Beyond "Capture" Theory: Toward an Institutional Perspective

But private regulation, like public regulation, varies in so many respects, internal and external, that no single theory fits all forms. Just as capture theory has limited application in the public sector, particularly in the area of protective regulation, there is reason to question its universal application in the private sector. The politics of private regulation appear to be far more complex than capture theory admits. The mixture of motives and interest groups in the private sector is wide-ranging and unpredictable. Internal factors, such as administrative procedures and organizational self-interest, further complicate the picture. Each suggests reasons why capture theory apparently fails to chart the most important differences between public and private standards-setters.

Who Benefits from Private Safety Standards?

Private standards-setters are widely assumed to be "captured" by business interests. Suggesting otherwise would, under this view, be as naive as indulging the notion that public agencies simply carry out their statutory charge to act "in the public interest." But developments in the public sector suggest that capture theory does not fit protective regulation nearly as well as it fits economic regulation. The classic state-

ments of capture theory—Samuel P. Huntington's "administrative marasmus," Marver Bernstein's "life-cycle theory," and Stigler's "theory of economic regulation"—stem from agencies that regulated prices or terms of entry.^[29] There is little justification for such regulation, the kind long performed by the Interstate Commerce Commission ("the most studied of all agencies" when McConnell and Lowi wrote about government regulation).^[30] But protective regulation is different. It is economically defensible in various (arguably frequent) instances of market failure.^[31] And, at least in the public sector, protective regulation does not come about through the demands of business. More often it is adopted over their objections. "Only by the most extraordinary theoretical contortions," Wilson concluded, can this regulation be explained "by reference to the economic stakes involved."^[32]

Protective regulation in the private sector is similarly complex. Business interests are neither unitary nor necessarily opposed to the public interest. Some forms of private standards-setting, typically those sponsored by trade associations, are controlled entirely by the regulated. Others are more independent, offering services such as "third-party certification." The mission of these organizations resembles those of the public agencies charged with protecting health and safety. Their status is unclear, however, and this lack of clarity has given rise to several disagreements about motives. UL lost a legal battle with the Internal Revenue Service in 1943 when a federal court decided that "testing for public safety" is a business, not a charitable undertaking.^[33] A private standard developed by the National Sanitation Foundation was upheld in a recent case partly because the court considered the organization to be "independent."^[34] How to characterize the American Society of Mechanical Engineers (ASME) was the source of strong disagreement in a recent Supreme Court case, with one side calling it a "scientific" group and the other side alleging it is "dominated by commercial interests."^[35]

To be sure, there is a rich tradition of using "self-regulation" to stifle competition. This includes standardization of sizes and shapes, practically a prerequisite to effective price-fixing.^[36] But safety standards are different. Granted there are some anticompetitive ones masquerading as safety standards, but there are also genuine safety standards that, although not necessarily as strict as what government would adopt, certainly benefit the diffuse interests of consumers.

These private standards-setters do not fit easily into the existing understanding of private organizations. In their landmark study of formal organizations, Peter Blau and W. Richard Scott classified organi-

zations "on the basis of the cui bono —who benefits."^[37] In his book Who Profits, Robert Leone suggests looking at regulation in a similar way.^[38] Either way, private standards-setters are far more complicated than generally appreciated. In Blau and Scott's terms, private standards-setters are likely to be considered "mutual-benefit associations," organized primarily for the benefit of membership. But that analysis fits the trade associations much better than the "independent" organizations. The membership of, say, the National Fire Protection Association is so large and diverse that the "mutual-benefit" theory clearly does not fit. The members are not the primary beneficiaries of most standards. And many organizations, such as Underwriters Labs, do not even have members.

These groups might be considered "service organizations" because they have clients. But that description is also inappropriate, because product testing and certification appear to be directed at third parties, including insurance companies, wholesale buyers, and individual consumers. This leaves the most nebulous category of all: the "commonweal" organization, whose prime beneficiary is the public at large. While this term undoubtedly describes some private standards-setters, it is not clear whether "commonweal" private standards are likely to be better or worse than the public alternatives.

Several political scientists have condemned private standards in any case. Lowi declared private safety standards guilty by association with the old National Recovery Administration (NRA). Calling these standards "indistinguishable" from the old NRA codes, Lowi marveled that "there is so little suspicion as to their constitutionality" under the nondelegation doctrine.^[39] Others have invoked the ghost of Herbert Hoover—the engineer turned secretary of commerce intent on a grandiose plan of economic "standardization"—to belittle private standards.^[40]

These arguments are not convincing. In contrast to Lowi's interpretation, Donald Brand has recently argued that "ideology and the institutional interests of the state played a more important role in determining the behavior of those administrators than special interest demands."^[41] Moreover, just as it would be inappropriate to judge the Environmental Protection Agency based on the performance of the Interstate Commerce Commission, it is inappropriate to judge private safety standards as if they were akin to the NRA's "codes of fair competition" (in other words, economic regulation).

Lowi's argument also misrepresents the role of the public and private sectors by suggesting that government is preeminent in protective reg-

ulation. By framing his argument in terms of "delegation," Lowi implies that these functions are somehow inherently public. This conception is not supported by history. The private sector was in the business of product safety decades before the Consumer Product Safety Commission was created in 1972. The American Gas Association Labs started regulating gas appliances in the 1930s, and Underwriters Laboratories was certifying electrical equipment before the turn of the century.

