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Regulatizing Process and the Boundaries of New Public Governance

Edward Rubin Vanderbilt University Law School

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THE REGULATIZING PROCESS AND THE BOUNDARIES OF NEW PUBLIC GOVERNANCE Edward Rubin* Vanderbilt University School of Law

New Public Governance offers important insights into the operation of modern government and promises significant improvements in the way that government develops during the coming decades. 1 It aspires to emancipate us from the adversarial, zero-sum command and control mentality that has often afflicted regulatory programs, opening up a new realm of cooperation, flexibility and collectivity-generated creativity for solving the complex problems that beset modern society. But it can also sound naïve. There are real wrongdoers out there, selfish people who seek

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University Professor of Law and Political Science, Vanderbilt University Law School. I want to thank Dean T. Alexander Aleinikoff and the Georgetown New Public Governance Seminar for their comments and suggestions. 1 This has become a widespread movement during the past two decades in American, British and Australian legal scholarship. See, e.g., Ian Ayres and John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (1992); Grainne de Burca and Joanne Scott, Narrowing the Gap: Law and New Approaches to Governance in the European Union, 13 Colum. J. Eur. L. 513 (2007); Michael Dorf, Legal Indeterminacy and Institutional Design, 78 N.Y.U. L. Rev. 875 (2003); Daniel Farber, Revitalizing Regulation, 91 Mich. L. Rev. 1278 (1993); Daniel Farber, Taking Slippage Seriously: Noncompliance and Creative Compliance in Environmental Law, 23 Harv. Env. L. Rev. 297 (1999); Jody Freeman, Collaborative Governance in the Administrative State, 45 UCLA L. Rev. 1 (1997); Neil Gunningham, Peter Grabosky and Darren Sinclair, Smart Regulation: Designing Environmental Policy (1998); Richard Pildes and Cass Sunstein, Reinventing the Regulatory State, 62 Chi. L. Rev. 1 (1995); Charles Sabel and William Simon, Destabilization Rights: How Public Law Litigation Succeeds, 117 Harv. L. Rev. 1015 (2004); Joanne Scott and Susan Sturm, Courts as Catalysts: Rethinking the Judicial Role in New Governance, 13 Colum. J. Eur. L. 565 (2007); Susan Sturm, Second Generation Employment Discrimination: A Structural Approach, 101 Colum. L. Rev. 458 (2001). For overviews, see Orly Lobel, The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought, 89,Minn. L. Rev. 342 (2004); Victoria Nourse and Gregory Shaffer, Varieties of New Legal Realism: Can A New World Order Prompt a New Legal Theory, Cornell L. Rev. (2009) (forthcoming).

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nothing but their own advantage,2 irresponsible people who are too inconsistent to be relied upon, and sociopaths who will frustrate any effort to cooperate with them. 3 In these situations, traditional command and control regulation, and the even more traditional idea that law is essentially a set of orders backed by sanctions, 4 seem to exert a renewed appeal. Conclusions about whether cooperative or command and control regulation represents the preferable strategy seem to vary from person to person, from discipline to discipline, and sometimes from moment to moment. Some people, by nature or experience, are more trusting or optimistic, some more wary or cynical. Sociologists tend to focus more on cooperative behaviors and social interactions, while economists are typically more inclined to see human behavior as motivated by self-interest, and perhaps ―self-interest seeking with guile.5 And most people have experienced different moods when they are feeling either charitable or misanthropic toward their fellow human beings. It seems apparent that both New Public Governance and traditional regulation are well grounded in empirically observable

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Modern microeconomics is built upon this behavioral assumption, with varying degrees of subtlety. See, Robert Pyndick and Daniel Rubinfeld, Microeconomics 61-88; 254-55 (5th ed., 2000); George Stigler and Gary Becker, De Gustibus Non Est Disputandum, 67 Am. Econ. Rev. 76 (1977). In the form of rational actor theory, it has been applied to a broad range of social (i.e., non-economic) behaviors. See Gary Becker, The Economic Approach to Human Behavior (1978); James Buchanan and Gordon Tullock, The Calculus of Consent (1962); Mancur Olson, The Logic of Collective Action (1965); Dennis Mueller, Rational Egoism Versus Adaptive Egoism as Fundamental Postulate for a Descriptive Theory of Human Behavior, 51 Pub. Choice 3 (1986) 3 See, e.g., David Jones, Understanding Criminal Behavior: Psychosocial Aproaches to Criminality (2008); Benjamin Lahey and Irwin Waldman, A Developmental Propensity Model of the Origin of Conduct Problems during Childhood and Adolescence, in Benjamin Lahey, Terrie Moffitt and Avshalom Caspi, eds., Causes of Conduct Disorder and Juvenile Delinquency 76 (2003). Becker argues that sociopathic behavior is simply a variant of self-interested behavior. Gary Becker, The Economics of Crime (1995). 4 See Hans Kelsen, General Theory of Law and the State (1945); Hans Kelsen, Pure Theory of Law (1967). 5 Oliver Williamson, The Mechanisms of Governance 253 (1996). Williamson defines this as opportunism, ―in contrast with simple self-interest seeking, according to which economic agents will continuously consult their own preferences but will candidly disclose all pertinent information on inquiry and will reliably discharge all covenants.‖ The opportunistic self-interest seeker clearly presents a greater challenge for a New Public Governance approach to regulation.

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phenomena and appeal to entirely plausible assessments of human behavior. These personal, methodological and affective variations in the desirability of cooperation or command raise an important issue for New Public Governance. The descriptive version of the issue involves the boundaries of the cooperative approaches that New Public Governance recommends. Under what circumstances is this strategy likely to be effective, and under what circumstances should it yield to command and control? The prescriptive version involves the circumstances that contribute to the growth of New Public Governance techniques. How can we create conditions where cooperative approaches will be effective, so that we can reduce the need for strategies that are adversarial, confrontational, often costly and sometimes counter-productive? This essay explores the boundaries of the New Public Governance approach to regulation at both the macro and the micro level. At the macro level, it uses social theory to trace the evolution of cultural attitudes that favor cooperative approaches and identifies the general circumstances where such approaches are more or less likely to be effective. At the micro level, it uses recently developed ideas regarding regulatory implementation derived from game theory to identify the specific actors who are more or less likely to be amenable to cooperative strategies. In addition, both levels of analysis rely on organization theory because the primary actors in the context where New Public Governance has been most fully developed are institutions rather than individuals. The first part of the essay addresses the macro level, an inquiry that leads to the conclusion that the boundaries of cooperative regulation, as an optimally effective strategy, are temporal, and derive from the evolution of regulatory governance. The second part addresses the micro level, and concludes that a further boundary results from the variations in institutional behavior among regulated parties. The third part tests and illustrates these boundaries by using a single empirical example, the regulation of commercial aviation. I. The Macro Level: Boundaries Across Time A. Elias‘ Theory of the Civilizing Process Social theory, in its effort to understand the basic forces that have shaped human history, is obviously a large topic, even if it is

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confined to the Western World. Focusing on the specific issue of organizational behavior in a regulatory context narrows the range of relevant approaches, but still leaves a formidable array of complex accounts that might be employed. Weber‘s theory of bureaucratization,6 Habermas‘ theory of rationalization, 7 and Giddens‘ theory of structuration8 are among the likely candidates, and that is already too much for a single article. This article, therefore, selects one of the relevant theories – Norbert Elias‘ theory of the civilizing process – on the basis of its direct relevance to the issue of cooperation, and specifically cooperation with the ruling authorities within a polity. 9 Selection of a single theory necessarily means that certain themes will be emphasized more than others. In this case, Elias‘ theory is being used to identify one particular factor – although, it will be argued, an important and sometimes dominant one – among the many that contribute to the behavior of regulated entities. Moreover, theories developed in a particular context, as in Elias‘ case, must be adapted before they can be applied to a different one. Elias focuses rather heavily on individual behavior;10 it is necessary, therefore to incorporate an account of organizational behavior in order to apply his theory to regulatory settings. The essence of Elias‘ theory is what he calls the civilizing process, an evolutionary trend that spans the entirety of Western, or post-Roman history. It is characterized by decreasing levels of interpersonal violence, decreasing economic inequality, increasing privacy between individuals, decreasing contact with the visceral or animal aspects of life, increasing specialization of work and, perhaps most important, increasing internalization of elaborate norms of behavior that make such specialization possible. Elias draws a vivid picture of the Middle Ages, and especially the Early Middle Ages, as 6

Max Weber, Economy and Society 212-99, 956-1003 (Guenther Ross and Claus Wittich, eds., 1978) 7 Jurgen Habermas, The Theory of Communicative Action, vol 1: Reason and the Rationalization of Society 279-95 (Thomas McCarthy, trans., 1984) 8 Anthony Giddens, The Constitution of Society (1984) 9 Norbert Elias, The Civilizing Process: The History of Manner and State Formation and Civilization (Edmund Jephcott, trans., 1994). This is a continuously paginated volume containing two books which Elias published separately in 1939, The History of Manners, at 1-256, and State Formation and Civilization, at 257-543. 10 In fact, he relies largely on Freudian psychology, speaking of the desires that emerge from the id, and constraints imposed by the superego. This perspective pervades the entire work, and is explicitly invoked and discussed in its most general and theoretical section, id. at 443-513.

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a violent, savage era. 11 The warrior aristocrats who dominated the period were constantly armed and frequently violent, not only in their conflicts with each other but also in their constant depredations on defenseless peasants, artisans, and sometimes even clerics. 12 Royal governments tended to be ineffective, maintaining, at most, a nominal and symbolic control over their purported realms and the bellicose nobles who inhabited them. These ―nobles‖ ate with their fingers and picked their teeth with their knives, 13 urinated and defecated in public,14 blew their noses into their hands, 15 spit on or under the dinner table and in a variety of other public places, 16 slept naked and undressed for bed in front of other people, 17 and ran naked through city streets on their way to the bath house (on the occasions when they bathed).18 After a marriage, the wedding guests escorted to the bride and groom to their bed and undressed them or watched them undress.19 As the Middle Ages gave way to the modern era, related developments occurred in the evolution of manners and the development of nations states. The relationship between these two seemingly separate realms is conceived by Elias as co-causal, that is, an ongoing interaction over time where each incremental change in one realm leads to changes in the second, which in turns produces 11

Periodization is always difficult. For present purposes, the Early Middle Ages, a term that historians now prefer to the more traditional ―Dark Ages,‖ extend roughly from 500 to 1000 AD, that is, from the fall of Rome to the beginnings of Western European expansion, and the Middle Ages or High Middle Ages from 1000 to 1400 or 1500 AD, that is, the period of expansion and increasing commerce up through the Renaissance, the age of exploration, and the Reformation. Of courses, all people see themselves as living in modern times. 12 Elias, supra note [ ], at 275-86, 335-45. Around the turn of the millennium, peasants and clerics joined together in a social movement, the Peace of God, to condemn and combat the endemic violence in the society. See Geoffrey Koziol, Monks, Feuds and the Making of Peace in Eleventh-Century Flanders, in Thomas Head and Richard Landes, eds., The Peace of God: Social Violence and Religious Response in France Around the Year 1000, at 239 (1992); Hans-Werner Goetz, Protection of the Church, Defense of the Law, and Reform: On the Purposes and Character of the Peace of God, 989-1038, in id. at 259. 13 Elias, supra note [ ], at 51-55 14 Id. at 106-09 15 Id. at 121-22 16 Id. at 129-30 17 Id. at 134-37 18 Id. at 135 19 Id. at 145-46

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changes in the first. Perhaps the primary engine of the process, in Elias‘ view, was the increasing monopolization of force by the central, generally royal governments. This took a long time and necessarily involved a great deal of resistance by the local magnates whose authority and independence were being undermined. 20 One of the major instrumentalities that royal regimes employed to gain control of their fractious nobility was the royal court (another one was artillery, which could pulverize the previously-invulnerable stone walls of the noblemen‘s fortified castles). 21 During the Middle Ages, royal courts were peripatetic institutions, moving from one part of the regime to another and occupying space in different noblemen‘s castles. 22 It was an odd arrangement, but reflected the reality that a medieval king needed to be physically present to exercise control in these chaotic times. As royal regimes became consolidated, and gradually obtained a monopoly of force within their boundaries, they established fixed and increasingly elaborate capitals and courts. Political and economic power became concentrated at these courts, and the nobility gravitated towards them and away from their local and increasingly provincial principalities. 23 This transformation of the nobility from combatants to courtiers is a large part of Elias‘ story. In his role as lord of a substantial – or diminutive – realm in a predominantly localized regime, the warrior aristocrat was subject to relatively few constraints. He could be violent, vindictive, concupiscent and crude, which, given human nature and his barbarian origins, was exactly what he was. His success in maintaining his position depended on his physical prowess and the loyalty of his retinue, neither of which required him to exercise much personal self-control. Once he moved to the capital and became a member of the court, however, the nobleman had to control his behavior and adopt increasingly refined and sophisticated manners. His success now depended on his ability to perform an 20

Id.at 345-89. See Joseph & Frances Gies, Life in a Medieval Castle 218-22 (1974); Jacques Le Goff, The Birth of Europe 157-59 (Janet Lloyd, trans., 2005); John Keegan, A History of Warfare 321-28 (1994); Lynn White, Jr., Medieval Technology and Social Change 97-103 (1964). A weakness of Elias‘ account is its exclusive focus on social interaction to the exclusion of technological factors. 22 R.H.C. Davis, A History of Medieval Europe: From Constantine to St. Louis 288 (2nd ed. 1988); Richard Mortimer, Angevin England 1154-1258, at 17-19 (1994); W.L. Warren, Henry II 302-04 (1977). 23 Elias, supra note [ ], at 465-75. 21

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elaborate pavane of courtly ritual. Instead of being ruled by momentary impulses, the quondam warrior now had to anticipate the future consequences of his actions, and finely tune his behavior to produce the desired long-term results.24 As time went on, the selfcontrol and behavioral constraints that characterized this new mode of behavior became internalized, or ―psychologized‖ in Elias‘ terminology. ―The momentary drive and affect impulses are . . .held back and mastered by the fore-knowledge of the later displeasure, by the fear of future pain, until this fear finally opposes the forbidden behavior and inclinations by force of habit, even if no other person is directly present.‖25 As this process continued, it provided the behavioral grounding for further consolidations of royal power and thus for further internalization of norms. A similar transformation of behavior occurred among the nonnoble population. 26 Elias is somewhat less clear and less convincing in his account of this process. He attributes it to class competition between the nobility and the bourgeoisie and to the interpenetration of these two classes that resulted from the increasing scale and complexity of commerce.27 His account can be amplified with the work of Durkheim, Foucault and Giddens, all of whom reach essentially the same conclusion. 28 Durkheim‘s central insight on the subject, which clearly influenced Elias, involves the specialization of work and the increasing interdependence that it generates.29 The resulting relationships between individuals and society, which Durkheim describes as ―organic solidarity,‖ are characterized by cooperation, as opposed to repression. Durkheim ascribes the increasing division of labor, and the consequent increase in cooperation, to the size and density of the society.30 Foucault focuses more specifically on the process of industrialization, and the need for 24

Id. at 475-98 Id. at 477 26 Id. at 464 27 Id. at 464-65, 499-513 28 Emile Durkheim, The Division of Labor in Society (W.D. Halls, trans., 1984); Michel Foucault, Discipline and Punish: The Birth of the Prison (Alan Sheridan, trans., 1979); Anthony Giddens, Central Problems in Social Theory: Action, Structure, and Contradiction in Social Analysis (1979). 29 Durkehim, supra note [ ]. Elias refers to Durkheim only once, and that is in his Introduction to the 1968 edition of his book, where he identifies Durkheim as the originator of an idea developed by Talcott Parsons, Elias, supra note [ ], at 188. I am unable to explain why Elias does not engage Durkheim‘s work more fully. 30 Durkheim, supra note [ ], at 200-23. 25

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a disciplined work force whose members can follow detailed rules and defer gratification. 31 For Giddens, the crucial development is the interdependence of people in an enormously complex society. 32 The fact that this society functions, and functions so well most of the time, is something of a marvel, in his view, but it only functions because people have internalized so many behavioral norms.

