Regulation is an integral part of institutional change. Regulation sets the rules of the economic game and thereby the incentives faced by the actors. There are several general theories of economic regulation, each fraught with difficulties when one examines the life – and rarely death – of any particular regulation. Finding fault with general theories of regulation, Anne Krueger espouses the case study approach, arguing that we could learn more by amassing historical detailed studies of specific regulation and then generalizing from the results.

Until the pioneering article by Stigler, the dominant view among economists was that market failure calls for regulation. Even today, the standard textbook treatment of externalities and monopoly begins by pointing out the inefficiencies associated with market failure and almost naturally leads students to the conclusion that government intervention is warranted. We label this the public interest paradigm. As Krueger states in this essay, “Underlying these sets of policy prescriptions is the notion of government as a benevolent guardian hampered only by ignorance of proper economic policy as it seeks disinterestedly to maximize a Benthamite social welfare function.”

The Stigler view of regulation followed in the footsteps of Olson, positing that special interest groups have lower costs of organizing and demanding regulation in their self-interest. This position has led to the view that special interest groups “capture” the regulators. Taken to its extreme, this view suggests that because special interest groups benefit ultimately from regulation, they must be the ones who are responsible for the origins of the regulation.