to be doing, the answer might reduce to four words: “serve the public interest.” This phrase, “the public interest,” occurs over and over in regulatory statutes. It is a key both to the history of regulation and to the reasons why the agencies have pleased so few of the American people.

The phrase has a long history in English law. One of its most memorable nonlegal uses came in Adam Smith’s famous treatise, The Wealth of Nations , published in the same year as the American Declaration of Independence. Smith was at pains to show how individual self-interest in a competitive market system inevitably benefited the society as a whole:

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest , nor knows how much he is promoting it. … and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. [Italics added.]

For Adam Smith, and for the classical economists who followed him, the operation of the free market not only served the public interest, but was virtually synonymous with it. This is why the “invisible hand” became the bestknown metaphor ever coined by an economist ; and economists are the most notorious metaphorists in the academic world.

In nineteenth-century American society, the operation of the classical market often did coincide with “the public interest” as perceived by policy makers and perhaps by most of the American people. In the market-oriented culture of the time, productivity and growth usually seemed to promote the overall good of society. Americans generally allowed the “laws” of the market to control their economic decisions. There were compelling reasons for this emphasis, of course. Resources seemed inexhaustible. The American Revolution had been fought, in part, against some of the same British economic policies that Adam Smith had criticized in The Wealth of Nations . Most important, the very meaning of America was individual opportunity, a necessarily short-run phenomenon. Long-range implications—say, beyond a generation—were hard to visualize. Even when the government did intervene, as the states did in financing canal construction, or the federal government did in helping to build the transcontinental railroads, the controlling purpose was promotional assistance to the market. The pay-off would come quickly, or so most Americans believed.

The greatest virtue of the market as regulator was its instantaneous manipulation of supply and demand through the price system. As a mechanism for short-run operations of this type, it had no equal. It still has none to this day. But

it could not, and cannot, function very well beyond the next alteration of supply or demand. Thus the market was of little help in protecting society against the exhaustion of natural resources. Nor could it install a floor of living standards below which society could not in good conscience allow its members to sink. Nor could it prevent new industrial processes from exacting a frightful toll of human misery, in lives or limbs lost and existence stunted.

Since the market could not regulate such matters as industrial safety, other regulators had to be found. Belatedly, state legislatures began providing rules for the safe operation of such new devices as railroad trains—incredibly dangerous machines for a society accustomed to the speed of the buggy and the mass of the wagonload. Later, after the turn of the twentieth century, “industrial commissions” materialized to regulate factory safety, and to administer the new workmen’s compensation laws passed by the states. This movement, a part of what in Europe was called “social democracy,” came late to the United States and only after a generation of journalistic muckrakers had stirred up Americans of the Progressive Era, much as Ralph Nader has recently done for those Americans’ grandchildren. That so many commissions of various types originated during the Progressive Era points up the reformist impetus of regulation itself. It also furnishes another reason why the agencies so often seemed to fail: too much was expected of them by their sponsors, as is often the case with other kinds of reform legislation.

Besides, there is nothing inherently humanitarian about regulation. Just as the focus of life in nineteenth-century America was more on the wealth created by industrialization than on the human cost ofthat wealth, so regulation dealt first with economic, not humanitarian, concerns. Businessmen themselves were the first to perceive the inadequacies of the Smithian market in the face of new economic imperatives and create regulatory mechanisms within the business system that would short-circuit the competitive market. They themselves were the first to control prices, outputs, and entry into various industries, and they did it to minimize their own risks. By the late nineteenth century, the inherent economic tendencies of certain types of business had made them so large and expensive that some sort of adjustment beyond the Smithian market was essential. Businessmen therefore invented the long list of devices for consolidation, collusion, or informal cooperation that frustrated the competitive forces of the market, and have frustrated consumers ever since. These devices—pools, informal cartels, holding companies, oligopolies—did not work equally well for every industry. They functioned best for those that by their nature were more efficient on a large scale. That such companies as United States Steel and Standard Oil prospered, whereas others like United States Leather and Standard Rope and Twine did not, tells us more about the nature of these industries than about the shrewdness or wickedness of their leaders.