B. The Nature of Regulation and Regulated Entities The history of regulation in the United States reiterates Elias‘ civilizing process in a compressed time period. This observation could be viewed as an extended analogy, with the Early Middle Ages standing for the period before regulation, the peripatetic king playing the role of the common law courts, the modern (Renaissance onward) king playing the role of the agency, and so forth. But structural similarities prove very little and the choice of one theory rather than another as an analogy appears arbitrary. The claim that will be advanced in this section is a different one. In essence, it is that Elias‘ theory illuminates a process that has occurred in the interaction of regulatory law and its subjects, particularly its institutional subjects, over the course of the last century and a half. This is not because there is some structural or mystical similarity between these institutions and the individuals whose manners and attitudes are the subject of Elias‘ study, but rather that there is an identifiable process operating on regulated institutions that produces similar results to the ones Elias observed. To describe this process, unfortunately, it is necessary to coin a term. The natural equivalent of ―civilizing‖ would be ―regularizing,‖ which is not entirely inaccurate, but means something else. This essay, therefore, resorts to the neologism ―regulatizing‖ as a short way to refer to the process it describes. The word is admittedly an ugly one, but the process is often an ugly one as well. 31

Foucault, supra note [ ]. Both Foucault and Durkheim are centrally concerned with criminal law. Their theories of society are quite general, however. The concern with criminal law probably stems from the view that criminal sanctions -the outright deployment of the state‘s coercive power to prohibit a particular action – are conceptually central to the process of social control. This is one of the views that New Public Governance has contested directly and convincingly. 32 See Giddens, supra note [ ]; Anthony Giddens, The Consequences of Modernity (1990)

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At the outset, it is necessary to define regulation, at least in a rough, provisional sense that can delineate the subject matter under discussion. Every adult in our society is subject to criminal laws and tort laws, which can involve fairly detailed constraints on behavior, so a definition framed in terms of mere constraint would merge the subject of regulation into the larger subject of law and thus be of little value. Similarly, everyone who engages in any commercial activity is subject to contract laws and tax laws, so the constraints that these impose must again be distinguished from the concept of regulation. It is possible to define regulation as the constraints on behavior imposed by a regulatory agency, 33 that is, a bureaucratically organized government institution located in the executive branch. 34 That is serviceable, and probably sufficient for present purposes, but it is a bit like defining human beings as featherless bipeds – it distinguishes the category, but it does so on the basis of arbitrary characteristics that tell us little about the subject being defined. 35 A better approach is to build the definition from the tasks that these agencies perform.36 We can begin with comprehensive regulation, the most distinctive and dramatic manifestation of the category. It occurs whe n the government controls entry to a particular type of activity by means of licenses that are granted rather 33

This is the definition typically used in administrative law treatises. See, e.g., Alfred Aman and William Mayton, Administrative Law 1 (2 nd ed. 2001); William Fox, Understanding Administrative Law 1 (5th ed. 2008); Richard Pierce, Administrative Law 1 (2008); Keith Werhan, Principles of Administrative Law 1 (2008) 34 The use of the term ―bureaucratic‖ does not make the definition circular (or pejorative) because we can rely on Weber‘s definition of bureaucracy. According to Weber, a bureaucracy is a government institution that has a defined jurisdictional area, a hierarchical organization, written (or electronically stored) files that guide its activities, a specialized, credentialed staff whose members devote their full working time to the institution, and a set of stable and exhaustive general rules that define its operations. Weber, supra note [ ], at 956-69. For other definitions, see Martin Albrow, Bureaucracy (1970); Eugene Kamenka and Martin Krygier, eds., Bureaucracy: The Career of a Concept (1979). 35 Thus, an alien coming to Earth would be able to distinguish human beings from other organisms on the basis of the definition, but the definition conveys no essential information about human beings, that is, it is completely arbitrary, in terms of the nature of human beings, whether there exists on Earth a chimpanzee that has become entirely bipedal, or an ostrich that has evolved without feathers. 36 One treatise, Richard Pierce, Sidney Shapiro and Paul Verkuil, Administrative Law and Process 1-22 (5th ed. 2009) adopts this approach, although in a somewhat different manner than the one used here.

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than sold. Licensing of this sort allows -- and generally requires – some government instrumentality to set the rules for participation in the activity and to monitor compliance with these rules. With respect to individuals, driving a car is a regulated activity, but walking, running swimming, and reading are not. With respect to commercial organizations, broadcasting, banking, practicing law or medicine and driving a taxi cab (in most jurisdictions) are regulated activities, but manufacturing toys, selling clothes, teaching yoga and conducting séances (in most jurisdictions) are not. A second type of regulation is functional, rather than comprehensive, that is, it establishes rules or constraints for particular functions carried out by any firm or any individual, whether comprehensively regulated or not. To constitute regulation, these rules must be stated in advance and enforced by a public authority using a proactive, systematic strategy. Thus, working conditions in American businesses are regulated with respect to safety, union organizing, pollution and agreements among competitors, but not regulated with respect to salaries, job evaluation or on-the-job training, all of which are clearly important. That does not mean that these latter functions are not subject to legal constraints; minimum wage laws set a lower limit on salaries, anti-discrimination laws affect job evaluation, and tort law limits certain forms of on-thejob training.37 But most of these constraints, in our legal system, are imposed retroactively and enforced by private action, which is not what we describe as regulation. The discussion that follows will focus on the regulation of commercial enterprises, rather than individuals. One reason is simply to restrict the domain of a sprawling, complex topic, and another is that this tends to be the primary although not the exclusive focus of the New Public Governance literature. The limitation allows for one simplification, which is that comprehensive regulation, in the institutional context, not only means licensing of a particular activity, but also all-encompassing supervision of the enterprise. Since an enterprise, unlike an individual, exists to perform a particular function, licensing that function is equivalent to all-encompassing control. Functional regulation of commercial enterprises, in contrast, focuses on one part of the enterprise‘s activity, such as worker safety

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The rule for the Cossacks, at least in legend, was that if they received a recruit who had never ridden a horse, they assigned him to a horse that had never been ridden.

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or environmental impact, and leaves others parts, such as pricing or capital investment, unsupervised.

C. The Regulatizing Process In the United States, regulation is typically established in response to a particular economic or social problem, the ―problem‖ being, of course, a socially constructed perception. 38 This is sometimes a sudden, dramatic event, such as the World Trade Center bombing, and sometimes a gradually developing situation, such as labor-management conflict. In any event, the advent of a regulatory regime where none existed before, or a qualitative increase in the level of regulation, will naturally disrupt pre-existing practices, regardless of whether it is perceived as beneficial or deleterious. Every intervention by the regulatory authority, every new requirement or implicit threat, to say nothing of actual sanctions for noncompliance, will remind the regulated parties of their former freedom, a freedom that the potent mixture of nostalgia and resentment will paint with the sepia colors of a long-lost Eden.39 The shift from the unconstrained to the constrained situation is dramatized, or perhaps even constructed, by the technical, specialized nature of regulation. Regulatory programs rarely instantiate prevailing and deeply-entrenched social norms, the way criminal law 38

See Jeffrey Alexander, Toward a Theory of Cultural Trauma, in Jeffrey Alexander et al, eds., Cultural Trauma and Collective Identity 1 (2004); Neil Smelser, Psychological Trauma and Cultural Trauma in id. at 31. See generally Peter Berger and Thomas Luckmann, The Social Construction of Reality: A Treatise in the Sociology of Knowledge (1996). 39 See Diane Vaughn, Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (1983); Jack Katz, Cover-up and Collective Identity: On the Natural Antagonisms of Authority Internal and External to Organizations 25 Soc. Probs. 3 (1977); Steward Macaulay, Private Government, in Leon Lipson and Stanton Wheeler, eds., Law and the Social Sciences (1986); Diane Vaughn, Transaction Systems and Unlawful Behavior, 25 Social Probs. 373 (1982). Race creates special circumstances in this case, as it so often does in the U.S., but the resistance of organizations to racial integration can be regarded as another example of resistance to regulation. See Melissa Fay Greene, Praying for Sheetrock (1991); Jason Sokol, There Goes My Everything: White Southerners in the Age of Civil Rights, 1945-1975 (2006); Frederick Wirt, The Politics of Southern Equality: Law and Social Change in a Mississippi County (1970).

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generally does.40 Thus, they will not be buttressed by the sense that the matter should have been constrained from the outset and that the enactment of the new legal rule is merely correcting an oversight. Rather, no matter how strong the general political support for the new program may be, it will be generally be perceived by parties subject to it as a new initiative by government, an expansion of public authority and an intrusion on a previously unencumbered situation. The perception of regulation as an intrusion is likely to be intensified, in the case of institutions, by the process leading to the creation of the regulatory program. Regulation is generally instituted by statute, although it can be extended in important ways by agency action alone. Institutions that will be potentially subject to a new form of regulation often oppose enactment of the statute that would establish it and, in the highly participatory atmosphere of democratic politics, often take an active role in doing so. They may lobby against the regulation directly, or testify before the legislature against its enactment, or they may simply be members of a trade organization that performs these functions, seeks their support and keeps them informed of developments.41 In either case, decision makers within the firm will have been exposed to explicit arguments against the regulatory program. Many of them, having articulated those arguments themselves, either in public settings or within the firm, will have developed the kind of psychological or institutional commitment to them that participation of this sort engenders. 40

Instead, modern law consists largely of the implementation of social policy initiatives justified by a discourse based on instrumental rationality. This is generally described as the positivization of law. See 1 Jurgen Habermas, The Theory of Communicative Action: Reason and the Rationalization of Society 24371 (Thomas McCarthy trans, 1984); Niklas Luhmann, A Sociological Theory of Law 159-264 (Elizabeth King and Martin Albrow, trans. 1985); Max Weber, Economy and Society 217-26, 839-76 (Guenther Roth and Claus Wittich eds, 1978). 41 For classic works on this subject, see Raymond Bauer, Ithiel Pool and Lewis Dexter, American Business and Public Policy (1964); Robert Dahl, Who Governs? (1961); G. William Domhoff, Who Rules America (1967); John Kingdon, Agendas, Alternatives, and Public Policies (2nd ed. 2003); Terry Moe, The Organization of Interests (1980); David Truman, The Governmental Process (1962). The active participation of interest groups, and specifically of firms potentially subject to government regulation, has been a mainstay of Public Choice Theory, to be discussed in greater detail below, [ ] infra. See John Ferejohn, Pork Barrel Politics: Rivers and Harbors Legislation, 1947-1968 (1974); Morris Fiorina, Congress: Keystone of the Washington Establishment (1977); David Mayhew, Congress: The Electoral Connection (1974); William Riker, The Theory of Political Coalitions (1962).

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To be sure, this is not always the case; firms sometime favor regulation as a means of resolving conflicts or uncertainties, particularly in a rapidly developing or changing situation. As will be discussed at greater length below,42 regulatory programs almost always benefit some firms, even if they disadvantage others; sometimes the benefitted firms are not members of the group being regulated, but sometimes they are. Nevertheless, the realities of the regulation may not be what the firms that supported it anticipated, the need to spend money on compliance may be unwelcome, and the threat of sanctions for non-compliance may seem intrusive. Whatever its perceived advantages, a new regulatory regime will require changes by the regulated firms, sometimes massive changes that alter the internal structure of the firm. This is likely to lead to resistance, whether active or passive. If the firms opposes the regulation, then every action taken by the agency will seem intrusive, because the firm‘s decision makers will be judging agency action against the prior absence of constraint, and illegitimate, because the decision maker‘s prior opposition to the legislation was sincere or self-persuading. This is likely to lead to active resistance on the part of the regulated firm. The first reaction to a newly enacted regulatory regime would be to find ways to minimize the regulation‘s impact on the firm‘s established mode of operation. There would be an assiduous search for loopholes in the regulation, an assessment of the enforcing agency‘s resources and the likelihood that violations would not be detected, perhaps a lawsuit challenging the constitutionality of the legislation or the statutory validity of the regulations promulgated under its aegis. If the firm favored the regulation, its resistance is more likely to stem from the difficulty of instituting change, rather than from conscious policy decisions, but that resistance will be nonetheless substantial. 43 While resistance to regulation among subject firms is a familiar and conventional account, Elias‘ theory suggests that the reaction is not necessarily a stable one. Over time, the regulations that were once an unwelcome novelty become an established fact, an 42

See § II.D, infra. See David B. Spence, The Shadow of the Rational Polluter: Rethinking the Role of Rational Actor Models in Environmental Law, 89 Cal. L. Rev. 917 (2001)(noncompliance often results from inefficiency, rather than explicit resistance); cf. Donald C. Langevoort, Agency Law Inside the Corporation: Problems of Candor and Knowledge, 71 U. Cin. L. Rev. 1187 (2003) (complexity of communication within corporations). 43

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all-encompassing environment in which the firm must function. 44 The pre-regulatory era is no longer remembered, at least not in the visceral way that generates emotion and affects behavior. The arguments against regulation that seemed so convincing when the regulatory program was being debated now appear embarrassingly quaint. Instead of opposing every action of the regulator, the firm has learned to live with it, to anticipate its ever-changing policies, to obtain the exceptions or indulgences it needs through negotiation, and to withstand its occasional excesses. In other words, the independent property owner has become a courtier. There is nothing mystical about this process; it does not rely on an analogy between the individuals and firms or seek equivalents for the id and superego that Elias relies on for his model of human behavior. Rather, standard organization theory provides the explanatory resources needed to support an account of institutional action that runs parallel to Elias‘ account of individual action. While organization theory is neither simple nor uncontroversial, it is a wellestablished body of scholarship with a substantial amount of empirical support.45 In any case, it is the prevailing approach to institutional behavior, and we will need some explanation of that behavior to say 44

Philip Selznick‘s account of institutionalization traces a similar process. See Philip Selznick, Leadership in Administration (1957)[hereinafter Selznick, Leadership]; Philip Selznick, TVA and the Grass Roots (1949) [hereinafter Selznick, TVA] 45 There are various schools of organization theory that can be characterized in various ways. One list would consist of general systems theory, see, e.g, Frank Baker, Organizational Systems: General Systems Approaches to Complex Organizations (1973); Bertalanffy, supra note [ ]; Lars Skyttner, General Systems Theory 301-37 (2001); Gerald Weinberg, An Introduction to General Systems Theory (2001), decision theory, see Richard Richard Cyert and James March, A Behavioral Theory of the Firm (1963); James March and Michael Cohen, Leadership and Ambiguity: The American College President (1974); Herbert Simon, Administrative Behavior: A Study of Decision-Making Processes in Administrative Organization (3rd ed. , 1997), and new institutionalism, see Walter Powell and Paul DiMaggio, eds., The New Institutionalism in Organizational Analysis (1991); W. Richard Scott and John Meyer, eds., Institutional Environments and Organizations: Structural Complexity and Individualism (1994); Lynne Zucker, The Role of Institutionalization in Cultural Persistence, 42 Am. Soc. Rev. 726 (1977), in addition to the human relations theory discussed below. While all these theories differ from rational actor theory, which, in essence, dissolves the organization into individuals with independent motivations, there have also been various efforts to unify the two methodologies, see, e.g, Douglass North, Institutions, Institutional Change and Economic Performance (1990); Williamson, Mechanisms, supra note [ ], at 219-49.

