It would be comforting to think that government regulators and others who participate in the regulatory process were led as if by an invisible hand to maximize the social weal--comforting, but mistaken. Recognition of the fact that government regulators--including antitrust officials--are conditioned by their institutional environments and respond to incentives is crucial to appraising the effects of government intervention. So is a recognition that the regulatory process can be and is used by firms and other interests to secure special advantage.
Within a somewhat narrow perspective, the history of economics can be divided into three phases. First, triggered by Adam Smith's extraordinary insights, the profession began the long process of understanding how freely functioning markets operate and how they optimize the allocation of resources. A second phase, commencing roughly during the 1930s, began to question the ability of the market to allocate resources efficiently. In particular, there developed an extensive literature on "market imperfections." The unstated, and unchallenged, assumption in almost all of this literature was that such imperfections could be eliminated by government intervention.
A third phase, which to some extent overlapped the second, was initiated by those who questioned the efficacy of government intervention to cure the market's imperfections. These scholars came from a broad variety of economic and philosophical perspectives. Marxists, who perceived that government regulation was orchestrated by business interests, condemned regulation as something of a "capitalist tool." Microeconomic theorists and econometricians teamed up and found that, despite good intentions, resource allocation was not particularly efficient in markets that were highly regulated. Finally, and most importantly, the public choice theorists, who were addressing the much broader question of how collective choices were made and how efficient they were (in the sense of meshing public-good demands with available supplies) shed considerable light on the regulatory process and how its performance might be improved.