These arrangements are far more complicated than capture theory admits. Undoubtedly, some private standards-setters are mainly self-serving. But others probably promote the public interest to a significant degree. When OSHA adopted hundreds of private standards, the problem was not that they were private; it was that the agency acted indiscriminately.^[42] Some of those standards were essentially defunct, like old statutes never removed from the books. Others were more desirable. Unfortunately, OSHA did not distinguish between the two. In 1988, however, without any measurable opposition, OSHA adopted a more carefully selected group of private safety standards.^[43] Certainly the public benefits to some extent from these standards, although the magnitude of the benefit and its corresponding cost must be examined before reaching any broader conclusions.

Bringing the Bureaucracy Back In

A second major problem with existing theories of private standards-setting is that they do not account for organizational interests or administrative procedures. Agencies should not be "mistaken as passive tools yielding to the strongest pressure of the time."^[44] Organizations have their own interests, although these are often overlooked in theories that emphasize compromise among outside interests. Bringing the bureaucracy back into the consideration of private standards challenges the conventional wisdom in two ways. First, it demonstrates that private administrative law is similar in many ways to traditional administrative law. Second, it identifies several unexpected manifestations of organizational self-interest.

Private Administrative Procedure . The rules of administrative procedure, the stuff of administrative law, are recognized as an important influence on agency decisionmaking in the public sector. Although the content of administrative law is controversial, it is widely assumed that the tradition of constitutionalism it reflects sets the public sector apart

from the private. By affording certain due process protections, enforcing notions of interest representation, and holding agencies accountable through an appeals process, administrative law shapes and legitimatizes agency decisionmaking. Private forms of governance, by contrast, are more consensual, minimizing the rule of law and, according to Lowi, favoring large, well-organized groups.

But the private sector is not without administrative rules and legal norms. In fact, there is a surprising degree of similarity in procedural requirements in the public and private sectors. The precepts of due process are enshrined in the by-laws of most private standards-setting organizations. Simple notice and comment procedures are commonplace. And the opportunity to appeal exists in many organizations. The Board of Standards Review, for example, hears appeals concerning any of the thousands of standards sponsored by the American National Standards Institute (ANSI). Committee membership in several private organizations is subject to rules against "domination" by any single interest. Some private standards-setters encourage outside groups, including consumers, to participate in their proceedings. The extreme example, the American Society for Testing and Materials (ASTM), even pays such groups to participate in the development of certain standards—a practice that has been discontinued in the public sector.

This is not to say that various private organizations protect individual interests to the same extent as public organizations; only that they apparently do more than is generally recognized. Of course, more is not necessarily better when it comes to procedural "protections." As Ronald Braeutigam and Bruce Owen point out: "This jurisprudentially laudable set of constraints on agency behavior has an interesting side effect, which is the creation of substantial delays and legal expense."^[45] Such costs might be worthwhile. But, as Lawrence Bacow observes, divisive proceedings might hinder compliance.^[46] Overly formal proceedings might also limit "the rich set of informal contacts" that would otherwise enhance decisionmaking.^[47] Therefore, the private sector might even hold an advantage over the public if its administrative procedures strike a better balance between providing meaningful procedural protections and minimizing the undesirable side effects of due process.

Organizational Self-Interest . Conceiving of standards-setting solely in terms of the regulated also overlooks the recognized importance of organizational self-interest. Agencies do not just respond to exterior

pressures; they have interests of their own. Although there is no clearly articulated theory of organizational self-interest in the public sector, it is widely assumed that the interests of private regulators diverge significantly from the public interest. Much has been made of Michels's "iron law of oligarchy," the tendency of organizational leaders to acquire and promote interests different from those of their members. McConnell went so far as to argue that "the sweep of [Michels's] work extends by implication to all organizations in which membership could be said to exist."^[48] Michels's conclusions stem entirely from a 1913 study of political parties in Germany, however, and in all likelihood the operation of this "iron law" varies significantly with such variables as organizational purpose and structure, not to mention larger differences in political culture and history.^[49] Even if Michels's hypothesis is fitting, what ultimately matters is the nature of the interests pursued by the leadership of private standards-setters.

One of the few studies of private safety regulation, Michael Hunt's examination of the Association of Home Appliance Manufacturers, suggests that the leadership might pursue policies more enlightened than those favored by the membership. Hunt found that the AHAM staff had "a substantially different set of preferences from the member companies" and used it to achieve "stricter" results than would have been supported by the membership!^[50] Steven Kelman's comparison of public regulation of the workplace in the United States and Sweden is similarly suggestive. Kelman concludes that these two seemingly different regulatory regimes produce surprisingly similar outcomes. He attributes this largely to the influence of safety professionals.^[51] Wilson's study of public regulation concludes that the motives of various types of government employees help explain outcomes that cannot be explained by capture theory. Similar influences probably exist in the private sector. To the extent that they do, private standards are more desirable than generally recognized. In short, Michels could be right about the significance of organizational self-interest, but Lowi could nonetheless still be wrong about the undesirable nature of the resulting outcomes.

There are several other reasons aside from the influences of professionalism why private standards-setters might adopt standards much stricter than expected. One is the desire to forestall government action. This incentive might actually lead the private sector to adopt stricter standards than government would have done.^[52] Another possible reason is liability law. In the case of product safety standards, for example,

strict standards may minimize liability costs or reduce the cost of liability insurance.

This is not to say that private standards are generally better or worse than public ones. Insufficient information is available to reach a conclusion. There are reasons both to doubt and to believe the conventional wisdom about public and private regulation. What is needed is more detailed information about the similarities and differences between standards-setting in the public and private sectors.