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anything about the regulation of commercial enterprises. Organization theory is certainly much better than naïve statements that use the accidents of language to that treat complex organizations as single actors: ―General Motors decided,‖ ―Chase Manhattan Bank resisted,‖ ―the pharmaceutical industry assumed.‖ According to Human Relations strand of organization theory, which will be given the greatest prominence in this discussion, 46 the crucial factor in explaining the change in institutional behavior is the passage of time. After a regulatory program has been in existence for twenty or thirty years, the individuals who led the institution when the program was first imposed have retired or died (or both). In their place are people who have achieved their position, and often entered the firm entirely, during the time that it was regulated. They will not share the sense of intrusion and illegitimacy that the former decision makers experienced; they have no recollection of an unregulated situation and they did not participate in the effort to preserve it. In fact, they will often have positive feelings about regulation because they have achieved their success in a regulated environment. Just as the earlier managers resented regulation because they acquired their management skills in an unregulated environment, and feared that they would falter when that environment changed, so the new managers understand that their skills apply to that regulated environment and might be obsolete were the regulations eliminated or rendered ineffective. More specifically, they know how to talk to the regulatory agency; they understand the regulations it has promulgated and the strategies that it has adopted.47 46

The Human Relations Theory of organizations owes its origins to the Harvard Business School experiments at the Western Electric Company‘s Hawthorne plant in Chicago. See Elton Mayo, The Human Problems of Industrial Civilization (1933); F.J. Roethlisber & William Dickson, An Account of a Research Program Conducted by the Western Electric Company, Hawthorne Works, Chicago (1939). For subsequent works of significance in this tradition, see George Homans, The Human Group (1950); Kurt Lewin, Resolving Social Conflicts: Collected Papers in Group Dynamics (1948); Donald Schon Beyond the Stable State (1971); Selznick, TVA, supra note [ ]; Helen Schwartzman, Ethnography in Organizations (1993), 47 J. Gregory Sidak and Daniel Spulber, Deregulatory Takings and the Regulatory Contract: The Competitive Transformation of Network Industries in the United States (1998) makes the interesting observation that deregulation often reduces or eliminates the value of the private property in the previously regulated firm, although their suggestion that the firms be compensated for this loss of value by the government is unconvincing. See William Baumol and Thomas Merrill, Regulatory Takings, Breach of the Regulatory Contract and the Telecommunications Act of

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A related point, or perhaps a different perspective on the same point, involves recruitment. People who join regulated firms expect to function in a regulated environment. In some cases, their training has specifically prepared them for that situation. In other cases, they have been previously employed by the regulatory agency and owe their selection and their expertise to the continuation of the regulatory regime. Moreover, once regulation takes effect, the firm will need to hire some high-level managers to monitor compliance with the regulations, whether these are the licensing and monitoring procedures of a comprehensive regulation or the particular environmental, worker safety or employee relations rules of functional regulation. As Lauren Edelman and her coauthors have observed, these managers and their staffs then become an internal lobby within the firm for a policy of compliance as opposed to resistance, since it is the subtleties and complexities of compliance that secure their position in the firm. 48 This individualized account of people‘s behavior in firms can be translated into institutional terms – again avoiding mysticism and unjustified analogies – by relying on the closely related field of social learning theory. 49 According to this theory, human attitudes are 1996, 72 N.Y.U. L. Rev. 1037 (1997). The suggestion here is that deregulation also decreases the human capital of the firm‘s managers in an industry that has been regulated for a length of time. While no argument will be made that they should be compensated for this loss, the reality of that loss may well lead them to favor the regulation‘s continued existence. 48 Lauren Edelman et al., The Endogeneity of Legal Regulation: Grievance Procedures as Rationalized Myth, 105 Am. J. Sociology 406 (1999); Lauren Edelman and Mark Suchman, When the ―Haves‖ Hold Court: Speculations on the Organizational Internalization of Law, 33 Law & Soc. Rev. 941 (1999); Lauren Edelman and Mark Suchman, The Legal Environments of Organizations, 23 Annual Rev. Sociology 479 (1997); Lauren Edelman, Howard Erlanger and John Lande, Internal Dispute Resolution: The Transformation of Civil Rights in the Workplace, 27 Law & Soc‘y Rev. 497 (1993); Lauren Edelman, Legal Ambiguity and Symbolic Structures: Organizational Mediation of Civil Rights Law, 97 Am. J. Sociology 1531 (1992); Lauren Edelman, Stephen Petterson, Elizabeth Cambliss and Howard Erlanger, Legal Ambiguity and the Politics of Compliance: Affirmative Action Officers‘ Dilemma, 13 Law & Policy 73 (1991). See also Keith Hawkins, Environment and Enforcement: Regulation and the Social Definition of Pollution (1984); Steward Macaulay, Private Government, in Leon Lipson and Stanton Wheeler, eds., Law and the Social Sciences (1986). 49 See generally Chris Argyris, Reasoning, Learning and Action: Individual and Organization (1982); Chris Argyris and Donald Schon, Organizational Learning: A Theory of Action Perspective (1978); Paul Lawrence & Jay Lorsch, Organization and Environment: Managing Differentiation and Integration (1967); John Friedman

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malleable and will change in response to the environment. The process is both active and pragmatic. Learning occurs when the individual or institution participates in a social interaction, and it is thereby tacit and implicit, rather than self-conscious and systematized, the way learning calculus or Latin would be. 50 At the same time, it is an active process, involving people engaged in purposeful behavior to achieve some identifiable and generally conscious goal. Because this learning process is seen as interactive, it typically focuses on a task-oriented action group, that is, a group of individuals and institutions in direct and continuous contact with each other. 51 The learning process can be either single loop or double loop; in the first, the actors change their attitudes and strategies in order to achieve their pre-established norms, while in the second they change their norms or values as well. 52 These processes, of course, are the essence of the co-causal interaction that serves as the basis of Elias‘ theory. By using social learning theory, we can explain how the individualized attitudes of human relations theory translate into emergent institutional behaviors, that is, actions of the organization that are not necessarily intended by any single individual within that organization.53 Another branch of organization theory, General Systems Theory, offers an alternative account of the same process. The theory, which originates in an analogy between biological and social systems, asserts that any internally-organized and continuously functioning system within an environment will need to possess certain features, such as a boundary that controls the entry of inputs, mechanisms for maintaining its internal organization in the face of & George Abonyi, Social Learning: A New Model for Policy Research, 8 Env. & Planning 927 (1976) 50 See Michael Polanyi, Personal Knowledge: Towards a Post-Critical Philosophy (1962). This approach owes much of its intellectual inspiration to Martin Heidegger, see Being and Time 102-48 (John Macquarrie and Edward Robinson, trans., 1962) 51 Edgar Schein, Process Consultation: Its Role in Organization Development (1969) 52 Argyris, supra note [ ]; Argyris and Schon, supra note [ ]; Chris Argyris and Donald Schon, Theory in Practice: Increasing Professional Effectiveness (1974); 53 On emergent characteristics generally, see Allan Hanson, Meaning in Culture (1975); Alfred Kroeber, The Concept of Culture in Science, in Alfred Kroeber, The Nature of Culture 118 (1952); David Kaplan, The Superorganic: Science or Metaphysics?, 67 Am. Anthropologist 958 (1965); Leslie White, The Meaning of Culture, 61 Am. Anthropologist 227 (1959).

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environmental stresses, and a feedback loop for sampling its output and treating that sample as an input.54 While analogies of this sort must be employed with caution, 55 the theory provides a useful image. When the surrounding environment imposes a stress, the system‘s reaction will be to maintain its internal equilibrium. This involves initial resistance and long-term adaptation. The system will first attempt to maintain its equilibrium by minimizing the effect of the stress, but over time, it will translate the external stresses into internal structures that can manage those stresses with less expenditure of energy or loss of functionality. 56 In many cases, this process is what some modern systems theorists describe as autopoetic, that is, the system generates its own internal structure that conforms to the system‘s existing patterns but responds to the external stress. 57 In other cases, the system displays institutional isomorphism, that is, it develops structures that parallel those of the external force. 58 Thus, a regulated firm might develop a separate unit, organized in a fashion similar to its other divisions, to monitor compliance with regulations, or it might reorganize its entire internal structure in response to the regulations, creating divisions that parallel those of firms that have won the regulators‘ approval. We can speculate that institutional isomorphism, as opposed to autopoetic structures, will be more likely to arise in regulation is comprehensive, as opposed to functional. 54

See generally Bertalanffy, supra note [ ], at 30-49; Niklas Luhmann, Social Systems 1-59 (John Bednarz, Jr., trans., 1995); Skyttner, supra note [ ], at 49-108. 55 See Jon Elster, Ulysses and the Sirens: Studies in Rationality and Irrationality 135 (arguing that human beings can act as global maximizers while animals or biological systems cannot). 56 See Luhmann, supra note [Social Systems], at 176-254. New institutional analysis is, among other things, an effort to combine the insights of human relations theory and general systems theory. One of its themes is that institutional isomorphism is not only a structural response but a human reaction 57 See Luhmann, supra note [Social Systems], at 34-41, 218-21; Gunther Teubner, ed., Autpoetic Law: A New Approach to Law and Society (1988); Guenther Teubner, Law as an Autopoetic System (Anne Bankowska and Ruth Adler, trans., 1993) 58 Paul DiMaggio and Walter Powell, The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality, in Walter Powell and Paul DiMaggio, eds., The New Institutionalism in Organizational Analysis 41 (1991); Marco Orru, Nicole Biggart and Gary Hamilton, Organizational Isomorphism in East Asia, in id. at 361. New Institutionalism is not a version of general systems theory; rather, it is conceived as a successor to Human Relations Theory and Decision Theory, see Paul DiMaggio and Walter Powell, Introduction, in id., at 1. Nonetheless, its insights are consistent with the main conclusions of Systems Theory as well.

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This evolution in attitudes among regulated firms, paralleling the civilizing process that Elias describes, suggests a boundary for the New Public Governance strategy of cooperative regulation. The adversarial stance of a newly regulated firm is comparable to the savagery and combativeness of the Early Middle Age nobility. Both sets of attitudes result from the desire for independence and a basic rejection of the supervision which subordination to a larger regime necessarily entails. In both cases, the result, while is certainly generates poetry and drama, is dangerous, particularly for ordinary people who do not possess a horse and a sword or their own independent business. Just as the peasants and artisans of the Middle Ages suffered from the depredations of the bellicose nobility, the ordinary people who worked for unregulated firms, who consumed their products, or who lived in their environment, suffered injury, oppression and injustice. And just as the nobility resisted the efforts of royal regimes to establish civil order, unregulated firms resisted efforts to impose worker, consumer and environmental controls. The royal regimes needed to use force to overcome this resistance, and regulatory regimes must often rely on command and control regulation. Command and control is an adversarial approach to regulation, as New Public Governance points out,59 but the regulatory agencies are often facing an adversarial situation when they are first imposing regulation. This approach can also be described as inefficient, but efficiency is a relative term; command and control is not inefficient when compared to outright disobedience, assuming one accepts the value of the regulation.60 It is in these situations that New Public Governance can seem naïve, as its critics have suggested.61 Faced 59

For an illuminating discussion of the role of adversarial in law, see Robert Kagan, Adversarial Legalism: The American Way of Law (2001). For a comparative account of the role of adversarial in the U.S and other advanced industrial nations, see Tom Ginsburg and Robert Kagan, Institutions and Public Law: Comparative Approaches (2005). 60 If one does not, then there is no point in trying to obtain compliance, and the entire inquiry collapses. 61 See Richard Abel, Risk as an Arena of Struggle 83 Mich. L. Rev. 772 (1985); Susan-Rose Ackerman, Consensus versus Incentives: A Sceptical Look at Regulatory Negotiation, 43 Duke L.J. 1206 (1994); Kenneth Bamberger, Regulation as Delegation: Private Firms, Decisionmaking and Accountability in the Administrative State, 56 Duke L.J. 377 (2006); Mark Burton and Justin Dabner, The Limits of the Responsive Regulation Model: What Really Defines the Relationship between the New Zealand Inland Revenue and Tax Practitioners, 15 New Zealand J.

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with truly adversarial behavior, or even resistance resulting from the stress of a new regulatory regime, the agency must be prepared to act punitively if it is to obtain any measure of compliance. It must be willing and able to impose significant sanctions on disobedient firms. More generally, it must declare its principles clearly, and maintain them in the face of demands for compromise by the regulated parties. Once a regulatory regime has been established, however, the situation is likely to change. Just as the courtier nobility of the late medieval and post-medieval period was more tractable and compliant than their localized, warrior predecessors, so firms in an industry that has been regulated for some time are likely to be more tractable, more willing to cooperate, than newly-regulated firms. At this point, the strategies recommended by New Public Governance become optimal. 62 The regulated firms are more civilized; they have internalized the norms of the regulatory regime and can truly collaborate with the agency in achieving the best results for their employees, consumers and neighbors as well as themselves. They can distinguish between regulatory rules that achieve their desired effect and those that are counter-productive, and they can engage the agency in a dialogue that distinguishes between the two. Some regulations that an agency adopts, in all good faith, will impose significant costs on regulated firms and produce little benefit. The regulations can be repealed, or remain unenforced, in a cooperative setting, but only if the firm is willing to abandon its adversarial stance and attend the agency ―at court.‖ Another, less dramatic boundary that is suggested by these same considerations is that comprehensively regulated firms are likely to be more tractable than firms subject to a variety of separate, functionally based regulations. The comprehensively regulated firm is locked in a more intense, or intimate relationship with its regulator. Taxation L. & Policy 111 (2009); Cary Coglianese, Assessing Consensus: The Promise and Performance of Negotiated Rulemaking, 46 Duke L.J. 1255 (1997); William Funk, Bargaining Toward the New Millennium: Regulatory Negotiation and the Subversion of the Public Interest, 46 Duke L.J. 1351 (1997). 62 See John Braithwaite, To Punish or Persuade: Enforcement of Coal Mine Safety (1985); John Braithwaite, Enforced Self-Regulation: A New Strategy for Corporate Crime Control, 80 Mich. L. Rev. 1466 (1982); Sidney Shapiro and Randy Rabinowitz, Punishment Versus Cooperation in Regulatory Enforcement: A Case Study of OHSA, 49 Admin. L. Rev. 713 (1997) Tom Tyler, Trust and LawAbidingness: A Proactive Model of Social Regulation, 81 B.U.L. Rev. 361 (2001). These studies do not specifically focus on advanced stages of regulation, but they seem to date from that phase of the process.

