Regardless of the normative conclusions of the economics of government and society, its study reveals some interesting phenomena:
1.) The Dilemma of Enlightened Policy
Say you’re a politician. You want to regulate the financial industry to prevent another collapse a la 2008.
Case A: If you write the bill yourself (or have your aides do it, or someone in your pocket, etc.), it will be woefully unequipped to control the financial industry, because you are not a financier and therefore do not understand their world as well as they do. Simply put: Who are we to govern people whose world we do not understand? That lack of understanding becomes poor policy, no matter your intentions.
Case B: If you ask a financier for advice in writing the bill, the financier is influenced by his vestments and associations so that, even given the best intentions, s/he is biased to develop policy that helps her clan more than it hurts (or, rarely, hurt them more than it helps the consumer). In asking a financier to develop financial regulation, you are asking the financial industry to regulate itself, or worse, giving them power to regulate their foes. If you assume self-regulation doesn’t work and therefore external regulation is necessary, return to case A. If you assume self-regulation works, then you don’t try to regulate the industry in the first place.
In effect, a politician seeking to regulate an industry must choose between ineffective policy or rigged policy.
2.) The Problem of Power Concentration
As power becomes more concentrated, it becomes easier to purchase and more susceptible to corruption. Centralized agencies are generally easier to administer, but are susceptible to this problem. Thus, power dispersion is key to a more efficient society, because it minimizes corruption.