taken into account in the ordinary process of doing business. According to one deﬁnition, it is the imposition of legal orders on those engaged in economic activity (Kagan 1978). States regulate capitalist enterprises within capitalist or mixed economies.
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1. Emergence And Justiﬁcation
Bureaucratic regulation of industries emerged in the nineteenth century with the rise of industrial capitalism and the bureaucratic division of labor. Britain established a factory inspectorate for the textile industry as early as 1832. The use of inspectorates to address the more dangerous conditions at work—in match factories, in tenement labor—expanded dramatically throughout the Western world in the 1890s (Rodgers 1998, pp. 254–9).
Regulation has proven to be at least partly reversible: central trends in capitalist economies during the 1970s and 1980s included both privatization of state-owned industries (see e.g., Graham and Prosser 1988, Pistula and Rasmussen 1990) and political pressure toward deregulating already regulated industries (Derthick and Quirk 1985, Harris and Milkis 1996).
Economists have thought it important to explain why regulation is necessary within a capitalist economy, given that neoclassical economic theory holds that social purposes are best accomplished by markets. The importance of neoclassical theory has meant that advocates and critics of regulation have also expended eﬀort understanding the justiﬁcations (see e.g., Breyer 1982). Justiﬁcation has sometimes centered on the concept of ‘externalities.’ A market requires that business pays for some components, for example, steel in manufacturing a car. However, the manufacturer does not have to buy the air that it pollutes in the process of making cars, and in turn, neither do consumers who drive the cars. In the United States in the 1960s and 1970s in particular, concern about the inability of companies to take into account the social costs of doing business was used to justify regulating products and processes in manufacturing.
In addition to regulating products and processes, governments regulate price and entry: the price that an industry may charge and the requirements to enter into the business. The justiﬁcation of price and entry regulation does not rely upon the concept of externalities. Rather, the argument is that some industries take on the characteristics of monopoly, whether as a natural monopoly or because there are very high barriers to entry. For example, it could be ineﬃcient to have multiple railways competing against each other since the costs of laying railroad track are very high. What is more, because it is expensive to build a railway, it is extremely diﬃcult to enter the business, which means that the competition that is supposed to ensure that prices and services are responsive to consumer demand does not exist. Without competition, railroads could charge what they would for services. Thus railroads, the ﬁrst industry subject to national bureaucratic regulation, in the United States would charge more for short-haul than for long-haul trips because there was much less competition in short haul (Skowronek 1982, pp. 124–5, 141–50). In air transport, too, the barriers to entry are high because airspace is limited and in any one airport runways and gates are limited. Someone must allocate the space and ensure that once the airline has the space it does not ignore what customers want. Economists also note the importance of ‘network eﬀects’ in monopoly. If having compatible computer systems facilitates the exchange of information, each person buying a computer system has an incentive to buy one compatible with those people already have, whether or not that is the best system. Advocates assert that professions like medicine and law require regulation because expertise is required to assess whether the profession is being practiced correctly. Consumers cannot assess whether a surgeon knows what she is doing until it might be too late.
These justiﬁcations for regulation have been subject to serious critique from those who believe that markets should be unregulated and from those who believe that regulation is ineﬀective because industries have special access to the state not shared by their workers or customers (Derthick and Quirk 1985). In this view regulatory bureaucracies, designed to incorporate public concerns into capitalist economies, become ‘captured’ by the industries they are to regulate. The regulatory bureaucracies then act largely to insulate the industries from competition and protect their interests. Sometimes that has happened by design: railroad regulators meant to maintain and steady the railroad industry. In the late nineteenth century railroads in the United States wanted to be regulated to moderate the incentives to cut prices that were putting railroads out of business (Skowronek 1982). In France notaires welcome regulation to preserve their monopoly on drawing up legal contracts; opening that monopoly would have meant decreasing income as a result of competition (Suleiman 1987).