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Its license to do business, and thus its very existence, depend on this relationship. Many different aspects of its operations are likely to be monitored by the agency in question, and the firm is thus more likely to internalize the norms that the agency represents. With functional regulation, in contrast, the firm must communicate with a variety of different agencies, which will render interpersonal relationships more attenuated and make norms more difficult to internalize. One might say that there is a certain element of novelty, and consequent resistance, as top decision makers in the firm must shift their attention from one agency to another. The point should not be overstated, however; the age of the regulations is the primary variable and the distinction between comprehensive and functional regulation is only a subsidiary one. New Public Governance has a great deal to offer with respect to functional regulation. The only point is that it may be even more effective with respect to comprehensively regulated firms. An important caveat is that the trend identified here is only one part of a complex situation. As noted at the outset, when actual industries and regulatory programs are considered, there will be many cross-cutting themes, some economic, some political, some adventitious.63 The cultural or attitudinal theme suggested here may not predominate; even if it does, it must be discerned through a welter of subordinate but significant tendencies that move in different or even opposite directions. The claim, therefore, is only that the regulatizing process will generally be present in a regime of regulation, and that it will establish the boundary of cooperative regulation‘s effectiveness in the absence of strong countervailing forces. D. Public Choice Theory‘s Alternative Explanation Public choice theory offers an alternative explanation for the reaction of firms to a regulatory program, and is probably the leading theory describing the relationship between regulators and the firms they regulate. The basic idea is that regulation enables firms to extract rents from the political process;64 more specifically, regulatory 63

See Neil Gunningham, Robert Kagan and Dorothy Thornton, Shares of Green: Business, Regulation and the Environment (2003) 64 It is thus a lineal descendent of the more venerable theory that regulated parties capture their regulators and shape regulatory policy to their own advantage. See Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American

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legislation can be regarded as a process that transfers wealth from those who are least capable of influencing the process, typically individuals, to those who are most capable to doing so, typically firms. 65 This explanation, like public choice scholarship generally, rests on the assumption that all human behavior is motivated by the desire to maximize the actor‘s material self-interest.66 The assumption seems plausible with respect to those in control of the regulated parties, that is, corporate executives, but to serve as a theory of political behavior, is must also apply to elected and appointed politicians. With respect to elected politicians, the claim is that they will act to maximize their chance of reelection; 67 with respect to History, 1900-1916 (1963); Samuel Huntington, The Marasmus of the ICC: The Commission, the Railroads, and the Public Interest, 61 Yale L.J. 467 (1952); Thomas W. Merrill, Capture Theory and the Courts: 1967-1983, 72 Chi.-Kent L. Rev. 1039 (1997). 65 See Richard Ippolito and Robert Masson, The Social Cost of Government Regulation of Milk, 21 J. L. & Econ. 33 (1978); Robert McCormick and Robert Tollison, Politicians, Legislation, and the Economy (1981); Sam Peltzman, Towards a More General Theory of Regulation?, 19 J. L. & Econ. 211 (1976); George Stigler, The Size of Legislatures, 5 J. Legal Stud. 17 (1976); Sherry Jo Wise and Todd Sandler, Rent Seeking and Pesticide Legislation, 78 Public Choice 329 (1994). 66 The self-interest motivating action must be material in nature, that is, it must involve the desire for wealth, income, power, or leisure, or conditions leading directly to those benefits, such as job security. Both proponents and critics of public choice, and rational actor theory in general endorse this view. See James Buchanan and Gordon Tullock, The Calculus of Consent 3-39 (1962); Donald Green and Ian Shapiro, Pathologies of Rational Choice Theory: A Critique of Applications in Political Science 17-23 (1994); Steven Kelman, Making Public Policy 234-36 (1987), Dennis Mueller, Public Choice III, 9-14, 304-05 (2003); Dennis Mueller, Rational Egoism Versus Adaptive Egoism as a Fundamental Postulate for a Descriptive Theory of Human Behavior, 51 Pub. Choice 3 (1986); Edward Rubin, Public Choice, Phenomenology, and the Meaning of the Modern State: Keep the Bathwater, But Throw Out That Baby, 87 Cornell L. Rev. 309, 313-28 (2002). This is what John Ferejohn described as a ―thick‖ theory of rationality. John Ferejohn, Rationality and Interpretation: Parliamentary Elections in Early Stuart England, in Kristen Monroe, ed., The Economic Approach to Politics: A Critical Reassessment of the Theory of Rational Action 282 (1991). If one allows non-material desires such as the desire for fame, political influence or subjective self-satisfaction to count as self-interest, the theory collapses because it allows for any behavior whatsoever. Altruism, generally taken as the polar opposite of self-interest, can be easily explained in terms of the desire for fame, influence or self-satisfaction and, indeed, is almost impossible to explain without relying on those factors. 67 See, e.g., See Ferejohn, supra note [ ], Fiorina, supra note [ ]; Mayhew, supra note [ ]; Riker, supra note [ ]; Sam Peltzman, An Economic Interpretation of the

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appointed politicians, no convincing claim has been advanced, although one bravura attempt was William Niskanen‘s idea that agency officials are trying to maximize their agency‘s budget.68 For this reason, public choice theory often founders when policies adopted by regulatory agencies are in question. 69 Despite these gaps, the theory offers a direct challenge to the claim that that this essay advances. It asserts that the regulated parties‘ motivation never changes – that it is always based on rational self-interest maximizing and that variations in observed behavior result from the adaptation of these uniformly-motivated actors to the prevailing situation. This article‘s theory is that the motivations for behavior change and that a process of social learning occurs over the course of time. In other words, public choice is a static theory of the relationship between government and regulated parties, in the sense that prior resolutions of the relationship will have no effect on current resolutions. In contrast, the theory presented here is dynamic, because it argues that attitudes will change, and that the changes will be directly caused by prior conditions of the system. 70 Because public History of Congressional Voting in the Twentieth Century, 75 Am. Econ. Rev. 656 (1985); Sam Peltzman, Constituent Interest and Congressional Voting, 27 J. L. & Econ. 181 (1984). 68 William Niskanen, Jr., Bureaucracy and Representative Government (1971). Niskanen‘s theory, which is somewhat implausible from a behavioral perspective (why exactly does the bureaucrat want to maximize the agency‘s budget when her salary is set by schedule) rests on three assumptions: that the agency is a monopolist (not always true, given turf battles), that it can conceal its costs (true only to a limited extent) and that it is given authority to make take-it-or-leave-it budget proposals (false, the Office of Management and Budget (OMB) produces the President‘s budget proposal and the Congressional Budget Office reviews that budget in detail, having been specifically created by Congress for that purpose). As Dennis Mueller, a strong proponent of public choice analysis, observes, ―relaxing any of the assumptions of the original budget-maximizing-bureau model shifts the outcome away from the excessive budget result, and in several cases yields the optimally-sized budget. Public Choice III, at 368 (2003). 69 Public choice experiences similar problems in trying to apply the maximization model to another important group of appointed officials, namely judges. See Richard Posner, Overcoming Law 109-44 (1995) for an implicit admission of defeat. 70 See C. Nelson Dorny, Understanding Dynamic Systems: Approaches to Modeling, Analysis and Design 3 (1993) (―A system is dynamic if the latest values of its variables depend on past values of the energy sources. We can think of a dynamic system as having memory; the effects of the energy sources integrate – accumulate over time.‖). Although ―dynamic,‖ as used in ordinary discourse, is laudatory and ―static‖ is pejorative (no corporate executive would declare a new

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choice presents such a direct challenge to this theory, and because is probably the leading theory in this area, the alternative explanation that it offers will be considered here in some detail. There are several ways in which the public choice hypothesis seems somewhat counter-intuitive. First, it would be odd if some legislative and executive officials were not motivated by the desire to benefit the public. People (including law and political science professors) generally take pride in doing their job well; why should these officials be different? Quasi-empirically, it would be risky for a firm to support regulation because it expected to use the regulation to extract rents. It might end up, through the vicissitudes of political compromise, with less favorable regulations, or lose out to more nimble competitors once the desired regulations were implemented. At a more theoretical level, the vaguely conspiratorial behavior that public choice proposes will be difficult for any firm to conceive and maintain. The whole theory seems premised on an overly simple analogy between a firm and an individual acting with instrumental rationality and guile.71 As discussed above, modeling the behavior of organizations is a complex task, for which a number of fairly sophisticated theories have been developed. Each of these theories suggests that getting all the members of a large organization to say one thing and believe another would be a formidable task. Beyond these difficulties, however, the public choice explanation for the behavior of regulated entities suffers from a deep epistemological difficulty. The problem is that the theory cannot be falsified in most situations, at least on the basis of the behavioral assumptions that lie at its core. Public choice scholars tend to conclude that regulation is enacted at the behest of regulated firms, or for the benefit of regulated firms, on the basis of empirical observations that these firms actually benefit from regulation or that

policy of static management) the terms are being used here in their technical sense. Many people, for example, favor a static theory of justice, where each case is decided on its own merits. 71 See Bamberger, supra note [ ], at 409-16. In addition to the limits on individual decision-making, collective behavior by disparate actors is notoriously difficult to organize. See James March and Johan Olsen, Ambiguity and Choice in Organizations (1976); Selznick, Leadership, supra note [ ]; James March, Decisions in Organizations and Theories of Choice, in A.H. Van de Van and W.F. Joyce, Perspectives on Organization Design and Behavior 205 (1981); Spence, supra note [ ].

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they support and welcome it. 72 But this conclusion rests on the idea that the only goal that counts as public-oriented is the impairment or destruction of private enterprise. That might in fact be the goal of a nationalization policy, but it is not applicable to the more mild forms of regulation that predominate in contemporary governance. These milder forms of regulation almost always benefit some firms within an industry at the same time that they are disadvantaging others. In some cases, regulation will favor large firms over small ones, in other cases the reverse. In virtually every case, it will favor those firms that adapt readily to the regulatory environment over those that are less agile or efficient. According to the premises of public choice, the firms that are benefited, for whatever reason will, as rational self-interest maximizers, favor the regulation in question as a way of gaining an advantage over their competitors. They will testify, advertise, organize and, most importantly, make campaign contributions to the proponents of the regulation. As a result, empirical observations that some firms benefit from regulation or support that regulation cannot tell us very much about the motivation of the legislative or executive officials that initiate and implement the regulation.73 Regardless of whether they are entirely public-oriented, and do only what they deem is best for the nation as a whole, or whether they are influenced by powerful interest groups and act solely to benefit those groups, the observed behavior will be essentially identical. 72

For example, they attempt to support the reelection maximizing model of legislative behavior by demonstrating that interest groups give contributions to candidates from whom they expect specific results that support their interests. James Snyder, Jr., Campaign Contributions as Investments: The U.S. House of Representatives, 98 J. Pol. Econ. 1195 (1990); James Stratmann, Are Contributions Rational? Untangling Strategies of Political Action Committees, 100 J. Pol. Econ. 647 (1992); James Stratmann, What Do Campaign Contributions Buy? Causal Effects of Money and Votes, 57 Southern Econ. J. 606 (1991). 73 To quote a leading source on public choice theory: The interest group model of political competition rests on three legs: (1) an equation to explain how interest groups allocate their campaign contributions, (2) an equation to explain the effect of campaign contributions on the way representatives vote, and (3) an equation to explain the effect of campaign contributions on the outcomes of electoral contests. All three legs of the model have found empirical support. Mueller, supra note [ ], at 493. But none of this support addresses the causal arrow, that is, whether the contributions determine how legislators vote (the public choice assumption) or whether legislators public-oriented decisions elicit contributions from those who will benefit from that decision.

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This point can be clarified by considering regulatory programs at a more specific level. The standard account of regulation is that it is designed to correct the classic market failures of monopoly, externalities and asymmetric information.74 Combating monopoly, however, necessarily involves benefitting the actual or potential competitors of the monopolist, since the remedy for monopoly is competition, and competition requires competitors. Indeed, the entire point of breaking up or restricting a monopoly is to improve the business of those who want to compete with it. Thus, the public interest is virtually indistinguishable from benefits to these competitors, at least when they are considered as a group.75 Combating externalities, or negative externalities to be more precise, involves some strategy to compel a group of producers to internalize costs that are being imposed on others; pollution control is the classic example. In theory, this could affect all producers in a given industry equally, thereby decreasing their sales volume due to substitution effects. Even so, the regulation would benefit producers of the substituted good, and might well benefit producers of the products that are needed to comply with the regulation. For example, assume that the production of oil paint generates a particular kind of pollution that is unhealthful for the neighbors of the producing plant and, for good measure, that it also creates atmospheric conditions in the plant that are hazardous to the health of the workers. These externalities could be internalized, and their cost passed on to the consumers who use the product, by requiring pollution control and 74

See William Baumol and Alan Blinder, Economics: Principles and Policies 255324 (7th ed. 1998); Stephen Breyer, Regulation and Its Reform (1982); N. Gregory Mankiw, Principles of Microeconomics 201-220, 311-38 (5th ed. 2008); Anthony Ogus, Regulation (2004); Daniel Rubinfeld & Robert Pindyck, Microeconomics 327-52, 561-619 (7th ed., 2008) 75 This might not be the case if the legislators chose to encourage competition through partial nationalization; that is, by creating a public company to compete with the former monopolist, rather than assisting private companies in doing so. But American seem to be unfamiliar with partial nationalization and ideologically uncomfortable with it. This is at least one reason why the ―public option‖ in some of the current health care bills is so controversial. See, e.g., Roger Cohen, Get Real on Health Care, New York Times, Sept. 13, 2009 (advantages of public and private options, as in France); Karl Rove, How to Stop Socialized Health Care, Wall Street Journal, June 11, 2009 (―If Democrats enact a public-option health-insurance program, America is on the way to becoming a European-style welfare state.‖) See generally Harold Luft, Total Cure: The Antidote to the Heath Care Crisis 224-29 (2008).

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internal ventilation of factories producing oil paint. The result would be an increase in the price of the product and a predictable drop in sales as artists switch to acrylic paint. In addition, the companies producing oil paint would need to purchase pollution control and plant ventilation equipment. This means that companies producing acrylic paint, pollution control and plant ventilation equipment would benefit from the regulation. Being rational self-interest maximizers, according to public choice theory, they would of course favor the regulation, presumably by collectively devoting the same amount of lobbying resources as the oil paint companies devote to opposing the regulation (since collectively, they gain about as much money as the oil paint companies lose). Thus, the observed behavior by private firms is essentially the same whether the legislators and administrators who initiate and implement the regulation are motivated by the desire to protect the health of the neighbors and workers or whether they are complicit in rent-seeking by the advantaged firms. One cannot simply assert that the legislators and administrators are complicit, since that is exactly what the empirical evidence is supposed to demonstrate. Moreover, the assumption that the regulation will always affect all the oil paint producers equally is unrealistic. Some of the producers are likely to be able to comply with the regulations more readily than others. Perhaps their business has expanded more rapidly and they thus have a higher proportion of new facilities that produce less pollution; perhaps they have already been compelled by a union to install the ventilation equipment because they operate in a more heavily unionized part of the country; perhaps the installation of pollution control and ventilation equipment is subject to economies of scale that favor the larger oil paint producers over the smaller ones. In these situations, the companies that can comply more cheaply may increase their market share to an extent that offsets their lost revenue and increased costs resulting from the regulations. They might then be described as obtaining rents from the regulatory program. If they could predict that they would be in this position – and all the advantages given above as examples can be known in advance – they might also lobby for the regulations. Thus, it is likely, if one accepts the public choice premise of rational self-interest motivation, that some firms within the industry, as well as those who compete with it or supply it, will favor proposed regulation, even if that regulation has been adopted for entirely public-oriented reasons.

