Chapter II - Regulation Beyond Market and Hierarchy: An Excursion into Regulation Theory

Abstract

This chapter discusses some of the debate on industrial regulation, both in microeconomics and organizational theory. A general theory of regulation covering both intra and inter-organizational/market issues do not yet exist. The new economic growth theory highlights the need to move beyond simple resource allocation and to start including dynamic learning processes into regulatory analysis. Strong theoretical grounds can be given for relativizing regulatory theory to specific national, regional and/or sectoral institutional conditions. Because of the complementarity as well as substitutability between markets and hierarchies, regulation theory should be intimately concerned with both economic and organizational factors, and the interplay between them. However, because of disciplinary specialization, organizational elements have often been severely underplayed and unduly simplified in economic regulation theory, and likewise, market elements have often been underdeveloped in organization theory. Within both economic and organizational regulation theory, it is possible to construct a development from simplistic, formalist, static, efficiency-oriented regulation towards a broader, complex, dynamic, growth-focussed regulation with a more procedural heuristic orientation. This development includes four steps: (1) control and static efficiency-oriented regulation; (2) organizational and economic refinements—that is, an enlargement of the regulatory menu; (3) regulation in a dynamic growth perspective, where economic and organizational regulatory instruments must be tailored to creative innovation; and (4) regulation in institutional context, and applying regulation to varying national styles and institutional conditions. At a synthetic level, regulatory design of dynamically developing industrial systems must largely remain a heuristic process-oriented exercise, with considerable scope for experimentation. Inspite of the possibility of partial and temporary static optimization, regulatory designs may never be finalized, but must remain open to constant challenge and reconsideration.