Economists call the eﬀort to gain protection from the market by legislative or bureaucratic intervention ‘rent-seeking behavior’—that is, an eﬀort to gain a return beyond what is required to keep one in the business—and many have argued that rent-seeking is the heart of regulation. For example, lawyers beneﬁt from the licensing of lawyers; it restricts the numbers of lawyers available and thereby maintains a higher price than would be the case if anyone could practice law. The claim that regulation protected ineﬃcient industries from competition and used state power to keep prices artiﬁcially high provided a substantial part of the support for deregulation in the United States. In the late 1970s and 1980s (Derthick and Quirk 1985, Harris and Milkis 1996). In other nations, critiques of state ownership of industries led to privatization, which in turn entailed regulation (Graham and Prosser 1988). Across the industrialized Second World, industries diﬀered in their ability to maintain monopolies or other advantages regulation provides (Derthick and Quirk 1985, Suleiman 1987).
In the United States, deregulation seems to have promoted consolidation in the airline industry and the trucking industry just as understandings of ‘natural monopolies’ might have predicted. Perhaps surprisingly, the strength of the pro-environmental regulation lobby meant that environmental deregulation did not go far (Harris and Milkis 1996). Those advocating a more market-based approach in pollution rights gained recognition in Clean Air Act Amendments, but government oﬃcials were still deeply involved in regulation (Harris and Milkis 1996). Presidents elected on anti-regulation platforms do not completely control the political environment in which they work. The American federal system also provides access in the states when people have lost at the federal level. For example, when the federal government tried to limit the regulation of advertising, activists turned to the more sympathetic state governments.
States approach regulation relying on diﬀerent institutions that have, in turn, diﬀerent styles. Courts, legislatures, local governments, marketing boards, and bureaucratic agencies all can (and have) imposed orders on capitalist enterprise. In the United States before the Civil War, rather than relying on negotiations between business and bureaucrats, or on rules from bureaucrats that were enforced in the courts, the United States relied on courts—largely state courts— to enforce statutes or common law duties. In addition, state legislatures granted charters to businesses and in return exacted some form of regulation: limits on what entrepreneurs could charge to cross a bridge or use a road (Hartz 1948), or requirements that those who owned docks contribute toward keeping harbors dredged and open (Hartog 1983). Such regulation is not a matter of general rules implemented through a bureaucracy, but it was an eﬀort to require businesses to take into account public concerns not readily addressed in the market. By the late nineteenth century most states had instituted some bewildering array of boards, commissions, and special courts to instead ensure that a broader public interest was taken into account.
2. Institutions That Regulate
The ﬁrst American federal regulatory agency, the Interstate Commerce Commission, was created in 1887. It was unusual in that it established an agency independent of immediate control by ministers, responsible for making a framework of policy through trial-type procedures, with decisions that could be appealed to general jurisdiction courts (Baldwin 1985, p. 7). The United States’ oﬃcial regulatory procedure is more rule-oriented than those in other Western industrialized states, and courts are more deeply involved in making policy. The American system also allows for much more public participation and opportunity to argue against regulations both within an administrative agency and through courts after administrative agencies have decided.
After World War Two regulation in the United States became open to wider public participation. Administrative agencies must hold public hearings after announcing the topic of a rule they are considering. They must then justify the rule they issue according to the evidence they have. Often an organization concerned with the rule will bring the regulatory agency to court. Federal courts usually review the processes by which the rules were promulgated and decide whether the rule or decision is justiﬁed according to the evidence. What lawyers have won in the United States has been observed sometimes with horror, sometimes with envy in other nations.
Other nations do not rely so extensively on the equivalent of generalist courts to assess the procedures by which rules are enacted. The French have a specialized court that hears challenges to administrative decision-making , the Conseil d’Etat, or Council of State. The Conseil d’Etat is staﬀed with people who have built careers within administration; the purpose is to have a court that will take into account public purposes, or the interests of the state, in deciding cases brought by individual challengers. In Britain, practitioners in regulation were frustrated enough with how their general jurisdiction courts supervised administrative decisions that the state created a version of a specialized administrative court in the 1970s (Sterett 1997). Particular judges specialize in hearing complaints about administrators. The political justiﬁcation for both courts is that specialization in administrative complaints will lead to sensitivity to public purpose and an awareness of what can go wrong in administration. Germany, also, relies on a specialized administrative court staﬀed by a trained civil service judiciary that lies above a system of specialized tribunals.