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The same analysis applies to regulation designed to combat the market failure of asymmetric information. Regulation in this case generally takes the form of required disclosures, which may not have as great an impact on the price of the product as internalizing externalities, and thus may not produce strong substitution effects. But the disclosures are designed to reveal important differences between products that are otherwise indistinguishable to the consumer in their absence,76 and thus should greatly benefit those firms within the industry that offer better products. These firms can then be expected to favor public-oriented regulation. Moreover, there is a very formidable supplier whose business almost inevitably benefits directly from disclosure regulation, namely attorneys, so we can expect these self-interested actors to favor such regulation, regardless of its motivation. Once again, it will be virtually impossible to tell, from either actual or perceived benefit to private parties, whether the regulation is designed to benefit the public or provide rents to powerful interest groups. The most convincing way to determine the actual motivations of legislators and administrators is to employ a research technique that public choice scholarship tends to avoid, which is to ask them. Of course, they might lie, but we live our lives in this society, conduct our business transactions, and send accused offenders to prison on the basis of our ability to determine when people are lying and when they are not. We can‘t do so with perfect accuracy, of course, but in-depth interviewing, like cross-examination, incorporates techniques that allow well-trained practitioners to improve the odds of getting at the truth. As it turns out, when scholars have conducted interviews, they generally come to the unsurprising conclusion that legislators, like other people, display a range of motivations. In many cases, the legislators are sincere, that is, they are trying to do what, in their view, is best for the country. 77 Assuming they are instrumentally rational,

76

George Akerlof, The Market for Lemons: Qualitative Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488 (1970). A company that offers high quality used cars, to use Akerlof‘s example, will benefit from required disclosures of the car‘s quality. 77 See, e.g, James Barber, The Lawmakers: Recruitment and Adaptation to Legislative Life (1980); Christopher Deering & Stephen Smith, Committees in Congress (3rd ed. 1997); Richard Fenno, Congressmen in Committees (1995); John Kingdon, Agendas, Alternatives and Public Policies (2 nd ed. 2003); William Muir, Legislature: California‘s School of Politics (1983)

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even if they are not self-interest maximizing, they will of course accept and try to elicit campaign contributions to support their reelection, but this does not demonstrate that either the contributions specifically, nor the desire for reelection generally, constitutes their primary motivation. 78 In fact, contrary to public choice theory, they may well be value rational as well as instrumentally rational, which means that they think critically and responsibly about the goals they are trying to achieve. 79 The theory suggested here builds on this more plausible account of legislators‘ and administrators‘ motivations. It assumes that they generally want to act responsibly, although some are venal and most are prepared to compromise their principles at certain times. It maintains this assumption in opposition to the claims of public My own study of the Truth-in-Lending Act‘s creation supports this view. Edward Rubin, Legislative Methodology: Some Lessons from the Truth-in-Lending Act. 80 Geo. L.J. 233 (1991). The person responsible for initiating the effort to enact this statute was Senator Paul Douglas of Illinois. Douglas was dead by the time I conducted the research, but I was able to interview several members of both his personal staff and the staff of the subcommittee that he chaired and that held hearings on the bill. All agreed that Douglas was motivated solely by the desire to enact what, in his view, was good public policy. Id. at 242-43. There was virtually no support for the legislation when he began the effort in 1959; the consumer movement did not yet exist, and the concept was too novel for any of the possible beneficiaries, such as lawyers, to be aware of it. Financial institutions were adamantly opposed, however, and mobilized opposition to Douglas as well as to the legislation. None of this dissuaded Douglas from continuing his efforts, however. In fact, he lost his reeelction bid in 1966 to Charles Percy, who made an issue of his support for the Truth-in-Lending bill. Id. a 251. 78 See Max Weber, Economy and Society 24-26 (Guenther Roth and Claus Wittich, eds., 1978) (instrumentally rational action consists of ― ‗means‘ for the attainment of the actor‘s own rationally pursued and calculated ends‖). Even a public-oriented legislator who had no interest in re-election (a lame duck for example) or no concerns about it (because they have safe seats) would want to elicit the support of firms that benefit from the regulation in order to ensure its passage and effective implementation. 79 Habermas, supra note [ ], at 279-95; Weber, supra note [ ], at 24-26 (valuerational action is ―determined by a conscious belief in the value for its own sake of some of some ethical , aesthetic, religious or other form of behavior, independent of its prospects for success‖). An essentially equivalent term is ―deontological.‖ Public choice theory essentially denies the existence of this mode of action. Even in its absence, however, the public choice theory of regulation is subject to the problem described above, because public-oriented behavior could be motivated by the desire for fame, approval, or election to a higher office. In fact, the claim that people are never value rational or deontological is highly implausible, as the case of Paul Douglas, see note [ ], supra, indicates.

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choice because there is simply no convincing empirical evidence that public choice‘s counter-intuitive hypothesis about reelectionmaximizing legislators or budget-maximizing bureaucrats is correct. Evidence from interviews with actual legislators invariably disconfirms this hypothesis, while the proffered evidence support for regulation, and advantage derived from its implementation, is readily—and indeed more naturall—explained on ther grounds. In contrast, the theory suggested here advances a falsifiable claims about the behavior of regulated parties and public officials. It asserts that the two will move from an adversarial to a cooperative mode when a regulatory program is in place over a period of time, other things remaining equal. To be sure, while this claim can be demonstrated empirically, it is certainly not easy to do so. Regulatory programs are invariably complex; aside from the passage of time and the increasing tractability of regulated parties, there are invariably a multitude of factors at work. Other things are rarely, if ever, equal. But the theory that a regulatizing process is at work at least makes an assertion that is capable of being demonstrated. II. The Micro Level: Distinctions Among Firms Any account of behavior with the sweep of Elias‘ theory, or even the theory of regulated behavior that has been derived from it, is necessarily a generalization. Exceptions, at both the individual and the collective level, are not difficult to find. In the boisterous Middle Ages, Richard the Lion-Hearted may conform to Elias‘ image of a brawling, undisciplined medieval aristocrat, but his contemporary and rival, Philip Augustus, exhibited a level of self-control and guile equal to any eighteenth century courtier or contemporary politician. In modern times, George Washington‘s entire life was characterized by exquisite self-discipline and self-control, but Andrew Jackson displayed towering passions worthy of any maniacal Merovingian. Because human behavior is so variable, general theories of society never purport to explain every individual case and cannot be disproven by identifying particular exceptions. Rather, their claims relate to the general run of behavior at a given time, and can only be proved or disproved through the difficult process of discerning overarching patterns. This observation about the inevitability of exception is not merely an epistemological point about the validation of social theories, but also a pragmatic one about the optimal strategy for

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regulatory agencies. Just as a general social theory cannot account for every individual case, so the general strategy that a regulatory agency adopts will not necessarily be optimal in every instance. There will be tractable firms at the very outset of the regulatory program, and recalcitrant, ―uncivilized‖ firms even after the program has been long established and generally accepted by the regulated parties. As a practical matter, therefore, regulators take a risk in assuming that all regulated firms will respond to a cooperative approach once the regulatory program has been in place for many years. While this may be true as a general matter, it will nonetheless allow the inevitable exceptions to victimize the agency. This phenomenon may be regarded as a second boundary on the effectiveness of New Public Governance. Unlike the boundary discussed above, this boundary appears at the micro level, that is, the level of individual firms, rather than at the macro level of entire industries. The contours of this second boundary can be traced by slightly reinterpreting the interesting scholarship on agency implementation that is, in fact, closely allied to New Public Governance. John Scholz recognized that a regulatory agency‘s relationship to the parties it regulates could be modeled as a repeat prisoner‘s dilemma game. 80 The conditions of the game are that ―there are two players. Each has two choices, namely cooperate or defect. Each must make the choice without knowing what the other will do.‖81 In the regulatory context, the two players are, of course, the agency and the regulated party, with each party being treated separately in a micro level analysis. For the regulated firm, cooperation consists of compliance with the regulations. For the agency, cooperation consists of granting benefits to the firm or not imposing sanctions on it, depending on the nature of the regulation. In a comprehensive regulatory scheme, the agency is often in a position to grant or withhold desired benefits, while in the case of functional regulation, its action more typically involves imposing or withholding sanctions. 80

John Scholz, Cooperation, Deterrance and the Ecology of Regulatory Enforcement, Law & Soc. Rev. 179 (1984); John Schloz, Cooperative Regulatory Enforcement and the Politics of Administrative Effectiveness, 85 Am. Pol. Sci. Rev. 115 (1991); John Scholz, Voluntary Compliance and Regulatory Enforcement, 6 Law and Policy 385 (1984). See also Robert Kagan and John Scholz, The ―Criminology of the Corporation‖ and Regulatory Enforcement Strategies, in Keith Hawkins and John Thomas, eds., Enforcing Regulation 67 (1984). 81 Robert Axelrod, The Evolution of Cooperation 7-8 (1984).

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The firm must decide whether to comply or disobey before it knows what the agency will do in response. Part of Scholz‘s insight was to recognize that the agency is in a similar position. The traditional view is that the agency can wait to see what the firm will do and then respond by imposing sanctions for noncompliance or by withholding sanctions when the firm complies. That is true in certain circumstances, generally when the agency is dealing with a relatively small number of regulated parties. In many cases, however, the agency cannot determine whether the firm is complying without investigation, and this investigation is simultaneously an expenditure of limited resources for the agency and the imposition of a sanction on the firm. It is an expenditure of limited resources because virtually no agency receives enough funding to conduct a complete investigation of every firm that is subject to the regulations it is enforcing, and must therefore select a limited number of firms or issues on which it will expend its available funding. Because an agency enforcement effort, such as inspecting a plant, auditing accounts, or contesting an interpretation of the regulatory statute, is costly for the firm, those firms that are selected for enforcement are effectively being sanctioned; the agency has imposed expenses on them -- a burden in itself – and it has not imposed those expenses on its competitors. Thus, the agency must ―play‖ -- that is, it must decide whether to cooperate by not investigating or defect by investigating and imposing costs -- before it knows what the firm‘s response will be. This is the classic prisoner‘s dilemma, and supports Robert Axelrod‘s argument that the prisoner‘s dilemma analysis is relevant across an extremely wide range of decision-making situations. 82 Scholz‘s solution is based on Axelrod‘s analysis of the optimal strategy in a prisoner‘s dilemma game. When the game is played only once, there is no optimal solution, but when it is played repeatedly, between the same participants, and with no definitive end point, an optimal strategy exists, which Axelrod calls TIT FOR TAT. According to Axelrod, ―TIT FOR TAT is merely the strategy of starting with cooperation, and thereafter doing what the other player did on the previous move.‖ 83 In other words, the first player begins by cooperating. If the second player continues to cooperate, the first play does so as well. If the second player defects on one turn, the first 82

Axelrod, supra note [ ], at 17-19, 73-105. See id. at 18 (―The framework is broad enough to encompass not only people but nations and bacteria.‖) 83 Id. at viii.

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player defects on the immediately following turn. If the second player then returns to cooperating, the first player does as well; if the second player defects in retaliation, however, then the first player continues to defect as well. 84 TIT FOR TAT belongs to the general category of ―nice‖ strategies, defined as all strategies where the player is never the first to defect.85 Another feature of this strategy is that it ―has a memory of only one move.‖ 86 It thus can be regarded as quasistatic; it is not entirely independent of past history, but it only takes the immediate past history into account. In the regulatory context, TIT FOR TAT means that the agency should begin by adopting a cooperative strategy. This might not work if there is widespread resistance and the agency lacks the resources to discover that resistance and apply a sanction. For this reason, TIT FOR TAT will most likely function best once the regulated industry has become regulatized to the point where cooperation is the norm. In that case, defections will be easier to detect and respond to. Once there is a defection in this setting, the agency should defect as well, either by imposing a sanction, or withholding a benefit. If the firm then shifts to a cooperative stance, the agency should immediately shift as well, rather than acting punitively. But if the firm continues to resist, the agency should keep imposing sanctions or withholding benefits until the behavior changes. This can be regarded as a second boundary for the New Public Governance strategy of cooperative regulation. It suggests that the agency should abandon its cooperative stance, and switch back to a punitive or command and control model, until the firm in question conforms to the general norms of the regulatized industry.

III. The Example of Commercial Aviation As stated above, the claim advanced in this essay can be empirically verified, but it is far from easy to do so. The regulatizing process is only one strand of a complex history where many themes 84

For an expanded discussion of the strategy and its advantages, see Ian Ayres and John Braithwaite, Responsive Regulation: Transcending the Deregulation Debate 19-53 (1992). For an explication in a specific regulatory context (occupational health and safety regulation) see Eugene Bardach and Robert Kagan, Going By the Book: The Problem of Regulatory Unreasonableness (2002). 85 Id. at 33-36. 86 Id. at 58.

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are interwoven, like the civilizing process that Elias discerns. As I have suggested elsewhere, the only truly convincing way to demonstrate an empirical claim about a complex human situation such as this is through the process of microanalysis, that is, a careful exploration of specific institutional settings. 87 Microanalysis is not opposed to theory, and does not embrace the naïve pragmatism that underlies a substantial amount of American legal scholarship. Rather it is methodology for choosing among theories, not by debating their general merits but by tracing their range of application in specific settings. For present purposes, one specific regulatory setting will be chosen, commercial aviation in the United States. This has the advantage of an unambiguous beginning in the fairly recent past. In fields that have existed since the advent of the modern regulatory state and before, such as banking, farming, manufacturing, or mining, identifying the first stages of regulation can be complicated due to the incompleteness of historical records and the complexity of the interaction between state and federal government in the American context.88 Commercial aviation, we can be quite certain, did not begin before the twentieth century; in fact, as will be discussed below, it began in 1925. It is also a well-documented history and has the particular advantage that the actual individuals who headed regulated firms, being quite interesting as corporate executives go, have been studied in detail. Admittedly, the regulation involved is comprehensive as opposed to functional regulation, but focusing on one field necessarily involves a choice of this sort. The fact that the entire enterprise of comprehensive regulation in this field is currently in some degree of disrepute89 is an advantage, not a disadvantage, in that it helps provide perspective on the historical process. 87

Edward Rubin, The New Legal Process, the Synthesis of Discourse, and the Microanalysis of Institutions, 109 Harv. L. Rev. 1393 (1996). 88 See, e.g., Brian Balogh, A Government Out of Sight: The Mystery of National Authority in Nineteenth Century America (2009); William Nelson, The Roots of American Bureaucracy 1830-1900 (1982); Stephen Skowronek, Building the New American State: The Expansion of National Administrative Capacities 1877-1920 (1982); Jerry Mashaw, Reluctant Nationalists: Federal Administration and Administrative Law in the Republican Era, 1801-1829, 116 Yale L.J. 1636 (2007); Jerry Mashaw, Administration and ―the Democracy‖: Administrative Law From Jackson to Lincoln, 1829-1861, 117 Yale L.J. 1568 (2008). 89 See Martha Derthick, The Politics of Deregulation 147-73 (1985); Alfred Kahn, The Economics of Regulation 209-19 (1988); Thomas McCraw, Prophets of Regulation 222-99 (1984).

