Cases Searching for a Theory

...Whether the government requires firms to adopt capital-intensive methods of pollution control or methods with low capital investments and high operating costs affects production patterns, he asserts...

...In the midst of today's deregula-tory frenzy, a thorough discussion of how regulators could balance distributional and social objectives with those relating to efficiency would be much in order...

...What we have here are cases in search of atheory...

...Syrup makers, whose earnings depend on the total volume of product sold, are hurt, whereas bottlers, for whom higher margins can outweigh the loss in revenue from reduced sales, may escape harm...

...The author's overarching theme is what he labels the "Iron Law of Public Policy": Any change in government policy will have consequences in the marketplace, creating both winners and losers...

...The major exception is his analysis of the impact of pollution regulations on the pulp and paper industry...

...For example: • Requiring deposits for soft-drink containers to reduce litter raises the cost of soft drinks and slackens demand, thus changing the distribution of profits in the industry...

...Reviewed by Marc Levinson Senior editor, "Dun's Business Month " Let me confess at the outset that I don't think much of public administration as an academic discipline...

...After the first semester, economists and political scientists ate lunch at separate tables: The number-crunchers confidently viewed good public policy as the natural result of maximizing certain differential equations, while the less quantitatively inclined pondered political theory and worried about finding jobs after graduation...

...How many manufacturers saw a competitive edge for themselves in the 1981 Reagan tax cut, never imagining that the budget deficits resulting from their lowered tax bills would cause the dollar to soar and aggressive foreign competition to swarm over the U.S...

...Leone can tell us the outcomes of past regulatory cases—these are a matter of history...

...Leone's Iron Law seems commonplace enough, yet it is undeniable that government officials and the public at large often fail to grasp the way an apparently unbiased piece of legislation can impinge quite differently on competing firms, raising costs for one more than another, restricting the market for product A more than product B. The government actions he cites in his cases are well-chosen to illustrate his point...

...Allowing auto makers to meet fuel economy standards based on an average of all the cars they market, rather than stipulating that each model comply with the standard, benefits full-line American producers at the expense of small European manufacturers whose narrow product lines do not allow the flexibility of averaging...

...Similarly, Leone contends that a stiff fine for regulatory noncompliance is no more effective than a milder one, even though the claim is squarely at odds with his book's emphasis on the sensitivity of business decisions to changes in cost...

...Building a capital-intensive water treatment facility is not really a "fixed cost...

...Leone's treatment of these cases is generally discerning...

...How does one heed the advice to "think positively and use government to augment competitive advantages," if it is true that what advantages one firm is almost sure to disadvantage another...

...A third approach—the one taken, for example, by Harvard's Kennedy School of Government—is known as the case study method...

...Richard A. Leone, an economist who teaches at the Kennedy School, gives us case after case where government regulatory policy has had a substantial impact on patterns of business competition...

...His discussion is, on the whole, lucid and even entertaining...

...But that is probably more than the case study approach can deliver...

...What, for instance, is one to make of his dictum,'' Get the regulatory policy right and the competitive consequences are more likely to be acceptable," after 10 chapters explaining in great detail why there is no such thing as a policy that is impartially "right...

...He also maintains that "The less intrusive government can be, the lower the cost of doing business is likely to be," but this is flatly untrue: Reduced Federal regulatory intrusion implies greater uncertainty about actions by the courts and state governments, and such uncertainty always raises the cost of doing business...

...The second go-round was at a private institution that readily admitted its inability to figure out precisely what public administration is...

...My bias is based on some experience...

...The first time around, at a state university, we pretended public administration is a science: We read Administrative Science Quarterly and argued about the nature of the administrative process...

...Optimality is in the eye of the beholder, he asserts, and the effect of a policy on profits and other goals will necessarily determine how it looks to a particular firm...

...That, in a nutshell, is what is wrong with Who Profits...

...Methods with low capital outlays but higher operating costs purportedly offer companies greater flexibility in running their mills...

...henceforth, the expenditure should play no role in the company's decision about how intensively to run its paper mill...

...But in the end we are left with little more than a bunch of cases...

...They make a good read, but once we've read them, we're none the wiser...

...Prohibiting film manufacturers from tying the sale of film to processing hurts companies using conventional technology, such as Kodak, but leaves untouched competitors like Polaroid whose instant development technique makes the prohibition irrelevant...

...the reader seeking a comprehensive framework for regulation will not find it here...

...Capital-intensive methods supposedly impose "fixed costs" that force firms to operate at higher rates of capacity utilization to pay for the pollution control, making them vulnerable to cyclical declines in business...

...For reasons that need not concern us here, I've managed to pick up two graduate degrees in the field...

...Although this provides a simulacrum of real-life experience, it leaves the learner hazy on theory and uncertain as to how to apply his insights to uncommon cases...

...As is the fashion in books about business these days, Who Profits...

...After the investment is made, however, the money is gone...

...it is a "sunk cost," which is incurred prior to operation and cannot be recovered...

...Unfortunately, the rules will beoflittleusetothe well-meaning bureaucrat...

...The example, though trivial, underscores how tricky it is to gauge the competitive effects of government regulation a priori...

...So far as I can see, that is wrong...

...Evaluating the future market impact of regulatory efforts is altogether more difficult in the complex world of modern capitalism, where companies are often unable to envision less unpredictable developments...

...All too often, he argues, public officials fail to take the competitive ramifications into account when they write rules and regulations...

...By coming to understand the results of their actions on the market, policy makers can "advance social goals without unnecessarily constraining economic activity and private initiative...

...Before building the facility, the firm would be well-advised to study whether the expense could be recovered...

...What they cannot do, Leone submits, is arrive at decisions that are objectively the "best"—no matter how careful their research or subtle their analysis...

...market...

...concludes with some simple rules for public managers, numbered one through eight for easy reference...

...Students are called upon to wield the tools of economics, political science and operations research in detailed dissections of the sort of problems they are likely to encounter as public administrators...

...With either type of pollution control, the company will operate its plant so long as the sale price of that last roll of paper is greater than the variable costs the company incurs in manufacturing it...