A further contribution to the complexity of regulation in the United States is the extent of interest group litigation. Interest group challenges to the general rules under which administrators work are far more numerous than in any other nation. However, social welfare groups have in recent years organized to challenge rules concerning immigration and environmental regulation in Western Europe. The expansion of standards via the European Court of Justice and directives via the European Union have made it more possible to challenge domestic regulation, or refusals to regulate, in Europe. Finally, cross national treaties or other agreements also shape domestic regulation, for example in ozone regulation (Braithwaite and Drahos 2000; Canan and Reichman 1993)
In most countries there are specialized courts between generalist courts or the upper level administrative court and front line administrators. These specialized courts usually include representatives of relevant sectors (e.g., employers and union representatives in labor tribunals) in their staﬀ. Members of specialized courts are not always legally trained. Their procedures are often less formal than those of generalist courts, and those before them do not always have legal representation. The informality and discretion allowed most tribunals provides substantial opportunity for a slip between formal statement of government policy and its meaning in particular cases.
3. What Does It Cost?
Line items in government budgets for regulatory agencies do not actually tell what regulation costs. To comply with regulatory requirements, businesses incur the costs of improving safety or documenting that they are trying to. To the extent that regulation requires businesses to internalize their externalities, to pay for pollution abatements, for example, there is no one thing to measure. Business representatives have argued that the processes of American regulation are more diﬃcult than those in other Western postindustrial states: compliance requires more documentation, inspectors more readily impose ﬁnes, businesses can expect more public interest group confrontation, hearings, and possibly court battles (Kagan and Axelarad 2000) The outcomes in Western states—the regulatory standards that are imposed—tend to converge. (Kagan and Axelarad 2000). It is unclear whether this means that other states achieve comparable standards without the process costs incurred in the United States or that the United States through its extensive procedures sets standards that are copied elsewhere.
Regulation involves trade-oﬀs between eﬀectiveness and other considerations. For example, we might want nursing homes to provide good care for people, but that is hard to measure. To the extent that we try to enforce it, we might direct eﬀort in an organization toward documenting practices that do not quite get at caring, such as providing meals on time (Braithwaite 1993). A more substantive mandate to care might better capture what we want, but it would be unenforceable. In addition, diﬀerent substantive regulations are acceptable to businesses and broader publics in diﬀerent countries. For example, American commitments to nondiscrimination, which critics see as more extensive than those in most other countries, impose costs through requirements of documentation of fair procedures. Such provisions do not require any particular substantive outcome. Other countries, however, employ approaches that would be unacceptable in the United States. For example, Sweden tried to implement employment equality in a way that could keep administrative costs low while resulting in real change, by setting employment quotas for women in jobs in which they were underrepresented (Brown and Wilcher 1987). Britain, on the other hand, has relied on loose and open-ended deﬁnitions of nondiscrimination implemented through tribunals whose members are not legally trained and whose primary jurisdiction is not nondiscrimination law. The result seems to be a relatively inexpensive system that has done little to challenge discriminatory practices in the workplace (Kenney 1992).
Globalization has increased the importance of legal rules and lawyers in regulation in national states outside the United States, raising questions about the costs of more formal styles of regulation (Kagan 1997, Kagan 2000). Despite concerns about the expense of regulation, enterprises sometimes choose to pursue the goals of regulation beyond what governments require, because compliance oﬃces sometimes employ people who take the goals of regulation to be their mission, or because large corporations concern themselves with their public image as good citizens (Edelman 1990; Rees 1988). Compliance is not always a matter of direct orders.
4. Explaining Regulation: Political Institutions And Political Culture
Explanations for the diﬀerent approaches to regulation—contentious, and emphasizing public procedures and rules as against consensual, and without formal rules—across postindustrial states are of two diﬀerent types. The ﬁrst explanation emphasizes the historical emergence of governance in diﬀerent countries. The second explanation emphasizes cultural predilections such as individualism as against faith in authority.