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A. The Origins of Commercial Airline Regulation Prior to the technology-accelerating experience of World War I, airplanes had virtually no commercial use. 90 The vastly improved planes that became available after the War could carry passengers between cities, but not to a commercially viable extent; they held only a few people, were limited to the turbulent lower altitudes that modern jet aircraft pass through quickly on their way to the calmer air above, and crashed with disconcerting frequency. Cargo was not sensitive to turbulence and its loss in a crash was a misfortune rather than a tragedy, but the small size of the planes was a limiting factor for which their greater speed of delivery failed to compensate. The one type of cargo that constituted an exception was mail, where weight was not excessive and time was of the essence; thus, mail carrying was the primary sources of the airplane‘s commercial value in the first decade or so after the War. 91 This placed commercial aviation firmly within the jurisdiction of the federal government, which exercised a monopoly over U.S. mail delivery throughout this period. At first, the Post Office Department operated the mailcarrying aircraft itself, but the Harding and Coolidge Administrations were not fond of nationalized enterprises and the politically powerful railroad industry was not fond of tax-supported competition. 92 The Contract Air Mail Act of 1925, known as the Kelly Act, 93 began the 90

In the early days of aviation, even after the War, barnstormers would travel from town to town offering rides, crop dusting, or skywriting in a desperate effort to make money off the new technology. A well know comment by a pilot from this era is that ―the most dangerous thing about flying was ‗the risk of starving to death.‘‖ T.A. Heppenheimer, Turbulent Skies: The History of Commercial Aviation 5 (1995); also Nick A. Komons, Bonfires to Beacons: Federal Civil Aviation Policy Under the Air Commerce Act, 1926-38, at 12 (1989). 91 R.E.G. Davies, Airlines of the United States Since 1914, at 16-30 (1972); William Leary, Aerial Pioneers: The U.S. Air Mail Service 1918-1927 (1985); Carl Solberg, Conquest of the Skies: A History of Commercial Aviation in America 13-29 (1979); Henry Ladd Smith, Airways: The History of Commercial Aviation in the United States 50-93 (1942). Prior to 1925, the only commercial airline was Aeromarine airways, which flew seaplanes from Florida to Havana and other points in the Caribbean but went bankrupt in 1924. See Davies, supra [ ], at 5-10; Leary, supra at 160-70; Smith, supra at 86-88, 161. 92 See Davies, supra note [ ], at 33; Leary, supra note [ ], at 222-24 93 43 Stat. 805 (1925). See Komons, supra note [ ], at 66-67; Heppenheimer, supra note [ ], at 11-12; Smith , supra note [ ], at 94. Representative Clyde Kelly, the

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process of yielding the airmail routes to private contractors, who were then granted licenses to carry mail at heavily subsidized rates. 94 Having relinquished ownership, the government retained control through regulation, passing the Air Commerce Act the following year.95 The Act was designed to remedy what airline historians generally describe as the chaotic situation that prevailed in the years following World War I. 96 It provided for registration of all aircraft, licensure of pilots and the development of safety and navigation standards by the Department of Commerce. 97 Following a familiar pattern in American regulation, it was woefully underfunded and immediately developed a backlog on license applications. 98 Its enforcement strategy for violation of its safety standards was the typical mixture of reprimands, fines, license suspensions and license revocations. 99 The Kelly Act, and the general enthusiasm for air travel generated by Charles Lindbergh‘s solo flight across the Atlantic in 1927, spawned a welter of small airlines competing for mail contracts and attempting to earn some additional revenue by carrying passengers.100 ―People wanted to get into the air, and the airlines, now springing up the dozen, were eager to carry them. Unfortunately, many of them were to learn the hard way as few had bothered to do their arithmetic in order to establish the basic prerequisite of any successful business, namely that revenue should exceed expenditure.‖101 The chief executives of these airlines tended to be fairly venturesome individuals, many of whom got their experience in

sponsor who gave the Act its popular name, was known to be a strong supporter of the railroads. Davies, supra note [ ], at 33; Heppenheimer, supra note [ ], at 11. 94 For a description of the license granting process, see Smith, supra note [ ], at 103-12, 118-22. 95 Pub. L. No. 251, 69th Cong., 1st Sess., 44 Stat. ch. 344, at 568 (1926). See Smith, supra note [ ], at 97-102. 96 Heppenheimer, supra note [ ], at 1-17; Komons, supra note [ ], at 7-33; Solberg, supra note [ ], at 30-45. 97 Komons, supra note [ ], at 65-88; Smith, supra note [ ],at 94-102 98 Komons, supra note [ ], at 99-104; Smith, supra note [ ], at 99-102. The original appropriation for the Aeronautics Branch of the Commerce Department was $550,000. 99 Id. at 107. 100 Davies, supra note [ ], at 36-55; Leary, supra note [ ], at 224-26; Smith, 10312. 101 Davies, supra note [ ], at 89.

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the field by being pilots or race car drivers.102 Their companies were typically small and lightly capitalized, given the multiplicity of carriers and the fact that airmail was hardly a major industry in the 1920s. The newness, small size and multiplicity of these companies produced a sort of Wild West mentality, with many entrepreneurs who were trying to make money quickly from government largesse, and not sure how long their good fortune would last. 103 Many carriers regularly defrauded the government by shipping heavy objects back and forth or filling the planes with junk mail. 104 Because the recipients of the Post Office contracts were primarily interested in carrying mail, the airlines that were established to carry passengers tended to be even smaller, more numerous and less reputable. 105 When Herbert Hoover, a progressive, big government Republican, became President, he appointed Walter F. Brown as Postmaster General, 106 and supported passage of the McNary-Watres Act, which granted the Postmaster extensive authority to determine airmail rates.107 Brown used this authority to reorganize the entire 102

See Davies, supra note [ ], at 41-42 (―True to the tradition of the West, the men who pioneered the first mail lines wee colorful characters, the kind who were prepared to take risks, and use unorthodox methods to promote their ideas if necessary.‖) In addition to Eddie Rickenbacker, who will be discussed at pp. [ ] infra, Harris Hanshue, president of Western Air Express, was also a race car driver. See Davies, supra note [ ], at 43. 103 Davies, supra note [ ], at 39-53; Komons, supra note [ ], at 191-97; Smith, supra note [ ], at 117-55. 104 R.E.G. Davies, Rebels and Reformers of the Airways 6 (1987); Komons, supra note [ ], at 193-94, Smith, supra note [ ], at 125-26. Another trick, taking advantage of the Post Office Rule that registered mail had to be padlocked, was to put each registered letter in a separate sack, with its own heavy padlock. Komons, supra note [ ], at 193. According to Davies, the story that Varney Airlines employees would send neatly packaged bricks to one another is apocryphal but indicative. 105 Davies, supra note [ ], at 54-55; Komons, supra note [ ], at 191-96 106 Heppenheimer, supra note [ ], at 31; Komons, supra note [ ], at 197; Smith, supra note [ ], at 156-57. Brown was a Bull Moose Republican, who shared Roosevelt‘s belief in a strong central government, rather than Harding and Coolidge‘s distrust of it. On that basis alone, he would have been a natural appointment for Hoover. In addition, however, he had played a crucial role in securing the Republican nomination for Hoover, and in the subsequent presidential campaign. He was, in fact, one of the most powerful people in Washington. 107 Brown drafted the act and played a crucial role in its passage. See Heppenheimer, supra note [ ], at 34; Komons, supra note [ ], at 200; Smith, supra note [ ], at 198. Its operative language stated: ―The Postmaster General is authorized to award contracts for the transportation of airmail by aircraft between

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industry, forcing airlines to consolidate in order to create a small number of larger corporate entities that would be easier to manage and would have the necessary capital to invest in passenger travel. 108 In pursuit of these goals, he convened a meeting among the larger airlines, which subsequently became known as the ―spoils conference.‖ Four carriers, American Airways, Transcontinental and Western (TWA), United Air Transport and Eastern Air Transport, emerged with dominant control of government-allocated mail routes; many others were forced to merge or given an effective death sentence by being denied access to the mail subsidy. 109 The reorganized industry prospered and passenger travel tripled, but four years later, with a Democratic administration in power, some of those who had been disadvantaged by Brown‘s high-handed treatment, including Thomas Braniff, triggered Congressional hearings.110 Chaired by Senator Hugo Black, the hearings revealed enough suspicious activity to motivate President Roosevelt to cancel all private airmail contracts and transfer the function to the U.S. Army

such points as he may designate to the lowest responsible bidder at fixed rates per mile for definite weight spaces. . .‖ § 4. This shift from using the weight of mail actually carried to the freight capacity of the airplane carrying it was designed to end the junk mail and heavy object abuses, but had the secondary effect of favoring companies that could afford to purchase larger aircraft. Brown also tried to add a provision allowing him to award contracts without competitive bidding, but Representative Kelly, who was irritated that someone else was drafting airmail legislation, managed to eliminate the provision from the final statute. Smith, supra note [ ], at 160-61. 108 Heppenheimer, supra note [ ], at 33-35; Komons, supra note [ ] at 202-10; Smith, supra note [ ], at 156-86 109 Heppenheimer, supra note [ ], at 35-36; Komons, supra note [ ], at 202-10; Smith, supra note [ ], at 167-86. Harris Hanshue, president of Western Air Express and one of the pioneers of commercial air service, was forced to merge his company with Transcontinental Air Transport, forming the new TWA (Transcontinental & Western Air, or TWA, and was furious about the way he had been treated. Davies, supra note [ ], at 89-92; Smith, supra note [ ], at 167-86. 110 Davies, supra note [ ], at 155-56, 161-63; Heppenheimer, supra note [ ], at 5557; Solberg, supra note [ ],at 140-43; Smith, supra note [ ], at 214-48. The irony of the situation was that many of the airline executives who attended the ―spoils conference‖ felt bullied and abused by Brown, but were then accused of collusion by the Black Committee. Harris Hanshue, for example, see note [ ] supra, was forced to resign the presidency of TWA, despite his resentment over the company‘s formation. Of course, however badly they felt at the time, the surviving airlines had benefitted enormously from the restrictions on competition that the agreement provided.

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Air Corps.111 The result was a catastrophe that included 66 crashes and 12 pilot fatalities;112 Roosevelt, furious and abashed, restored commercial mail service under temporary contracts and induced Congress to enact a new law, the Black-McKellar Act, which divided regulatory responsibility among several agencies, set much lower postal rates for the new contracts, disqualified former contract holders from obtaining these contracts, and excluded executives who had attended the spoils conference from being officers in the contracting companies.113 This virtuous but impractical response was quickly circumvented by Roosevelt‘s Postmaster General, James Farley, who allowed the quondam contract holders to bid for new contracts by simply changing their names, generally from ―Air Transport‖ to ―Air Lines,‖ a change that probably would have occurred in any case as passenger travel became increasingly important.114 The jurisdictional farrago of Black-McKeller was also quickly rectified with the passage of the Civil Aeronautics Act in 1938, which established a single agency, the Civil Aeronautics Agency (CAA) with comprehensive authority for all passenger, cargo and mail operations of commercial airlines. 115 Two years later, a further 111

Executive Order 6591 (Feb. 19, 1934). See Davies, supra note [ ], at 156-57; Heppenheimer, supra note [ ], at 57-59; Solberg, supra note [ ],at 143-44; Smith, supra note [ ], at 249-51. As Heppenhiemer reports, the Air Corps was ―a backwater within a peacetime army. . . Pilots flew no more than an hour a day, weekdays only. They definitely were a fair-weather force, unaccustomed to flying at night or in poor weather.‖ Supra at 58. The Air Corps became responsible for air mail delivery in February, and the weather that year was particularly severe. 112 Conrad Black, Franklin Delano Roosevelt: Champion of Freedom 321-22 (2003); Davies, supra note [ ], at 157-61; Heppenheimer, supra note [ ], at 59-60; Komons, supra note [ ], at 272-74; Solberg, supra note [ ] , at 144-46; Smith, supra note [ ], at 253-58. 113 Air Mail Act of 1934, 48 Stat. 933. Davies, supra note [ ], at 194; Kommons, supra note [ ], at 266-69; Solberg, supra note [ ], at 198-99; Smith, supra note [ ], at 285-88. Kommons, at 267, describes the Act as a ―hodgepodge of conflicting ideologies.‖ One thing it did that was fully consistent with the New Deal ideology was to permit direct federal support for airport construction. See Heppenheimer, supra note [ ], at 119. 114 Davies, supra note [ ], at 194-98; Smith, supra note [ ], at 291-300. 115 Pub. L. No. 75-706, 52 Stat. 973 (1938). Davies, supra note [ ],at 200-03; Kommons, supra note [ ], at 363-79; Smith, supra note [ ], at 301-09. Unlike the previous administrators, the Department of Commerce and the Post Office, the CAA, like the successor CAB, was established as an independent agency. The statute‘s primary sponsor, Senator Pat McCarran, explicitly sought to place airline regulation under the control of an apolitical agency.

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consolidation was effected when the Air Safety Board and the CAA were combined into a single agency, the Civil Aernonautics Board (CAB). 116 This was the agency that remained in place, exercising comprehensive regulatory authority over the entire airline industry, until the advent of deregulation during the Carter Administration. B. Comprehensive Regulation and the Executives It Regulated The top executives of the airlines that obtained contracts from the new CAA or CAB were different types of people from the ones who had shaped the industry in its early years. As one historian of American commercial aviation states, the comprehensive regulatory system that had been established ―rewarded certain types of executive personalities better than others . . . Airline leaders who were by nature ‗insiders‘ received much more favorable attention from the CAB than extreme individualists who were temperamentally attuned to an earlier era and had difficulty with interpersonal relations in a strange new world of ‗organization men.‘‖ 117 In other words, a ―civilizing‖ or regulatizing process had taken place; the new executives did not perceive regulation as an intrusion to be resisted, but as a reality to be managed. While they certainly sought their companies‘ advantage, and bemoaned particular decisions that frustrated their desires, they accepted the basic rules of the regulatory process and functioned within its parameters. Whether they actually internalized these rules, as individuals, is difficult to say, but their willingness to employ cooperative strategies meant that their companies had done so. Because there were a relatively small number of major airlines, and because – for whatever reason – the executives who assumed leadership of them remained in place for many decades, it is fairly easy to summarize the backgrounds and behavior of the particular individuals who were responsible for this change in industry behavior. In some cases, the new, cooperative approach can be partially attributed to background and training. The most dramatic example is Donald Nyrop who became president of Northwest Airlines in 1954 and built what had been a troubled regional carrier into a major international airline. Trained as a lawyer, Nyrop found 116

Davies, supra note [ ], at 203-09; Smith, supra note [ ], at 357-62 W. David Lewis, Introduction: Ambivalent Relationship: Airline Executives and Federal Regulation in Lewis, supra note [ ], at 1, 16. 117

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employment just before the Second World War in the general counsel‘s office of the CAA, and by 1950, at the age of thirty-eight, had become the boy-wonder Chair of the CAB.118 After assuming the presidency of Northwest, he had his differences with the CAB, but since his entire career, and all his experience with commercial aviation, had been as a federal bureaucrat, he was deeply conversant and fully comfortable with the regulatory regime. 119 C.R. Smith, who built American Airlines and served as its CEO for over thirty years, was trained as an accountant -- perhaps the only profession more distant than law from being a barnstorming pilot. Beginning his career with Peat, Marwick and Company, he moved to the Texas-Louisiana Power Company, and was soon assigned to manage its subsidiary, Southern Air Transport in 1930. 120 When a leading financier, Erran Lobban Cord, combined Southern with several other small carriers in 1934 to form American Airlines, he somewhat reluctantly selected Smith to be president of the new company. 121 Free of the taint of the spoils conference or any other involvement with Walter Brown, Smith quickly developed a working relationship with the newly-established CAA and then the CAB. In fact, this was far from the limit of his ability to navigate the federal bureaucracy. Having concluded that American needed to upgrade its fleet with Douglas Aircraft‘s new 21-seater (the DC-3),122 Smith 118

Donna Corbett, Donald W. Nyrop: Airline Regulator, Airline Executive, in Lewis, supra note [ ], at 125, 126-30. 119 Id. at 141-52. See Davies, supra note [ ], at 540. Similarly, the President of United Airlines, W.A. Patterson was a banker who was put in charge of a small airline owned by Boeing and United Aircraft that was subsequently merged into United. He became President of United when the Roosevelt Administration reauthorized private air mail service in 1934, and remained in that position for over 30 years. Barbara Peterson and James Glab, Rapid Descent: Deregulation and the Shakeout in the Airlines 25 (1994). 120 Roger Bilstein, C.R. Smith: An American Original, in Lewis, supra note [ ], at 83-85 121 Id. at 85-86; Smith, supra note [ ], at 291-92. Smith was suspected of opposing Cord‘s acquisition of Southern Air, but he overcame this disadvantage because of his obvious talent. Cord soon fled to Europe, presumably to escape investigation by the SEC, leaving Smith to run the airline unencumbered. 122 This is the airplane that transformed passenger air travel into a remunerative business. See Davies, supra note [ ], at 189-93. Smith‘s role in the process was actually more crucial than merely being the first airline executive to order the plane. He apparently persuaded Donald Douglas to produce the plane by modifying the DC-2 he was already producing to accommodate more passengers. Originally, the plane was produced in two version, the Douglas Sleeper Transport, or DST, with 14

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negotiated a 4.5 million dollar line of credit with the Roosevelt Administration‘s Reconstruction Finance Corporation to pay for the new planes. 123 He maintained working relationships of this sort throughout the following decades, and was rewarded with some of the most lucrative routes in the nation. To quote one of his biographers, ―Smith did not have an aversion to collaboration with the federal government and its agencies, especially when he perceived benefits as a result.‖124 He established an American Airlines office in Washington ―not to conduct guerilla warfare with the government but to keep abreast of bureaucratic trends and adjust to bureaucratic realities.‖ 125 His relationship with the airline industry‘s omnipresent regulators was ―a ‗civilized‘ marriage of bureaucratic propriety.‖ 126 In 1968, after he retired from the presidency of American, he served briefly as Lyndon Johnson‘s Secretary of Commerce. Both Nyrop and Smith had backgrounds that distinguished them from the first generation of airline executives. But another of the executives who shaped the industry in its regulatory era, Robert Six, demonstrates that background is not the only determinant of behavior. Six, a six-foot-four Texan with a famous talent for profanity, spurned the aspirations of his middle-class parents and got his pilot‘s license when he was twenty, immediately after Lindberg‘s flight had filled the nation with enthusiasm for aviation. 127 He then tried by make a living by barnstorming, was expelled from Boeing‘s commercial pilot training program in San Francisco, and crashed three planes, which convinced the training program not to readmit him. 128 After wandering around the U.S. and China doing a variety of odd jobs, he managed to marry a wealthy woman. In 1936, he convinced her father to provide him with financial backing to become a partner in a small Southwestern airline company, which he grandly berths, and as a dayplane, the DC-3 itself, with 21 seats. See id. at 190; Thomas Petzinger, Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos 12-13 (1995). ―DC‖ stands for Douglas Commercial. 123 Davies, supra note [ ], at 86; Smith, supra note [ ], at 292-93. Smith‘s feat was particularly impressive because American had an outstanding debt of $3,415,000 that had to be refinanced before the RFC would approve the loan. 124 Id. at 84 125 Id. 126 Id. at 117 127 Michael Gorn, Robert F. Six: Continental Giant, in Lewis, supra note [ ], at 169, 170-71;. R.E.G. Davies, Rebels and Reformers of the Airways 31-32 (1987) 128 Gorn, supra note [ ], at 171-72; Robert Serling, Maverick: The Story of Robert Six and Continental 15-21 (1974).

