Theories of Economic Regulation Richard Posner The Bell Journal of Economics and Management Science 1974 Law and economics is now a well-established methodology, used to analyze the impact of policies and regulations. But this type of analysis is a relatively recent development. In the 1970s, a group of legal scholars produced groundbreaking articles and empirical studies that brought law and economics together. One of the earliest influential works was “Theories of Economic Regulation” by legal scholar and federal appellate judge Richard Posner. Posner wrote the article examining the predominant theories of government regulation. These theories supposedly explained how regulation affected society and the economy. Posner outlined each theory, and its primary variations, to see which of them did the best job of explaining verifiable phenomena. A major challenge to social theory is to explain the pattern of government intervention in the market-what we may call "economic regulation." Properly defined, the term refers to taxes and subsidies of all sorts as well as to explicit legislative and administrative controls over rates, entry, and other facets of economic activity. There were two primary types of theories: the “public interest” theory, and the “capture” theory. The public interest theory relies on two basic premises: 1) that economic markets operate inefficiently or inequitably, and 2) that government regulation is virtually costless. Judge Posner shows that both of these assumptions were questioned by studies of regulated industries and government agencies. Posner pointed out that, despite its name, the actual “interests” of the public are not considered in regulations, which are designed by agencies and not the legislature. The second major theory was the “capture” theory, and there are three versions discussed in the article. One asserts that government regulation is “captured” by big business capitalists who control all societal institutions. Another version emphasizes private interest groups as driving regulation, without specifying which interest groups or why those in particular should succeed. The last version, and the one of most interest to Posner, is the economic theory of regulation. This theory is based on two simple but important insights. The first is that since the coercive power of government can be used to give valuable benefits to particular individuals or groups, economic regulation-the expression of that power in the economic sphere-can be viewed as a product whose allocation is governed by laws of supply and demand. The second insight is that the theory of cartels may help us locate the demand and supply curves. . . The economic theory can thus be used to explain why we so often observe protective legislation in areas like agriculture, labor, and the professions, where private cartelization would hardly be feasible. This is an important advance over the other theories that we have examined. The remainder of the article examines available empirical evidence to see if it obviously supports either the public interest theory of regulation or the economic theory. Posner concludes that not enough systematic research had been conducted to overwhelmingly favor one theory over the other. However[. . .] the general assumption of economics that human behavior can best be understood as the response of rational self-interested beings to their environment must have extensive application to the political process. Richard Posner’s “Theories of Economic Regulation” challenged lawyers, economists, and political scientists to develop more precise tools to study regulation. Fifty years later, data-driven economic analysis is now the primary way to evaluate regulatory impact.