Public economic regulation of the modern commission type emerged

in response both to some of these private business efforts to evade competition, and to the problems of a few industries that tended toward “natural monopoly.” Imagine a city in which ten electric companies compete for the consumer’s dollar, just as grocery stores do. All ten could tear up the streets, run their lines into houses and business establishments, and march their transmission towers across the local landscape. Or imagine a pair of small nineteenth-century cities connected by twenty different railroad tracks laid down by competing rail corporations. None of the railroads would get enough freight to make a profit, and most of them would soon go bankrupt. These industries, and a few others like them, have the peculiar character of being more efficient under monopolistic conditions because their economies of scale are so large. It takes an immense amount of money just to go into the railroad or utility business. But once the tracks are laid, or the lines strung, it costs relatively little more to carry additional freight, or to transmit additional current. Thus the cost of doing a lot of business is not much more than the cost of doing a little.

On the other hand, with just one railroad serving a city, or just one electric company, the consumer can no longer buy from a competitor if he is not satisfied with the service. He either buys from the electric company or he goes without electricity. As modern technology made certain fingers of Adam Smith’s invisible hand arthritic, some new means of regulating natural monopoly industries had to be found. In part, regulatory agencies first appeared as a surrogate for competition, a substitute for the lost discipline of the Smithian market.

Commissions were the characteristic American solution to the problem, but they were by no means the only possible alternatives. In many European nations, even those with capitalist economies, the state often went into business for itself. The publicly owned Prussian railways, for example, were an international model of efficiency. To this day, many transportation and electric utility enterprises abroad are publicly owned—and so are a few in the U.S. But in nineteenth-century America, public ownership seldom struck policy makers as the best solution to the problem of natural monopoly. For one thing, it smacked of socialism, though this argument belonged more to the twentieth century than to the nineteenth. Secondly, the Founding Fathers had deliberately designed a somewhat inefficient, cumbersome, tripartite government so as to check the accumulation of absolute power often found in European governments. Then too, the federal system of overlapping state and national spheres of influence made the American context much more complicated. And finally, widespread political corruption during the Gilded Age made public ownership seem the one method least likely to succeed in practice, even though it made the best sense as a proposition in logic. As Charles Francis Adams, Jr., remarked in 1867, “One might imagine the glee of the New York ‘rings’ and bar-room politicians on

hearing that the Hudson River [Railroad] or the Erie road was to be given over to their pure hands and tender mercies. …”

Adams, grandson of one President and great-grandson of another, was an expert on railroads and a leading advocate of their regulation by commission. In 1869, owing largely to his voluminous writings and quiet lobbying at the State House, the Massachusetts legislature created a state Board of Railroad Commissioners. The governor appointed the 34-year-old Civil War veteran to one of three board positions. Adams set about his work with the dedication that had already distinguished his family’s contributions to public life for four generations. His method, again characteristic of his family, was to persuade by reasoned argument rather than coercion. He sought to show through careful analysis how the interests of the railroads could harmonize with “the public interest.” Throughout his decade of service on the Massachusetts board, he spent at least half his time simply studying the railroad problem, and writing about it. “Busy in my usual way,” notes one of his diary entries for 1870, “that is with my pen.”

Adams’ unusual emphasis on what might be termed regulation by publication accorded not only with his own talents, but with the state government’s notions of how best to deal with the natural monopoly question. The commission regulated not through lawsuits and other legal proceedings, but through suggestion and the cultivation of public opinion. “The board of commissioners,” observed Adams, “was set up as a sort of lens by means of which the otherwise scattered rays of public opinion could be concentrated to a focus and brought to bear upon a given point.” Of course, behind the carrot of the board’s gentle reasoning stood the stick of legislative power. The legislature of Massachusetts customarily followed the commission’s recommendations for new laws, and itself continued to attend carefully to the state’s railroad policy.