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renamed Continental Airlines and relocated from dusty El Paso to burgeoning Denver.129 By 1938, Six, now just thirty-six years old, became president of the newly-named company. Despite his rather rough-and-tumble life experience thus far, he immediately realized that relations with the CAA, or CAB was a crucial ingredient of success. When the CAB opened a new airmail route, from Wichita, Kansas to Denver, Colorado, Continental was the first to file for it and secured the grant.130 After World War II, he worked assiduously to maintain good relations with the CAB and to convince it that the service Continental provided was as good as a major airline. According to one biographer, ―he rarely chafed at the imposition of directives from Washington. He recognized and respected the CAB‘s necessary role, regarding it as imperative to the health of air commerce and to the well-being of Continental itself.‖ 131 These efforts were rewarded in 1955 when the CAB granted Continental routes from Denver to both Chicago and Los Angeles and, even more strikingly, the direct, nonstop route between those latter two cities.132 At a single stroke, Six‘s company had been transformed from a regional to a national carrier. 133 Not all the airline executives of the regulatory era were as willing to cooperate as Nyrop, Smith, and Six, or as adept at doing so, but their resistance became increasingly aberrant as time went on and thereby worked to their companies‘ disadvantage. By far the most famous of the dissenters was Eddie Rickenbacker, president of Eastern Airlines. Rickenbacker, who – significantly -- was a decade or two older than Nyrop, Smith or Six, 134grew up in a poor SwissGerman household where no English was spoken; his father was murdered when he was fourteen and he became responsible for 129

Davies, supra note [Rebels] at 32-33 (1987); Gorn, supra note [ ], at at 173-75; Serling, supra note [ ], at 21-32. 130 Id. at 180. Six proclaimed that Continental‘s ― ‗application was filed so early that it was acknowledged by the new . . . chairman [Ed Noble] . . on [the] stationery of his former firm, the Life Saver Corporation.‘ ‖ 131 Id. at 177 132 Davies, supra note [ ], at 38-39; Gorn, supra note [ ], at 188-89; Serling, supra note [ ], at 111-17. There was more passenger traffic on the Chicago-Los Angeles route than there was on Continental‘s entire network at the time. 133 Around this time, Six divorced his wife, who had given him his start in business, and married Ethel Merman, the Broadway singer and actress. They were divorced in 1961, however, and Six then married Audrey Meadows, a television actress who played Jackie Gleason‘s wife on The Honeymooners. 134 Rickenbacker was born in 1890, Nyrop in 1912, Smith in 1899 and Six in 1907.

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supporting his mother.135 After holding a series of jobs that attested to his entrepreneurial instincts without producing much income, he became an auto racer and quickly rose to prominence in the sport. 136 Joining the Army in 1917 to serve as a driver, he got himself into a training program for fighter pilots and qualified in March, 1918. Over the next six months, he shot down twenty-two German planes to become the leading American air ace of the war. 137 He returned a hero, but without any formal training or clear sense of direction. During the decade and a half that followed, Rickenbacker circulated out of various jobs at General Motors, where he was always welcome and attempted, unsuccessfully, to start his own automobile company and, more briefly, his own airmail service.138 In 1934, he induced GM to buy Eastern Air Transport, and install him as President. Renaming the company Eastern Airlines, Rickenbacker proceeded to build it into a major carrier. GM decided to sell Eastern in 1938, Rickenbacker was able to raise the necessary capital to purchase it, thereby become part owner of the company as well. In February, 1941, Rickenbacker was a passenger on a DST that crashed, injuring him so badly that the attendants at the hospital to which he was taken left him for dead while they tended to other victims. He made a remarkably rapid recovery, however, and when the U.S. entered World War II a short time later, volunteered to perform a variety of special missions for the Army Air Corps. On one of these –delivering a reprimand to General Douglas MacArthur139 – his plane ditched in the Pacific Ocean and he drifted with six other passengers for three weeks until finally rescued. 140 After the War, he returned to the Presidency of Eastern, and for while continued to manage it successfully.

135

W. David Lewis, A Man Born Out of Season: Edward V. Rickenbacker, Eastern Air Lines, and the Civil Aeronautics Board, in Lewis, supra note [ ], at 242, 24446. 136 Lewis, supra note [ ], at 247-50 137 Id. at 252 138 Id. at 253-59. His airmail venture, called Florida Airways, failed in less than a year because of the collapse of the Florida real estate boom and a freak accident that damaged three of its planes while they were on the ground in Nashville. 139 MacArthur was being reprimanded for making public statements critical of the President, the same behavior for which he was ultimately dismissed by Harry Truman. See David McCullough, Truman 834-56 (1992). 140 Lewis, supra note [ ], at 266-67. For Rickenbacker‘s own account of the incident, see Edward Rickenbacker, Seven Came Through (1943)

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Although he did not become an airline executive until the dawn of the modern regulatory era, Eddie Rickenbacker belonged to the early generation of barnstormers and roustabouts. Perhaps more importantly, he maintained a firm, perhaps mystical belief in selfreliance. It is hard to argue with the efficacy of that belief; there are probably few human beings who were as frequently faced with lifethreatening situations, over as long a period of time. But however well this belief system served him on the racetrack, in an aerial battle, or adrift in the open ocean, it was not well adapted to the role of being chief executive officer of a highly regulated company. In his role as an executive, Rickenbacker immediately ran afoul of the Roosevelt Administration when he declared that shifting mail delivery to the Air Corps was ―legalized murder.‖ 141 Having proven quite correct in his judgment, which the Administration implicitly conceded when it returned the service to private carriers, Rickenbacker abated his antagonism for a few years, and was sufficiently cooperative to ensure his company‘s early success. By the late 1940s, he had become an increasingly strident critic of the CAB, which he linked to the New Deal, socialism, and the decline of religion in America. Perhaps more seriously, he doggedly opposed the CAB‘s policy of encouraging passenger air travel by making the service more commodious and congenial, a policy that lay behind its rate-setting decisions that fixed ticket prices and impelled companies to compete on service. Rickenbacker believed in efficient, no-frills service, perhaps because his own tolerance for discomfort was preternaturally high; this sounds familiar now, but it was unwelcome to air traveler‘s at the time, some of whom formed an organized named WHEAL (for ―We Hate Eastern Air Lines‘). 142 In addition, Rickenbacker hated unions and adopted an adversarial stance toward them that generated labor problems for his company and further antagonized the CAB, since, reflecting the 141

Davies, supra note [ ], at 160; Komons, supra note [ ], at 260; Lewis, supra note [ ], at 260; Solberg, supra note [ ], at 144. This is certainly one of the most famous quotes in the history of American commercial aviation; it was widely noted at the time and is mentioned in almost every history of the subject. Needless to say, it did nothing to endear Rickenbacker to the Administration, even (or perhaps especially) after it proved to be correct. 142 Lewis, supra note [ ], at 268-74; Petzinger, supra note [ ], at 176; Solberg, supran note [ ], at 351-52. Rickenbacker also had his pilots trained to fly straight through turbulence, rather than around it, thereby keeping to the scheduled arrival times, but giving the passengers a harsher ride. Id. Probably no corporate decision reflects Rickenbacker‘s personality as fully as that one.

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comprehensive nature of the regulatory regime, the right of airline employees to bargain collectively was secured by its organic statute.143 The CAB responded by cutting Eastern‘s mail subsidy, denying its requests for new routes, and authorizing other airlines to compete with its existing routes. Rickenbacker only became more strident attacks on the regulatory authorities and the entire concept of regulation, and Eastern‘s position continued to decline. In 1959, Laurence Rockefeller, the company‘s dominant stockholder, forced Rickenbacker to retire. 144 The final airline executive to be considered here, George T. (―Ted‖) Baker, was similar to Rickenbacker in many ways, although he was certainly no hero.145 He entered commercial aviation in the chaotic era before Walter Brown‘s consolidation of the industry, probably by acquiring a small company that sold flying boats on consignment and using them to smuggle alcohol. 146 When the Roosevelt Administration restored the air mail service to private carriers, Baker‘s little company, which he had renamed National, managed to obtain a route within Florida because no one else wanted it, and because Baker had been far too minor a figure to be invited to, and tainted by, the spoils conference. 147 Although he behaved strategically in achieving this minor coup, Baker was as stridently opposed to Roosevelt, regulation, the CAB and labor unions as Rickenbacker. He wasn‘t Rickenbacker, however, and as long as he kept his opposition purely verbal, the CAB was willing to use his fledgling airline to create competition for Eastern on some of its more lucrative routes, most notably New York-Miami. But he attracted the ire of the CAB by negotiating package arrangements with Miami hotels, a commercially creative idea which threatened to undermine the regulated fare structure.148 In 1948, he tried to oust the pilot‘s 143

Lewis, supra note [ ], at 279-80. Id. at 280-84. 145 R.E.G. Davies, supra note [ ], at 539, describes Baker as running his airline ―with the rugged individuality that characterized his early life,‖ a description that could certainly be applied to Rickenbacker as well. Not surprisingly, the two men hated each other. 146 George Hopkins, Fortunate in His Enemies: George T. Baker, National Airlines, and Federal Regulators in Lewis, supra note [ ], at 213, 216. 147 Id. at 217-18 148 Id. at 225. Although a certain sense of impropriety and general sleaziness attaches to Baker, unlike the other executives profiled here, he was a creative executive. He was also one of the innovators of interchange arrangements, where airlines share routes by selling tickets to each other‘s flights. Id. at 228-29. 144

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union from National Airlines and endured a bitter pilot‘s strike. This, combined with justifiable concerns that National was no longer solvent, convinced the CAB to initiate a dismemberment case against the airline.149 Baker relied on his outspoken support for Thomas Dewey, who he – like so many other people --expected to win the presidential election that year.150 When Dewey lost, Baker knew he was in trouble. His response was to find God through Frank Buchman‘s Moral Rearmament movement.151 God then instructed Baker to make peace with the union, and ―he began calling pilots individually, begging their forgiveness, swearing to mend his ways, and blaming all of the bad things that had happened on the ‗power of Satan.‘ ‖ 152 Over the course of the following decade, he abandoned his anti-regulatory rhetoric and his efforts to circumvent the regulatory rules, and became ―a model citizen in the regulated airline community.‖ 153 In response, the CAB withdrew its dismemberment case, but, not surprisingly remained somewhat distrustful of Ted Baker. It did not grant National any major new routes during the 1950s, and in fact authorized a new competitor (Northeast) on its principal New YorkMiami route.154 At the end of the decade, however the CAB organized a major hearing (the Southern Transcontinental Service Case) to open new routes across the rapidly-developing Sunbelt. Despite the inferior quality of its presentation, National received the Miami-California route, and thereby became one of the leading airlines in the nation.155 C. Airline Regulation and the Regulatizing Process The brief history of commercial airline regulation, and the sketches of the individuals who headed the regulated firms, 149

Davies, supra note [ ], at 243; Hopkins, supra note [ ], at 222-26. On the elections and people‘s expectations about the results, see McCullough, supra note [ ], at 653-719. 151 See Garth Lean, On the Tail of a Comet: The Life of Frank Buchman (1988). Moral Rearmament was a reincarnation (as it were) of Buchman‘s Oxford Group. There are indications that it harbored pro-Nazi sentiments before the War. 152 Lewis, supra note [ ], at 226. 153 Id. at 227 154 Id. at 227-29 155 Id. at 231-32. With his fortune made, Baker, an instinctively imperious person, may have decided that he was tired of groveling, and sold his interest in National the following year. Id. at 214. 150

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provides evidence of the regulatizing process that has been described above. When regulation of the field began, the regulators faced a multitude of small firms of very recent origin, managed by individuals who typically had never been previously subjected to regulatory control. The boundary is particularly crisp in the case of commercial airline regulation. Firms, as opposed to individual entrepreneurs, could not exist in this field until the government privatized the only significant source of revenue,156 namely mail carrying, and they sprang into existence immediately thereafter. Pursuing the two closely related goals of ensuring safety and encouraging the development of passenger service,157 the original regulators (that is, the Aeronautics Branch and the Post Office) adopted standard command and control regulation. While regulation by the Aeronautics Branch was not particularly oppressive, it relied on the typical techniques of reprimands, fines, suspensions and revocations. The Post Office, under Walter Brown, was quite oppressive, and its forceful reorganization of the industry to create a small number of firms that could develop passenger service, while somewhat extreme for American regulation, fits readily into the command and control model. By the time the CAA and CAB were established, the commercial air industry was becoming regulatized. Safety regulation had been in place for a decade and most of the pilots, having learned to fly in the era when they were required to have licenses in order to do so, entered the field with the expectation that they would be subject to these regulations. 158 Even more significantly, Brown‘s spoils conference had consolidated the industry, producing a limited number of relatively large carriers that owed their position to the Post Office and were accustomed to its rules, despite their decreasing economic dependence on the postal subsidy. Because it confronted a relatively small number of sophisticated parties, the CAB was able to shift to a more cooperative mode of regulation. This not only 156

The failure of Aeromarine, see note [ ], demonstrates this. The two goals did not fully overlap because the safety regulations applied to all commercial air traffic, including cargo carrying and recreational flying. 158 Although the regulations had only been in place for 12 years when the CAA was created, and 14 when it was succeeded by the CAB, the majority of pilots had entered the field within those 12 years because of the rapid pace of commercial aviation‘s growth, a pace greatly accelerated by Charles Lindbergh‘s flight. During the fiscal year that preceded his flight, there had been 1,800 pilot‘s license application; in the year following it, there were 5,500. Smith, supra note [ ], at 123. 157

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involved less reliance on sanctions and compulsion, but also a willingness to develop rules for the industry in a more collaborative manner. Executives like Nyrop, Smith and Six could be treated as partners in a joint enterprise, rather than as unruly subjects who needed to be disciplined. This does not mean, of course, that there were no conflicts or disagreements between these executives and the CAB; it simply refers to both the manner and the mood by which these conflicts were resolved. With refers to the vectors highlighted by Human Relations Theory, it is significant that Nyrop, Smith and Six all obtained their positions during the regulatory era. Smith was nothing but an accountant, with no connection to commercial aviation, until he was assigned to manage an airline subsidiary in 1930. Six had been a pilot, but had drifted away from the field, without having held any executive position in it, until he used he father-in-law‘s money to buy into a small airline in 1936. Nyrop, of course, had extensive experience with commercial airlines before he became president of Northwest, but as a regulator rather than a pilot or an executive. Thus, all three begun with a full understanding that they were entering a highly regulated field and that they would need to establish congenial relations with the regulators if they were to achieve success. Nyrop represents a further development in the evolution of a regulatory regime, namely, the creation of a pool of highly experienced bureaucrats who are then available to serve as executives of the regulated parties. These executives also illustrate the role of social learning in the evolution of cooperative governance. Taken together, the regulators and regulated parties constitute a task-oriented action group that engages in a dynamic interaction, and can thereby develop solutions to new situations that confront the industry. Clearly, each was learning from the other, and about the other, as the interaction proceeded. One question for further inquiry, and one that has important implications for the societal value of cooperative governance, is whether this is a single or double loop process, in Argyris‘ terms.159 A single loop process would comport with standard notions of legality, because the learning would be directed toward achieving a pre-established norm, presumably the one set by the statute. A double loop process is necessarily more problematic, in 159

Argyris, supra note [ ]; Argyris and Schon, supra note [ supra note [ ].

