The Economic Theory of Deregulation

Abstract

One of the consequences of the financial crisis of 2008 was a renewed focus on the issue of deregulation. The broadly recognized connection between the greatest economic downturn since the Great Depression and the systematic deregulation of our financial markets dating back over three decades reinvigorated the economic and political debate around the appropriate balance between market freedom and government regulation. This paper explores this theme historically, analyzing several economic markets that were highly regulated prior to the late 20th century. Through this analysis it establishes a foundational framework for the study of the widespread deregulation of the late 20th century. This paper first addresses the study of regulatory policy and its evolution throughout the 20th century. This section primarily focuses on the policy model proposed by George Stigler that acts as the foundational model for its conclusion. It then establishes the observed industries, the Airline and Trucking Industries, and provides evidence of their transition from industries that previously operated with strict governmental control of economic functions to markets that operated freely with little regulatory interference. This observed deregulation establishes the primary thesis question for this paper: what were the primary political and economic forces that caused the deregulation of these industries? The majority of this paper is dedicated to establishing alterations in the political and economic environment during this period that created these policy changes. This paper concludes that separate changes in the political and economic environment caused the deregulation of these industries. First, the evolution of subsystems from closed iron triangle systems to more complex issue networks granted smaller interest groups more influence on policy decisions. Thus, these groups' desired policies, which involved less regulation, received more consideration from the regulating agency. Second, the significant rise in the CPI increased the political pressure on elected officials to reduce prices. This pressure elevated the financial cost of regulating agencies to implement and maintain regulations that contributed to higher prices. These combined shifts caused a sudden, extreme removal of regulations in these markets. By establishing a causal analysis of the presented industries this paper creates a foundational case study for the broader, more complex deregulation that occurred throughout other industries during this time period.