Adams’ avoidance of coercion and adversary proceedings worked well for that state and that time. Moreover, the investigatory function continued to have an important role in regulatory practice in the future, both for the states and in the federal government. It did not, however, provide a complete solution to all the problems that regulators encountered in other periods and for other industries.

Indeed, at the very time that Adams was trying to regulate with his pen, other commissions were taking up the sword. A group of state agencies in the upper Midwest boldly fixed the maximum rates railroads could charge, then forcibly tried to make their rulings stick. The litigation that resulted culminated in the famous case of Munn v. Illinois (1877), in which the Supreme Court recognized the power of state governments to regulate industries that were, in the Court’s words, “affected with a public interest.” These were industries essential to the well-being of society; and many of them were “natural monopolies” as well. As time passed, the number of industries “affected with a public interest” in

the logical sense grew so large that the doctrine lost its usefulness as a legal distinction—though it remained the fundamental guide for administrative regulation by commissions.

Although many industries such as electric and gas utilities remained sufficiently local in nature to permit state regulation, the railroads quickly outgrew state boundaries. The railroad business is obviously interstate in nature, not only in the East, where the small size of many states makes even short trips interstate, but also in the agricultural West, whence staple commodities like corn and wheat were sent by train to the East Coast for transportation by ship to the markets of Europe. Thus, just as the railroad industry had been the first to undergo state regulation, it also became the first to come under a federal commission.

By the 1880’s, practically every area of the country, and every interest group involved in the problem, had come to accept the need for federal regulation of interstate railroad traffic. In 1887, nearly twenty years after the first bill for federal regulation had dropped into the hopper, Congress finally passed the Act to Regulate Commerce. This landmark piece of legislation created the Interstate Commerce Commission. In providing for a board of five presidentially appointed commissioners to serve staggered six-year terms, it set the pattern followed by most subsequent regulatory statutes. The ICC was to be independent, with no direct superior in the Cabinet. In determining the fairness and reasonableness of railroad rates, the commissioners in effect performed the functions of a court. In enforcing their decisions (a power they received later, after a long series of strengthening acts of Congress), they behaved like the executive branch. And in making rules and regulations for the industry, ranging from safety ordinances to the planning of a national transportation system, they performed legislative duties.

The Interstate Commerce Commission, then, had “quasi-judicial, quasi-executive, quasi-legislative-” functions, to use the language of the regulators themselves. This mixture of governmental powers traditionally held separate in the American system became a hallmark of regulator doctrine. It also became a target for critics. How, they asked, could one agency simultaneously be legislator, prosecutor, judge, jury and sheriff? To whom were the regulators responsible? Did not the combination of functions violate the system of checks and balances that lay at the heart of American government? Did not the agencies really constitute, as one influential study in the 1930’s concluded, “a headless ‘fourth branch’ of government,” responsible to no one?

In reply to these charges, the regulators and their defenders pointed out that the agencies are actually under tight control by all three regular branches. The executive appoints the commissioners and usually chooses the chairman. The legislature controls their budgets and defines their powers. The judiciary reviews their decisions. Furthermore, say regulation advocates, the combination of functions is essential if the commissions are to do their job expertly, quickly, and apolitically. Since it was the complexity of

modern business enterprise and the appearance of new forms like natural monopoly that made regulation necessary in the first place, the existing three branches of government were ill-equipped to regulate: the executive branch was too politically oriented; the legislature was too inexpert and impermanent; and the judiciary was too slow. Had they been up to the task, commissions need never have been created. To perform adequately, the agencies had to borrow powers from each branch. As the leading theoretician of administrative regulation, James M. Landis, wrote in 1938

To essay what we cannot do is often worse than to do nothing, for failure destroys too easily the dream of better ways of living. So much in the way of hope for the regulation of enterprise, for the realization of claims to a better livelihood has, since the turn of the century, been made to rest upon the administrative process. To arm it with the means to effectuate those hopes is but to preserve the current of American living. To leave it powerless to achieve its purposes is to imperil too greatly the things that we have learned to hold dear.