A historical-institutional approach holds that political institutions have shaped the emergence of diﬀerent regulatory regimes. Those political institutions are in turn the result of large-scale historical processes. In particular, in much of Western Europe, a career civil service insulated from politics was created in the nineteenth century (Kelman 1981). Administrative arms of government often started as the personal servants of the monarch; the political environment within which they worked did not include mass electorates. Governments could develop bureaucracies insulated from political pressure, setting in place systems diﬃcult to disrupt, no matter what cultural preferences there might be for a broader or more accessible or more aggressive system of regulation. Alternatively, the incorporation of political fragmentation also has a history necessary, for example, to understand aﬃrmitive action policy in India (Parikh 1997)
Parliamentary systems, in which the government controls the legislative agenda, provide the government substantial control over how a regulator bureaucracy will be organized and the forms account- ability will take. Should a government believe it is best to include only responsible-seeming or moderate interest groups in their discussion of regulation, they will ﬁnd little institutionalized opposition (Vogel 1986). Parliaments see little reason to institute checks on administrators that can be invoked directly by interest groups, such as a right to sue. From the point of view of government ministers, both in charge of government departments and sitting in parliament, such a capability only makes regulation more diﬃcult.
In addition to administrators and their ministerial supervisors, courts participate in regulation, to a diﬀerent extent in diﬀerent national states. In civil law systems, judging is a career to which people are trained. The highest level administrative court in France, the Conseil d’Etat, is staﬀed with top-level civil servants. Their charge is quite clearly to attend to complaints against administrators with an eye to maintaining the eﬀectiveness of a regulatory regime; it is not a system designed to allow confrontation over the fundamentals of public policy. Even within British-style common law systems, judges in the general legal system are selected from the elite of the bar, who are narrowly trained and disinclined to confront administrators. The insulation from the electoral politics that so profoundly shapes the civil services includes the judiciary.
The historical-institutional explanation points us toward the very diﬀerent institutional development in the United States in order to understand diﬀerences in the contentiousness of regulation. In the American presidential and federal system, the legislatures— Congress and the states—are not wholly within the control of the executive. Those who wish to insist on visions of regulation diﬀerent from that of the executive can gain leverage in the legislature to do so, not least through mobilizing popular mistrust of closed procedures. The American system of formal rulemaking procedures and some openness in administration resulted ﬁrst from the American Bar Association’s mistrust of regulation and then from the politically distinct mistrust emergent in the 1960s and 1970s. Both gained leverage through Congress and through the courts, which had more generous standards for allowing people to sue than did courts in other nations.
In contrast, cultural explanation for diﬀerences in regulation among states focuses more on shared meanings and less on the institutional sources of those meanings. American culture is individualist and assertive according to this interpretation, while cultures in other Western countries are more deferential, in part based on a monarchical past and strong social hierarchies (Vogel 1986). Deference, however, hardly characterizes the upheavals of the 1960s and 1970s, pervasive throughout Western industrialized states. Demands for participation were institutionalized in law in the United States but not in other nation-states in that period. In other nation-states attempts to make the government more responsive included instituting ombudsmen, state institutions to listen to complaints about administration in particular cases. Responses did not include a fundamental change in how rules were instituted, though they did in the United States.
Further evidence raises questions concerning the completeness of the cultural explanation. In Britain, for example, a country cited as having informal regulatory practices in comparison to the United States (Vogel 1986), land-use planning has been contentious, rule-bound, and full of litigation. A cultural explanation arguing that the British are more deferential than Americans cannot account for that contentiousness. An alternative institutional and historical explanation is relatively simple. The legal profession long made most of its income in land. By the time bureaucratic land-use regulation emerged, the government had to take into account the interests of an already organized legal profession accustomed to litigating land disputes. In attending to national cultures as a basis for explanation, tensions within cultures require scholars to attempt to explain why some cultural preferences have been enacted into law and some have not.
