Introduction
Financial Accounting Theory is a very important thing for the conduct of any kind of business. This theory allows its users to understand and properly interpret the phenomena and processes that take place in the objective reality and use this understanding to one’s own benefit. There are numerous theories that constitute the general financial accounting theory, and in this paper we are going to analyze critically the two of them in order to see their possible practical implementation and their use for interpretation of events that take place in economy.
These theories are the so-called “capture” theory and “economic interest” theory that formulate the main principles of economic regulation (Posner, 335). To achieve the purposes of this research, namely the identification of main features of the two theories and their practical implementation, it will not be out of place to consider the very term “economic regulation”. Next steps will be the critical analyses of the above mentioned theories and the examples of their practical implementation.
Capture Theory
To understand the essence of the capture theory of economic regulation better, we should at first take a brief look at the very definition of economic regulation. Despite the fact that the scholars have no uniform opinion about the most fitting definition, the main idea of the economic regulation, as all scholars agree, lies in the level of governmental involvement into the economy and finance of the state: “The term economic regulation refers to implicit or explicit legislative and administrative controls over various aspects of economic activity.” (Posner, 335) Thus, the government, or smaller regulatory agencies and organization, control the growth of prices, level of wages and many other parameters of the economic life of the society (Posner, 335).
Taking this into consideration, the essence of the “capture” theory becomes clearer. The major point of the “capture” theory is that the regulatory agencies and the organizations or firms regulated by them are in the permanent interrelation which is directed at “capturing” the regulatory power by the regulated organization and the so-called “subjugated” of the regulatory agency by a regulatory firm.
Scholars argue about the very basic principle of this theory as far as, according to Roberts & Kurtenbach (1998), this theory has no theoretical basis under it. The main argument to support this statement lies in the fact that Marxists and muckrakers created a false syllogism for this theory that can not be proved if put into the real conditions.
According to Marxists, the regulated organizations are controlled by big business, i. e. capitalists. But at the same time, big business, according to Marxists, controls all the institutions of the human society and regulation of economic life is one of them. Thus, according to this syllogism, big business regulates and is being regulated by itself which is absolutely impossible. Thus, Roberts and Posner doubt the very foundations of the theory and consider another, political, approach to the “capture” theory (Roberts, 5).
The political theorists designed their own view of the above mentioned theory, and it displays considerable improvements in comparison to the Marxists one but still leaves much points open for the discussion. The central place in this variant of the capture theory is taken by the so-called interest groups that are concerned with the capture of the regulatory power, and this is one of the most important controversial points of this theory. The very name “interest groups”, as well as the further description of their functions and activities, makes this theory look like the “public interest” theory which is not discussed here.
Thus, the theoretical foundations of this theory are under great doubt as far as they display no visible difference from the ones of “public interest” theory. Furthermore, this theory makes the regulated firms the only organizations that are interested in the obtaining, or “capturing”, of the regulatory power that will benefit them. Nevertheless, the authors of this theory do not count the possible, and actually great, interest of the customers of the regulated firms, in the process of capturing the regulation power by their firms that will benefit them as well (Roberts, 6). Due to all this facts, the essence of the “capture” theory is doubted by many scholars, but nevertheless, the main points of this theory are as follows:
- economic regulation is necessary for the existence of the society;
- regulatory agencies interact with the firms regulated by them;
- these firms act in order to gain regulatory power over the agencies that regulate them in order to have more freedom of action and gain more profit;
- interest groups are the central figures of the economic life of the society (Roberts, 6).
Economic Interest Theory
The economic interest theory can, at the first, sight seem to be the developed and improved variety of the “capture” theory, but actually it is quite different in both its name and fundamental principles. The main difference is that the economic interest theory does not operate with such military terms as “capture”, etc. These notions are replaced by the concepts of supply and demand that are considered to be the moving forces of any kind of regulation in the economy.
Moreover, this theory possesses a well-developed theoretical basis which allows the scholars to call it a theory to a full extent. The creators of this theory, Stigler, Truman and others admitted that the possibility of gaining the regulatory power by the customers of the regulated companies or other interested organizations exists. Nevertheless, as contrasted to the capture theory, the economic interest theory acknowledges that this can be achieved only by influencing the current legislation of this or that country.
Legislation becomes the central point of this theory together with supply and demand of the market that predetermine the power possessed by this or that firm. In other words, regulatory power is easier to acquire for that company whose products are in greater demand and in enough supply (Posner, 337).
Another important point in the economic interest theory is the concept of cartelization. This is the concept that presupposes the joining together of several organizations in order to make their struggle for influence and regulatory power easier. The cartelization, needless to say, involves certain costs but they are considerable only in the countries that prohibited it at the legislative level. In other regions, this method or economic regulation is quite efficient and brings profit that exceeds the possible costs in several times (Posner, 338). To sum up, the basic features of the economic interest theory are:
- possibility of “outside” influence of the regulatory organizations by customers of regulated firms and other concerned parties;
- the central role of supply and demand in gaining regulatory power;
- cartelization as one of the most effective instruments of achieving this goal;
- admittance of legislation as the only means to change the regulation rules (Posner, 341-343).
Works Cited
Roberts, R. & Kurtenbach, J. (1998). State Regulation and Professional Accounting Educational Reforms: An Empirical Test of Regulatory Capture Theory. Iowa State University, College of Business, Department of Accounting.
Posner, R., 1974. Theories of economic regulation. Bell Journal of Economics and Management Science 5 2, pp. 335–358.