Landis, who served on three different federal regulatory agencies, helped pioneer the new field of “administrative law.” One of the central thrusts ofthat development was an effort to insure to all parties involved in regulation the “due process of law” guaranteed everyone by the Fifth and Fourteenth amendments. The movement culminated in the Administrative Procedures Act of 1946, which prescribed standard practices for administrative agencies in order to assure that everyone got a fair hearing.

Some of the unintended consequences of the growing preoccupation with procedure in regulatory affairs were a dominance of regulation by lawyers; a poor record by the commissions in avoiding red tape; and (in the opinion of many economists) an even poorer record in promoting industrial efficiency. In other words, the agencies have often been accused of failing in the very missions in which they were expected to excel. If they were supposed to be quick, expert, and apolitical, then even the most generous analyst would have to conclude that on the whole they have not done a good job. Some of the crises they were supposed to alleviate have instead grown worse.

Industrialization itself gave rise to the natural monopolies that in turn stimulated the creation of railroad and utility commissions and agencies like the Federal Trade Commission (1914). Periodic crises in particular industries precipitated the creation of other federal commissions. Chaos caused when early radio broadcasters overlapped one another’s frequencies, for example, forced Congress to institute a Federal Radio Commission in 1927. This agency was to allocate the finite spectrum of frequencies among the many applicants so as best to serve “the public interest.” In 1934, Congress broadened the agency’s authority and renamed it the Federal Communications Commission. The FCC now regulates television and telephones as well as radio broadcasting.

A similar crisis in the electric utility

industry led to laws creating (1920), then strengthening (1930, 1935), the Federal Power Commission. The FPC received jurisdiction over the natural gas industry in 1938, and saw its powers over natural gas field prices much augmented by a Supreme Court decision of 1954.

Still another crisis led to the creation of an agency to regulate the stock exchange. The Wall Street Crash of 1929, and the long depression that followed it, demonstrated the competitive market’s failure to insure proper behavior by brokers and corporate executives responsible for new security issues. The result was the Securities and Exchange Commission, created in 1934.

A year later, Congress added trucking to the jurisdiction of the Interstate Commerce Commission, in response to a crisis in that industry and the inability of the ICC itself to regulate railroads while the rails’ major competitors, the interstate trucks, went unregulated. Aviation came under federal regulation in 1938, again in response to chaotic, destabilizing competition that caused a crisis within the industry. In this case, as with broadcasting, the industry itself asked for federal regulation.

By the end of the New Deal, the outlines of a modern system of state and federal regulation were complete. The state public utility commissions, now assisted by the Federal Power Commission and the Securities and Exchange Commission, became gradually more effective—though critics doubted that they could ever reach the goals set by their original promoters. Six major federal regulatory bodies, from the ICC to the new Civil Aeronautics Board, oversaw the operations of numerous industries. The Federal Trade Commission, revivified somewhat by Franklin D. Roosevelt’s appointees, attempted to strengthen the regulatory power of the Smithian market in naturally competitive industries.

In the years after the New Deal, the regulatory agencies gradually began to lose their reputations for service to “the public interest.” Part of the reason was a shift in national priorities, and the emergence of a booming prosperity that dissipated the atmosphere of economic crisis characteristic of the 1930’s. The problems of the 1940’s and igso’s had more to do with war and Cold War than with the behavior of businessmen or the efficacy of Adam Smith’s competitive market. As regulation seemed to become less important, regulators seemed more concerned with preserving the status quo than with policing the nation’s economic life.

But a new kind of crisis brought another wave of regulatory legislation. This was the energy-ecology-cost dilemma, first felt in the i goo’s and likely to persist for at least the remainder of the twentieth century. The consumer movement, itself in part an outgrowth of the new crisis, also contributed to the creation of new regulatory commissions. Water and air quality boards were created within the states while the Environmental Protection Agency and Consumer Product Safety Commission were established by the federal government. These agencies, both state and federal, dealt not so much with price, entry, and competition as with the quality of the environment and the safety of consumer products.

