Those who are of the Austrian School of Economics and free-market oriented have long faced the issue of whether or not any regulation or law can be something other than an interference with market forces. In fact, a government-initiated rule can only be seen as causing a price fix – which will inevitably result in a queue, inefficiency or scarcity. In a truly free-market economy the market itself would supply regulatory issues and other manifestations of governance.
This could take place in numerous ways. A watchdog group that would charge for its services could provide governance. Consumer Reports comes to mind. Governance could also be provided by aggrieved parties attacking the perceived injustice either privately through non-legal means or through private justice and a private court system of the kind that used to exist in Europe and America, known as common law.
It is only through the evolution of socialist justice, and the state gradually inserting itself into every part of the judicial equation, that the West has arrived at a situation where the State passes the laws, trolls for those who don't obey and then arrests, prosecutes and incarcerates offenders. The idea that one entity can do all this is never seen as a conflict of interest, though that is exactly what it is.
And thus it is with regulatory capture itself. The formulation whereby the State creates rules with private market input and then formalizes those rules, enforces those rules and punishes those who do not abide by them cannot in incarnation be seen as either efficient or useful. In fact, the largest players in any given industry quickly take control of the very regulatory agencies that were developed to police them.
Through various means, mostly the utilization of clout and appropriately applied funds, regulatory agencies soon begin to pass regulations that inevitably benefit those who have the largest market share. Those who work in the regulatory agencies are soon made to understand that their career path – and fiduciary rewards – will likely involve the larger industry players, and they will be loath to create serious impediments.
Thus it is that even the largest regulatory agencies, within the socialized construct of State power and industrial overlook, soon begin to pass regulations that benefit the larger players at the expense of the smaller. As regulation advances, the complex and ever-expanding rulebook acts as an impediment to competition and also a barrier to entry.
In the final phases of regulatory capture, the government entity is involved with virtually every aspect of the most powerful players it is supposed to regulate. The staff has all either worked for the larger players or plan to work for them. The research, input and ongoing comment on regulations – past, present and future – are virtually controlled by these private entities under the guise of cooperation and input. The regulations are now entirely focused toward providing an unspoken advantage for the biggest and most powerful industry participants.
State regulation, when seen from this point of view, is simply another way that powerful entities advance their competitive advantages under the guise of "fairness" and an "even playing field." In fact, every government entity of any size is subject to regulatory capture and at no time, therefore, does regulation create the environment it purports to generate. It becomes quite simply a way to create barriers to entry and a way to enhance the activities, legitimate and otherwise, of those it is intended to observe and correct. It does not help that, generally, every accretion of regulation further stifles innovation and creates additional inefficiencies.