Supranational courts shape regulation within the European Union. Both the European Court of Human Rights and the European Court of Justice make decisions concerning the rules that nation-states use in admitting immigrants, limiting sex discrimination, and determining the right to a family life or the right to travel. The European Court of Justice also decides cases concerning environmental regulation, based on directives from the Council of Ministers. The context for regulatory bodies therefore includes not only the businesses and practices that they regulate, alongside the attentive publics following regulation and their domestic political institutions. Increasingly, it includes supranational institutions harmonizing requirements cross-nationally. A perspective that takes nation-states as monolithic entities would see the supranational courts as an imposition on national autonomy. Since, however, not everyone within a nation-state agrees—some political activists want stricter regulation of pollution, or more openness to the families of settled immigrants—the introduction of supranational institutions makes for more complex alliances. State oﬃcials themselves are often not united, so supranational decisions can strengthen the hand of one administrative oﬃce over another.
5. Constituting Regulation: Rules And Discretion
National legislatures and executives may state general rules for regulation: that sex discrimination in employment is illegal, that businesses must reduce air pollution. Regulation is a complex task in which goals are often in tension—for example, to clean the air while ensuring that businesses that pollute do not have to close, or without severely curtailing driving. Multiple and conﬂicting goals for complex organizations mean that what counts as compliance requires interpretation. Even in the United States, where the courts are in the business of continually clarifying the rules, the facts of a situation can be complicated enough that compliance with a rule is something that will entail negotiation between the regulator and regulated, which a court then only ratiﬁes. An order to emit less smoke can easily become subject to negotiations regarding the kind of scrubbers to install (Melnick 1983). Distinguishing between general rules and decision making in individual cases is diﬃcult. In regulation, general rules often emerge out of particular decisions.
Where oﬃcials have substantial discretion in determining compliance, the meaning of regulation emerges in negotiations with the regulated company. Case-level administrators interpret their instructions in light of what regulated businesses ordinarily do. For example, in Britain, specialized courts (or tribunals) that were responsible for hearing labor complaints interpreted discrimination law so to prohibit unreasonable unfavorable treatment of women, even though the sex discrimination statute did not rely upon a standard of reasonableness. ‘Reasonableness’ was a standard in unfair dismissal cases outside of sex discrimination. Common sense told tribunal members that reasonableness must be part of the sex discrimination statute; in practice the tribunals ratiﬁed most of what businesses had been doing (Kenney 1992, pp. 104–8).
Changing the ordinary practices of an organization is diﬃcult. Where there are applicable rules or direct court orders against an organization, the organization must construe what it means to comply. Organizations have every reason to interpret decisions so that they ﬁt with organizational priorities. For example, a court order to pay women equally with men in comparable jobs still leaves open what count as equivalent jobs, how equal the pay must be, and over how long a period it must be equalized, all of which will be up to an employer to determine (McCann 1994). Administrative agency decisions or court interpretations of them gain meaning in their application.
The professional training of decision-makers shapes what regulations mean. In employment discrimination law in the United States, personnel administrators interpret the law so as to require what they see as good management practices, which requires that people who work together get along. They do not often interpret the law as a matter of legal right, that is, as an enforceable claim that someone can make against his or her employer. Rather, personnel administrators are more likely to interpret problems as matters of personality conﬂicts (Edelman 1993). Thus the presence of enforceable rights does not necessarily make regulation very diﬀerent from, for example, enforcement of water pollution laws in Britain, where there are no clear rules and enforcement oﬃcicals negotiate and bluﬀ (Hawkins 1984, see also Graboski and Braithwaite 1986). A substantial diﬀerence is whether oﬃcials can enlist courts in enforcement eﬀorts.
Recent scholarship focuses on both business organizations and administrative oﬃcials working in complex environments in which they mutually shape meanings of the law (Edelman 1993, Harris and Milkis 1996). Charting variation across sectors requires attending to that environment in which regulation works, including the variation in attentive publics as well as the organization of the state. While national states sometimes do have national approaches shared across regulatory sectors, the emergent supranational context is shaping regulation so as to require analysts to attend to reasons for convergence as much as diﬀerences between nation-states.
Diﬀerences could result less from diﬀerences between postindustrial states; the global context of operation might lead to convergence among First World states (Drahos and Braithwaite 2000), while Third World countries produce goods, often in conditions much worse for workers. Regulation there could depend as much on global political forces as on internal political dynamics.
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