By

the mid-1970’s, the steady growth of regulatory agencies had contributed to the evolution of a large and complex system of competing governments. The resulting situation did not represent a rational response to presentday problems, but instead a merger of two historical processes: the early reactions of government to industrialization and the rise of Big Business; and the series of crises that have occurred since the 1920’s. In combination, these forces produced a network of bureaucracies that competed with each other and sometimes tended to cancel each other out. One agency could not grow without giving some other agency the incentive to do likewise. The result was that both grew. The impact of the Environmental Protection Agency’s regulations, for example, forced state and urban governments to monitor local business behavior and increase their own staffs. HEW pursued affirmative-action programs, and in so doing forced universities and other institutions to complete innumerable questionnaires certifying their compliance with federal guidelines. The Civil Aeronautics Board, the Department of Transportation, and the Interstate Commerce Commission competed furiously for influence in shaping the nation’s transportation policies.

In part, the growth of regulation reflects the rise of Big Government. Yet even the most inflated estimates of the regulatory sector show it to be a tiny part of the total personnel or budget of the federal government. If all possible federal regulatory agencies were counted, the result would be a total of about twenty-five, with about 100,000 employees. Contrast these figures with the total number of public employees in the mid-1970’s: 2.7 million federal (excluding uniformed military), 3.1 million state, and 8.6 million local. The surprising fact is that during the last two decades the great growth of the public sector has been in state and local government, not federal.

Even so, regulatory agencies have also grown (see box). More striking than their growth is the failure of any to disappear. Why, one might ask, is it so much easier to create any kind of governmental body than to abolish it? Why do we have overlapping city, borough, and county governments, together with water, school, and public utility districts, all subject to state and federal legislation, and in turn to state and federal courts and regulatory agencies? Why don’t we streamline the government, and thereby simplify the whole complicated process?

Perhaps someday we shall. In the meantime, we might remember that the American government was designed in the first place to block the growth of absolute power. That design has proved successful to a fault. The Founding Fathers often chose weakness over efficiency in the interest of freedom. Then, too, public agencies, like some of the industries they regulate, are not subject to the discipline of the Smithian market place. They compete with each other for the taxpayer’s dollar, but none of them is ever put out of business because its cash flow was poorly planned, or because its inventories grew too large, or because a

competitor began to make a better product. Finally, interest groups in the private sector come to depend on the agencies, developing ad hoc alliances with them that resemble the alliances between defense contractors and the Pentagon. It is this symbiosis of business and government that lies at the heart of current complaints from the political left. It accounts for the recent clichés about industries capturing agencies, and about agencies betraying “the public interest.”

The truth is that the interests of industry and “the public interest” are almost never precisely opposed, just as they are rarely identical. Most often, the relationship is fuzzy and ambiguous, comprehensible only after careful thought about particular situations in particular industries. The word “capture” is therefore slightly off the point; one captures one’s enemies, not one’s friends, and not casual bystanders. To talk of capturing an agency postulates an adversary relationship between government and business that is by no means a constant condition in the regulatory process, either in practice or in theory.

In their efforts to serve “the public interest,” however that elusive entity may be defined, regulatory agencies perform a surprisingly diverse set of functions, some of them in open conflict with others. The Federal Trade Commission, for example, is supposed to promote maximum business competition. Yet other agencies, such as the ICC, the FCC, and the state utility commissions, limit competition in order to prevent chaos in particular industries, some of them natural monopolies. The Civil Aeronautics Board is supposed to promote airline development, keep fares to just and reasonable levels, and see to it that the nation’s cities—even some quite small cities—are provided with regularly scheduled air service. No agency could do all these tasks well, because the tasks themselves conflict with each other. Each task is a part of “the public interest,” but which one of them should take priority over the others?

Very often in regulatory proceedings, “the public interest” is far from a simple, self-evident proposition. Besides varying with time, and with the industry involved, it varies with the person or interest group defining it. The current energy-ecology-cost dilemma is perhaps the most dramatic example. It is extraordinarily difficult to say just what “the public interest” is in such matters as the burning of stripmined coal, the price of natural gas, or the comparative virtues of airlines, passenger trains, and automobiles as methods of transporting persons.