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]; Argyris and Schon,

that the norms that learning would achieve become subject to the interaction. Does this mean that the legislature, which is after all the people‘s representative and the prime policy maker in our system of governance, is no longer in control, that the purposes that it intended to achieve have been subverted by an excessively amiable relationship between the regulators and the regulated parties? Or is the idea that the legislature sets a goal that is supposed to remain constant over an extended period of time an over-simplification of a complex process and a misreading of what the legislature generally intends when it assigns a complex task to an administrative agency? The case of Rickenbacker and Baker indicates that the macro level process that Elias‘ theory suggests must be mediated by micro level considerations. Clearly, these were two airline executives who, at least at first, did not share the regulatized attitudes that characterized the industry in the CAA and CAB era. The divergence is certainly explicable in human relations terms.. Rickenbacker became a pilot nearly a decade before the Air Commerce Act instituted licensing, and was also an airline executive, however briefly, in the chaotic era of the late 1920s after the Kelly Act privatized airmail service. 160 Baker, although never a pilot, also began his career as an airline executive in the late 1920s. They thus belonged to an earlier, less settled era, somewhat similar to the illmannered Middle Ages that Elias describes. Independent of their specific background in aviation, however, both Rickenbacker and Baker were prickly, individualistic, politically conservative people who might have been less tractable than their colleagues in any event. They thus serve as example of the micro level limits of New Public Governance. Scholz‘s game theory approach to implementation helps explain the CAB‘s treatment of these two executives, and serves as an alternative to the obvious hypothesis that they were simply being punished for their political views. According to Scholz‘s theory, Rickenbacker and Baker were defectors from the optimal, repeatplayer strategy in a Prisoner‘s Dilemma game. The optimal agency response in this situation is to defect in turn, following the TIT FOR TAT strategy that Axelrod found most effective. According to that strategy, the agency should then await the next action by the regulated

160

Six became a pilot in 1927, when licensing was already in place, and did not become an executive until 1935. See Gorn, supra note [ ], at 171-73.

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party. If it cooperates, the agency should cooperate as well; if it defects on the next move, the agency should do the same. A plausible way to interpret the course of action under that the CAB adopted regarding Eastern and National Airlines is that Rickenbacker cooperated in the years before World War II, and generally received favorable treatment. His mail subsidy rate was cut in 1939 by 50%, which obviously represented a loss of income, but a CAB examiners‘ recommendation that the Board also recapture excess subsidies for the previous three years was rejected. 161 As Rickenbacker turned more truculent after the War, the CAB regularly authorized competition on its major routes and denied its applications to acquire new ones. One can theorize that the Board was waiting for Rickenbacker to change his attitude toward passenger service, and to the Board itself, before giving Eastern more favorable treatment. Rickenbacker, however became increasingly hostile as the 1950s progressed; at one point, ―he stormed into the office of CAB chairman L. Welch Pogue and launched a tirade, pounding on Pogue‘s desk with his fist while sweeping a row of books onto the floor with his other hand.‖162 Seeing no possibility that he would turn cooperative, and understanding, at least intuitively, that the Board would not cooperate until he did, Laurence Rockefeller demanded his resignation. In contrast, Baker‘s religious conversion can be interpreted as signaling his willingness to comply with CAB policy. Of course, he did not need to be so dramatic in order to send this signal, at least according to game theory. All he needed to do is end his resistance to the agency‘s policy by settling the pilot‘s strike, which he did. But he was also facing a dismemberment order because of his airline‘s parlous financial situation, and mere cooperation with CAB policy would not necessarily allay this larger concern. In fact, it would have been difficult for him to have sent any immediate signal that would do so; it would take time to turn the company around, and it would probably have been impossible without favorable route assignments by the agency. So instead he devised a signal to indicate that he would be adopting a cooperative strategy for all future turns. Not 161

Lewis, supra note [ ], at 264-65. Id. at 272. Lewis speculates that Rickenbacker may have been consciously putting on an act, but it was not an act that was likely to impress the Board with his willingness to cooperate. Based on the biographical accounts of Nyrop, Smith and Six, it is hard to imagine any of them engaging in this behavior, even as a strategy. 162

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only did he invoke a powerful and widely-shared belief system to make his commitment credible, but he also linked it to a popular and generally respected religious figure, who had the capacity to condemn him if he reneged.163 This is not quite TIT FOR TAT, of course. TIT FOR TAT, as Axelrod notes, ―has a memory of only one move‖; 164 it is quasi-static. Baker was attempting to send a signal that he would cooperate on all future turns, in place of his ability to send a convincing signal with respect to his financial condition on the turn that was occurring at the time. If Baker‘s action is viewed from this game theory perspective, then the CAB may have adopted the optimal strategy in response. It accepted his promise regarding future turns and abandoned its effort to dismember National, but it withheld its full cooperation to determine whether Baker would in fact defect, since he promise was not fully enforceable. It only granted National one minor route expansion, and it authorized additional competition on its bread-andbutter route from New York to Miami. Baker, unlike Rickenbacker, was able to exercise the self-restraint to continue his cooperative behavior, and finally, a decade later, the CAB turned fully cooperative and granted him one of the most desirable routes in the entire industry. This account seems preferable to the political explanation that may seem more obvious at first. Both Rickenbacker and Baker despised the Democratic administrations that had instituted CAB regulation, but Rickenbacker did well under the Roosevelt Administration as long as he kept himself under control, while he ended up in regulatory hell, and Baker continued in regulatory purgatory, under Eisenhower. Thus, even when cooperation prevailed at the macro level there were limits to a cooperative approach at the micro level. This is not surprising; Elias‘ theory does not, and could not, predict that every single nobleman would internalize the norms of courtly life and royal domination. A theory of this sort can only account for broad patterns of behavior. Just as European monarchs of the seventeenth and eighteenth centuries undoubtedly had strategies to deal with nobles who, because of background or personality, would not comport with the prevailing standards of conduct, so any agency must have a 163

See Jon Elster, Ulysses Unbound 69 (2000) (―One can impose costs on oneself by announcing publicly that one is going to quit, thus raising the stakes by adding shame and loss of prestige to other costs of relapse.‖) 164 Axelrod, supra note [ ], at 58.

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strategy for dealing with ―bad apples.‖ 165 TIT FOR TAT is such a strategy. Because it is a nice strategy, it can be viewed as one that is adopted within the context of a larger scale strategy that moves from command and control to cooperation as the regulatory system evolves. It therefore represents a second boundary of New Public Governance.

D. Deregulation and Beyond

The regime implemented by the CAB is a classic example of comprehensive regulation and, as is common with this approach, it granted the regulatory agency extensive control over the industry. Public support for this control ultimately collapsed, and commercial airlines were deregulated by the Carter Administration. 166 This naturally creates retrospective doubts about the wisdom of the entire undertaking. It is possible to set these doubts aside by limiting the question for this article, and for New Public Governance in general, to instrumental rationality167 -- how society effectively implements whatever policies its democratic leaders choose. Because this may seem both arbitrary and contestable, the underlying validity of the regulatory program merits at least brief consideration in this concluding section. At the time the CAB was created, the overriding concern was not economic efficiency but the development of passenger air travel. Federal officials believed that people would not patronize commercial airlines in sufficient numbers unless the service was reliable, pleasant, and sufficiently well organized to convey a sense of safety. In fact, air travel in its early days was a punishing experience. A trip across the country required several stops, not only because fuel capacity was limited but also because the airplanes flew at less than 200 miles per 165

Bardach and Kagan, supra note [ ], at 64-67. See Derthick, supra note [ ], at 143-73; McCraw, supra note [ ], at 229-99; Peterson and Glab, supra note [ ], at 49-89; Petzinger, supra note [ ], at 86-105; Anthony Sampson, Empires of the Sky at 133-46 (1984); Jagdish Seth, Fred Allvine, Can Uslay and Ashutosh Dixit, Deregulation and Competition: Lessons from the Airline Industry (2007). 167 See Habermas, supra note [ ], at 243-70 (Weber‘s idea that modern law is positivistic does not mean that morality is absent from government, but rather that it move from the level of law to the level of public policy) 166

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hour.168 Cabins were under-heated, unpressurized, and noisy. 169 As one passenger reported, at the end of a day‘s travel, ―my bones ached and my whole nervous system was wearied from the noise, the constant droning of the propellers and exhaust in my ears.‖ 170 Many planes did not have toilets; if some of the passengers needed to relieve themselves on the relatively long flight from Los Angeles to Phoenix, the pilot would land in ―Desert City,‖ which consisted of a gasoline pump and two outhouses.171 The largest passenger planes were small by modern standards, having fewer than 20 seats and were often buffeted by turbulence. Airsickness bags, a curiosity on today‘s airplanes, were used frequently, but not always efficiently; cabins often needed to be hosed down between flights.172 Western Air Express responded to this problem by providing windows that could be opened so that passenger could lean out of the airplane to throw up.173 Safety was a serious concern, of course; one airline attempted to reassure its passengers by providing them with a helmet, goggles, and a parachute.174 Under these circumstances, the policy of consolidating airlines into a few large carriers that could inspire confidence, afford to provide amenities, and finance improved aircraft design made a certain amount of sense. So did the elimination of price competition, which induced airlines to compete on safety and comfort.175 The judgment was that commercial air travel possessed a number of positive externalities that would only be realized if passenger travel was encouraged in some way. Moreover, the economists‘ preferred solution of a free, unsubsidized market was simply not available to 168

Davies, supra note [ ], at 130-31, 651-59. The DC-1, 2 and 3‘s, which flew 17080 miles an hours and had a range of 500 miles, revolutionized passenger travel in the pre-CAB era. The Fokker Super Universal had a range of 740 miles, but a top speed of only 118 mph; the Ford tri-motors flew at 100-10 mph and the Lockheed Vega flews 135 mph. 169 Heppenheimer, supra note [ ], at 25, 73. 170 Id. 171 Smith, supra note [ ], at 115. 172 Heppenheimer, supra note [ ], at 25; Petzinger, supra note [ ], at 9. 173 Heppenheimer, supra note [ ], at 73.. 174 Petzinger, supra note [ ], at 9. There were also other hazards; a number of passengers died when they walked into a turning propeller. Heppenheimer, supra note [ ], at 25. 175 As note above, pp. [ ] infra, Eddie Rickenbacker‘s refusal to respond to this inducement was at least as important as his anti-government politics in alienating the CAB.

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American policy makers because European nations were directly subsidizing commercial air travel, with Nazi Germany‘s Lufthansa line conveying a particular sense of threat.176 Had American commercial airlines not developed a passenger trade, these subsidized European carriers would have taken control of the American market. The comprehensive regulation that the CAB imposed seemed only mildly-interventionist by comparison with outright subsidies, and necessary if the United States was to keep pace with other modern nations. In fact, U.S. companies became the dominant force in world commercial aviation after World War II, providing evidence that the CAB‘s regulatory system was a resounding, if not unqualified success.177 But air travel did not become truly comfortable, and thus commercially secure, until jet aircraft were introduced in the 1960s. 178 At that point, the CAB‘s comprehensive system of regulation lost its rationale. Thus, the major problem with this regulation was not its original creation, but the fact that it lasted some 15 years too long. That is certainly not ideal, but it is not catastrophically bad either; democratic decision making takes time, and it may not be reasonable to expect elected officials to act with any greater celerity. Thus, there is no reason why the regulatory authority should have resisted the statutory program it was authorized to implement, and the question of the best strategy for it to use in implementing that program remains a valid one. A further question, suggested by New Public Governance literature, is whether the change would have occurred sooner had public officials been more responsive to private parties, and more willing to adjust their norms as well as their implementation strategies on the basis of a cooperative relationship with the regulated parties. One difficulty with this idea is that the major regulated parties were the airline companies; having been awarded lucrative routes and protected from competition, they rather liked the regulatory scheme. Perhaps a deeper difficulty is that the policy implemented by the CAB had been adopted by Congress, as the representative of the people. While it certainly allowed a great deal of discretion – discretion that the CAB exercised aggressively – its basic contours could not be 176

Heppenheimer, supra note [ ], at 14; Sampson, supra note [ ], at 26-36; Smith, supra note [ ], at 87-88. 177 Sampson, supra note [ ], at 77-86; Smith, supra note [ ], at 311-26 178 Davies, supra note [ ], at 508-29; Heppenheimer, supra note [ ], at 196-226; Petzinger, supra note [ ], at 18-19. The first commercial jet aircraft flights occurred in 1958.

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altered without challenging Congress‘ role as our primary policy maker.179 True normative debate about our basic choices, as Habermas suggests,180 is best pursued at the level of democratic politics, however messy or distasteful that process sometimes seems.

Conclusion This article has attempted to delineate two boundaries of New Public Governance‘s cooperative approach to regulation. The first, derived from Norbert Elias‘ theory of the civilizing process, operates at the macro level. It suggests that regulation is a dynamic rather than a static process, that is, the motivations and attitudes of the participants change over time, and in relation to their previous history. The change, which has been characterized here as ―regulatizing,‖ is that the regulators and the regulated parties grow accustomed to each other. As a result, regulated firms internalize the norms of the regulatory regime, and become increasingly willing to behave in a cooperative manner. The regulatory agency, in response, tends to become more cooperative as well, unless some external factor such as politics has rendered it dysfunctional. As this shift occurs, the New Public Governance approach becomes increasingly effective, and the need for adversarial, command and control regulation decreases. The second boundary is a static one, and continues to exist even after the regulatizing process has occurred. It operates at the micro level of specific firms, rather than the macro level of historical trends, and concerns those firms that continue to be truculent or resistant to the regulatory regime. Sometimes, such resistant results from personal or institutional mindsets, but it can constitute strategic behavior if the agency is invariably cooperative and fails to deploy the sanctioning authority it has presumably been granted. The optimal strategy, derived from game theory, appears to be one where the agency cooperates until it receives evidence that the regulated firm is

179

The second Bush Administration pursued a strategy of undermining regulatory programs it disliked, but could not get Congress to repeal, by choosing political appointees who opposed the program that they were supposed to run, leaving staff level positions unfilled, and indicating that regulatory initiatives were unwelcome. 180 Habermas, supra note [ ], at 243-70.

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consciously or negligently disobeying, and then imposes sanctions until the divergent behavior is corrected. All of this is a matter of regulatory strategy, not of public morality or substantive policy. If the regulations are counterproductive or improper, it may be better for society if firms disobey them. That is a question for a different and broader inquiry. The issue here, which New Public Governance has so effectively placed on the agenda of regulatory theory, is how we implement public policy in the most effective manner possible. It is the democratic process that must ultimately set that policy, but, in a modern industrial state, it is only the regulatory apparatus that can enforce it.

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