This chapter offers responses to the question ‘why regulate?’ and ‘why do regulatory regimes emerge in a particular form?’ by examining ‘theories of regulation’. While chapter 1 introduced the readers to the economic justifications of regulation, this chapter delves into the different theories that explain why we need regulation and how public and private actors interact to shape the content of regulation. These theories refer to a set of propositions or hypotheses about why regulation emerges, which actors contribute to that emergence, and typical patterns of interaction between regulatory actors. It discusses theories from several disciplinary approaches, classifying these theories into four kinds: public interest, private interest theories, systems and institutionalist approaches and ‘hybrid’ theories.

This chapter addresses the questions of how policy choices to improve education might be addressed by looking across social choice theory, public choice theory and capability approaches. The intention is to try and understand how to evaluate innovative programmes that are set up to improve the chances of the most disadvantaged children, and why these well-intentioned programmes continue to face challenges in terms of ensuring a scaling-up procedure. The chapter draws on an evaluative study undertaken in 2014 and 2015 to examine the dissemination and scaling up of the educationally innovative Activity Based Learning (ABL) programme in Tamil Nadu, India, to improve the retention rates and learning outcomes of children from challenging socio-economic backgrounds. The studys aim was to compare the manner and rolling out of the programme in Tamil Nadu with ABL programmes elsewhere, and to ascertain the extent to which they had been successful.

Advances in technology have opened up new opportunities for people to live in different ways. Human creativity is one of the most important causes of changes of this kind. Flourishing probably requires space for people to be creative (in a broad sense) and to benefit from (and rejoice in) the creativity of others. But creativity is often destructive, as Joseph Schumpeter famously noted, destroying value as well as creating it. That change will take place is predictable, but the direction of the change and how rapid it will be are things that probably cannot be known ex ante. Predictions made 50 years ago about what life would be like today are not noted for their accuracy. More recently, the uses of social media have gone beyond what the developers of the technology could foresee. In a world of increasing and unpredictable technological change, what will a life that we have reason to value look like?

In Adam Smith’s Wealth of Nations, prescriptive and descriptive analysis are intertwined. While incentives analysis is strictly descriptive, the motivation of the analysis is prescriptive as are the motivations for its prescriptions. For Smith, wealth tends to promote justice; it also tends to be a consequence of justice. Poverty tends to create injustices instead, and to be a consequence of injustice. Understanding how to increase the wealth of a nation is thus understanding how to increase its justice. The perverse incentives of special interests are destructive forces of both wealth and justice. Smith called Wealth of Nations a violent attack against the British commercial system because, in the interpretation offered here, the entire apparatus of the British Empire was the result of those perverse incentives of special interest groups that not only generated inefficient monopolies but also, and especially, generated gross injustices for the weakest members of society.

This chapter sets out the dystopian critique of the liberal democratic state that emerged when neoclassical economic reasoning was applied to the political realm. The resulting ‘public choice theory’ made assertive claims of democratic state failure that became a mainstay of neoliberal argument, but here they are shown to possess clear affinities with the Leninist account of bureaucracy as the ‘real’ centre of power in a bourgeois democracy. It follows from the deterministic, closed-system reasoning in both Leninist and neoclassical 'public choice' theory that these affinities continued into the respective prescriptions for the preferred constitutional order. The ideal constitution of limited government set out in public choice theory, most notably by James Buchanan, Gordon Tullock, and Geoffrey Brennan is shown to be a logically inevitable counterpart to the ‘withering away of the state’ under socialism anticipated by Lenin. The adjacent constitutional arguments of Friedrich August von Hayek are also considered, as is the more empirically robust account of bureuacracy as an essential feature of modernity set out by Max Weber.

Orthodox monetary policy scholarship assumes that central bankers act to maximize the public welfare. If imperfect incentives enter the model, it is on the part of the public. We challenge this assumption. Monetary policymakers are just as prone to incentive problems, which cause them to act according to their own self-interest. Furthermore, the self-interest of policymakers is not always the same thing as the public welfare. The two diverge frequently, in fact. We survey the history of the Federal Reserve and show the numerous ways discretionary central bankers have been compromised. These incentive problems are an inherent feature of discretion. They can only be eliminated by embracing true monetary rules.

This chapter critically examines the rise of board primacy as an alternative theory of firm governance. The chapter begins by categorizing such theorists as either “wise ruler” theorists or “long-term interest” theorists. In either case, board primacy theorists have responded to the revelation that shareholders, like other corporate constituents, have quite heterogeneous preferences not by extending voting rights to those constituents but by further distancing the shareholder electorate from real corporate decision-making. Their move conflates two different aspects of group decision-making processes: the responsiveness of the system and composition of the electorate. And by holding fast to exclusive shareholder voting, the theorists have just further detached their governance structures from the underlying preferences of corporate constituents without substituting anything in their place. We should instead investigate treating other constituents more like shareholders rather than the other way around.

Wicksell’s 1896 essay on just taxation approved of Mill’s endorsement of Hare’s system of proportional representation. The distinction between democracy, identified as government by discussion, and majority rule is central. When Buchanan laid out the role of the economist, he worried about a temptation to propose policies that garnered only majority support rather than policies with unanimous appeal. Buchanan’s development of Wicksell’s principle that expenditures and the taxes to finance them ought to be voted on simultaneously shows in his opposition to deficit financing: those who benefit from deficit-financed expenditures need not be the same as those who bear the costs. The link to an older Chicago tradition of Simons, who was concerned with the monetary instability generated by a fractional reserve monetary system, shows in the 1962 In Search of a Monetary Constitution. Tullock’s initial paper on rent seeking targeted the Chicago result that the economy was close to allocative efficiency. The question of the status quo comes into focus when we ask whether Wicksell’s simultaneity principle is appropriate under dictatorial rule where government by discussion does not exist.

Behavioral paternalism rejects the view that individuals always do the best for themselves, by their own lights and given their constraints. A large number of systematic mistakes called biases allegedly prevent individuals from enhancing their own welfare. This general position supports an array of policy prescriptions designed to correct their decision-making. Ideal decisions are those neoclassical agents would make if they were not plagued by biases. These are the decisions of a model construct (a “puppet”). We review the leading paternalist policy proposals and their behavioral rationales. We then preview some of our criticisms and summarize the contents of subsequent chapters.

In the framework of a critical illustration of the contemporary history of economics, this chapter illustrates the various streams of neo-liberalism, from Ordoliberalism to Mises’s new Austrian school and Hicks’s Austrian capital theory, from Friedman and the Chicago school to rational expectations and supply-side economics, from the public choice school to political economics, from the Mount Pélerin Society to the Washington consensus and the idea of expansionary austerity. Step by step, the feeble theoretical and conceptual foundations of this set of theories are critically discussed.