???? Tracing the Rise of the Regulatory State: What Can a Deeper Look Tell Us About Today’s Global Tech Battles?

Our newsletter is published twice a week to keep you at the forefront of digital regulation and technology policy:

Tuesdays: The "Bridging the Gap" edition offers an accessible, academic take on key digital regulation concepts, helping bridge the gap between theory and practice for those immersed in the world of tech policy.

Thursdays: Dive deeper with an in-depth analysis and my unique perspective on a significant development in tech regulation from the past week.

?? Subscribe and follow #DigitalRegulationSeries to stay informed and engaged with insights into the evolving world of technology regulation.

#BridgingTheGap (#11)

Let’s take you back and be systematic in our approach—especially in times when AI regulation is in the daily news, and there’s sometimes a lack of awareness of how we got to where we are. The Rise of the Regulatory State, as discussed by Edward L. Glaeser and Andrei Shleifer, provides crucial historical context that helps us understand the shift from litigation to regulation as the principal mechanism of social control over business.

?? Tracing the Origins of the Regulatory State

In the late 19th and early 20th centuries, the U.S. underwent a significant shift in how it controlled harmful corporate practices. Prior to this, courts were the main avenue for addressing business disputes. However, as industries grew and corporate power surged during the Gilded Age, it became clear that litigation alone could not keep up with the increasingly sophisticated—and at times, corrupt—business practices. The courts were simply too vulnerable to subversion by wealthy corporations.

Large corporations were able to "subvert justice," using their wealth to influence court rulings through bribery, delays, and other tactics. This made it difficult for smaller entities and individuals to win cases or seek redress for industrial accidents, monopolistic practices, and other forms of corporate misconduct.

?? The Move to Regulation: An Efficient Response to Corporate Power

The Progressive Era marked the beginning of a profound shift. Rather than relying solely on courts, policymakers began to introduce regulatory agencies as a more efficient and less corruptible way to manage industries. Agencies like the Interstate Commerce Commission (created in 1887) were established to directly oversee sectors such as railroads, which had previously been under the purview of courts.

This transformation was seen as an efficient response to the corruption and inefficiencies of the judicial system at the time. By creating specialized regulatory bodies, reformers sought to minimize the ability of corporations to subvert justice and instead enforce industry standards and safety through proactive oversight.

??? Regulation vs. Courts: Why the Switch?

The model presented by Glaeser and Shleifer explains this shift by highlighting the different vulnerabilities of courts and regulators. Courts, which impose large fines or punishments ex post (after an incident has occurred), are more prone to being corrupted by wealthy and powerful corporate interests. In contrast, regulation involves proactive measures—setting rules in advance and imposing smaller, more consistent fines for non-compliance, making it harder for companies to manipulate outcomes.

Regulation emerged as a necessary tool in a society where economic and political inequality made litigation unreliable. By imposing clear rules and smaller but enforceable penalties, regulatory agencies could better ensure compliance and protect public welfare.

?? A Deeper Look into Subversion of Justice

The Gilded Age showed how corporate wealth could distort justice. Corporations like Standard Oil used bribes and legal delays to escape accountability. The authors argue that regulation became the optimal solution because regulators were harder to bribe than judges, especially when the penalties were smaller and spread out over time, rather than being large one-time sums.

The rise of regulatory agencies wasn’t just about making markets fairer; it was about ensuring justice itself wasn’t corrupted. The Progressive Era’s reforms, including the creation of the Federal Trade Commission (FTC) and the passage of antitrust laws like the Sherman Act, reflected an understanding that courts alone could not protect the public from the might of industrial giants.

?? Why Regulation Matters Today: Lessons for Tech

Fast-forward to today, and we see echoes of the same dynamics in the tech industry. Just as the railroads and industrialists of the 19th century wielded outsized influence over the courts, there is an increasingly dominant narrative that tech giants today hold significant power over modern legal and regulatory frameworks. Many countries, from the EU to the U.S., are grappling with how best to regulate technology companies, particularly in areas like AI, data privacy, and monopolistic practices.

The real-challenge now is that we live in a world where innovation is a key driver of growth. In such a scenario how to balance the flexibility, large capital requirements and technological and human capacity that are currently concentrated in a few large tech companies with effective regulation that prevents monopoly rents and advantages?

This requires not just reactive litigation, but proactive rule-making to ensure that industries, especially tech, do not outpace the ability of courts to administer justice. Just as the rise of large industrial firms necessitated a regulatory response, so too does the dominance of today’s tech companies call for a renewed but updated focus on regulation over litigation.

Unanswered Questions

• How does the history of the regulatory state inform our current approach to AI regulation?
• Can we draw parallels between the Progressive Era’s shift from litigation to regulation and today’s challenges in governing AI?
• What lessons can we learn from the past about the potential for subversion of justice in the regulation of emerging technologies?

To Keep an Eye Out

EU's AI Pact faces challenges as major tech firms hold back: A European Union initiative to speed up AI regulation faced challenges at its launch last Wednesday, 26, with Meta and Apple opting out of the non-binding Artificial Intelligence Pact. While 115 companies, including Amazon and Google, signed on, their absence underscores the ongoing friction between tech firms and regulators. This reflects rising skepticism among some companies about regulatory measures, fearing that excessive rules could stifle AI innovation. Read more .

California governor vetoes A.I. bill over too much regulation: Gov. Gavin Newsom vetoed S.B. 1047, passed on August 28th, a bill intended to regulate large AI systems through safety testing, legal oversight, and an emergency kill switch for critical risks. He pointed to the bill’s limited focus on frontier AI models and called for revisions. Read more .

China pushes for local AI chips over Nvidia: Beijing is pushing Chinese companies to favor domestically produced AI chips over Nvidia’s, as part of efforts to strengthen its semiconductor industry in response to US sanctions. Though not a formal ban, regulators are encouraging firms to use chips from local suppliers like Huawei and Cambricon. Nvidia’s stock fell after the announcement, while Chinese tech companies rush to buy its chips ahead of possible new sanctions later this year. Read more .

Germany steps up oversight on Microsoft: Germany’s competition authority, Federal Cartel Office (FCO), just flagged Microsoft as a major cross-market player, giving them more power to crack down on any anti-competitive moves. This puts Microsoft under the same scrutiny as Apple and Google, following a recent EU fine for bundling Teams with Office. Read more .

Bridging the Gap

Understanding the rise of the regulatory state is essential for those in policy advocacy and public service. The shift from litigation to regulation was a response to the challenges of an industrializing nation, and it provides valuable lessons for today’s debates on AI and technology regulation. By recognizing the historical context, we can better navigate the complexities of modern governance and work towards frameworks that are both fair and effective.

Share your insights in the comments below!

?? Subscribe to our newsletter and follow #DigitalRegulationSeries for updates and insights

Reference: Glaeser, E. L., & Shleifer, A. (2001). The Rise of the Regulatory State. NBER Working Paper Series. Read the full article .

#techpolicy #tech #technology #innovation #publicpolicy #regulation #digitalplatforms #law #politicalscience #governmentrelations #governmentaffairs #ai #academia