That these kinds of issues are the very ones that customarily come before regulatory agencies suggests the overwhelming reason why the agencies themselves are so controversial : the issues they address are steeped in discord. If the issues were not inherently difficult, it would not have been necessary to create regulatory agencies to deal with them.

This is not to say, with Alexander Pope, that whatever is, is right; that all existing agencies are necessary, and are doing a good job. Some of the regulatory functions once essential are now less

so. Sometimes the same technology that crippled Adam Smith’s invisible hand can cure it, as has happened in parts of the transportation industry. ICC policies predicated on the existence of railroad monopolies, for example, make little sense in the presence of competition from trucks, barges, automobiles, and airlines. Thus, a natural monopoly in one era can be overtaken by events in another, and can find itself again subject to the discipline of market competition.

Of all the various criticisms of commissions, two seem most valid. The first is that their personnel have not generally been of the highest caliber the nation can offer. Historically speaking, men like Charles Francis Adams, Jr., and James M. Landis were the exceptions, not the rule. Even considering the many dedicated and talented men and women who have served on regulatory agencies, the inescapable conclusion is that, as a whole, commission service has not attracted the talent that, say, the federal judiciary has. The fault, of course, lies as much with the executives who appointed them as with the commissioners themselves. Positions have often gone to political hacks, or to cronies of governors and Presidents, or to defeated legislators who seemed worthy of a consolation prize. If, on the other hand, regulatory appointments go to specialists, the problem of the “revolving door” can arise. Numerous observers have noted the interchangeability of personnel between agency and industry, the easy shifts back and forth between public service and private employment. Reformers argue that the “revolving door” is conclusive evidence of the capture of agencies by regulated interests. Defenders, however, point to the exclusive possession of expertise within the private sector. They say that the choice often lies between someone with an industry background, on the one hand, and someone ignorant of the industry’s characteristics, on the other.

Efforts to halt the spin of the “revolving door” have raised still other difficulties. Such remedies as the “twoyear rule,” prohibiting former regulators from taking positions within regulated industries for two years after leaving an agency, have tended to discourage many capable persons from entering public service at all. Then too, since controversy and public dissatisfaction are largely built into the regulatory process, it could well be that many otherwise interested and talented persons have avoided it as too dangerous to their careers. The problem, in short, is not a simple one. But the one reform all critics of regulation might endorse is that in the future the field might attract, and executives appoint, better-qualified men and women.

The second justifiable criticism would not be easily remedied given the very best personnel. This argument, amply documented by recent studies, is that regulation sometimes wastes large amounts of money. The ICC, for example, has often pursued policies that cause particular kinds of freight to seek out the least efficient mode of transportation. Some mistakes of this nature could be corrected by common sense. But the more serious point is that regulators often face

impossible choices between economic efficiency and fairness to all affected parties. The commissions have sometimes succumbed to a temptation to compromise disputes by splitting the difference, giving in now to one interest group, now to another, and occasionally to the consumer. Several conditions have promoted this kind of pattern: the substantial economic and political strength of some of the industries under regulation; the domination of the regulatory process by lawyers, whose stock-in-trade is compromise and due process; and the scant influence, until recently, of economists, whose professional prejudices lie on the side of efficiency at the expense of due process.

For both reasons—mediocre personnel and the trade-off between efficiency and due process—”regulatory reform” will very likely persist as a perennial issue in American politics. Regulation will continue to be variously perceived by different constituencies, each with its own definition of “the public interest.” As in so many other ways throughout American economic history, the electorate will continue to encounter problems that force it to choose between a full hearing and substantial just ice for all, on t he one hand; and on the other, economic efficiency, which necessitates injuring some parties in order to help others judged more important to the well-being of society. Regulators themselves will continue to try to serve so many masters—legal, economic, political, cultural—that they can serve none of them very well.