Building Dynamite Regulations. The explosives industry and the regulatory State

Transcription

1 Work in progress please do not quote! Building Dynamite Regulations. The explosives industry and the regulatory State Josefin Sabo and Lena Andersson-Skog Economic history, Department of Geography and Economic History Umeå University, Sweden Abstract In this paper, we argue that the regulation of the explosives industry in Sweden between 1858 and 1948 can put a slightly different perspective on regulatory capture. First, in this case it was the upstart company, the Nobel Dynamite Company, not the established explosives companies that, in negotiations with the regulator, succeeded in establishing new national regulation. Second, the method behind the successful capture combined indirect and direct methods with a common risk-minimizing trait for the public and it developed in cooperation with the regulator. JEL Categories: N10, L50 Keywords: Sweden, dynamite, industrialization, regulatory capture, state-market relations 1

2 Introduction According to George Stigler, there are several ways of achieving regulatory capture, for example, by direct methods, such as discriminating pricing policies and vertical integration. Indirect methods, such as establishing of long-term personal relationships between corporate managers and technicians from the industry and officials with the regulatory authority, may also be used. Here, a close collaboration may also involve certain mutual advantages, such as building trust and future loyalty, cooperation with and obedience to the law. Regulatory capture is, for obvious reasons, often considered to be an obvious risk of distorted conditions on the market. Posner (1974), Peltzman (1976), and Becker (1983) also argue that when the line between governmental and market interests is blurred, the regulatory process opens up to the influence of other pressure groups outside the industry. Recent literature has shown that regulatory capture can be found in various areas like transportation and telecommunications, energy and environmental policy, farming and financial services (Sabo & Andersson-Skog 2017). Regulatory capture must also be considered in light of other regulatory concepts, where there is a common distinction between self-regulation, co-regulation and government regulation. Government regulation is a process in the political arena, without access to private interests, whereas self-regulation means that the company or economic actor makes decisions that are not necessarily profit maximizing in the short run, but result in other kinds of benefits. Co-regulation indicates a government that controls rule-making, but delegates the implementation of regulatory decisions to the market (Latzer et al. 2003; Funke 2015). One clear example of co-regulation in the regulatory process is the process in Sweden during the 1960s and 1970s, when the Rönnskär smelter, the world s largest producer of arsenic emissions practically abolished them as a result of the active involvement, initiatives and the leading role played by the company in the regulatory process and the establishment of a new legislation. This was a process of regulatory capture and coregulation that benefited all parties (Bergquist 2007). 2

3 This paper briefly describes the industrializing government, technological development, and regulation in the nineteenth century Sweden. A short description is given regarding the traditional explosives industry and its regulation from the black powder era to the modern dynamite industry. We will discuss three decision-making processes as examples of direct and indirect regulatory capture. The first related to cases where a nitroglycerin ban was introduced in Sweden in 1868, the Nobel Company influenced the decision to impose prohibition. We also examine attempts by traditional regional industry interests to obstruct passage of the government bill for a national regulatory authority, the Inspectorate of Explosives, and the Explosive Act of Third, the long-term and close relationship between the Nobel Company and the explosives authority will be discussed to show how the company benefited through regulatory measures. These three decision-making processes are discussed as examples of regulatory capture in relation to the Nobel Company. Industrialisation and the state From the beginning of the 20 th century, industrialization in Sweden was in full swing, and the annual growth was among the highest in the world. Besides the obvious importance of the international demand for ore, timber, pulp and paper, and later on manufactured goods, two other explanations are often emphasized as key factors behind the rapid development of the Swedish industry. First, the surprising achievements of a handful Swedish inventors and entrepreneurs in building internationally successful corporations and bringing their inventions to the international market (Andersson-Skog & Magnusson 2014). Second, the strong intertwined long-lasting techno-economical and political collaboration in technological research that emerged between Swedish authorities and private key industries for instance, the State Railroads and ASEA (now ABB), the State Telegraph and L M Ericsson (now Ericsson) - called development pairs (Fridlund 1999; Andersson-Skog 2000). Here, the mutual benefits 3

4 for the company (in terms of technological development and access to capital and markets) and for the state (access to technological expertise and economic development), is seen as the dominating raison d`être. In many sectors, such as sanitation, finance, and railways, telephone and telegraph, electrification and mining, the Swedish State became an active legislator as well as an active producer of goods and services. Sometimes the activities were organized in state agencies, as for instance the State Railroad Board, from 1888, and sometimes as joint ventures together with private business interests as for example LKAB, the major Swedish iron-ore mine from The active industrializing state fostered long term state-market co-operation that was market oriented and technology driven. The regulatory decision-making processes were however decided by parliament. This was not, however, the relation that evolved between the state and the industry founded by the perhaps most famous Swedish inventor of the 19 th century: Alfred Nobel and his invention of the blasting oil and dynamite and the foundation of the world s first dynamite company outside of Stockholm in There was a number of reasons for that. First, the production, transport, use and storage of blasting oil and dynamite was generally hazardous, and, in all too many cases, lethal (Sabo 2016, unpublished article). The industry was lined with accidents, threatening both public safety as well as health and safety of the workforce and customers. Hence, the prime driver for technological research and development was to make the product safer to avoid legislative measures banning it. Second, the R & D was carried out in the laboratories of Nobel s international companies, not in Sweden. Nobel left the Swedish company already in 1865 but continued to give improved patent rights for Sweden to his old company (Lundström 1974). This led to an increasing asymmetry in practical and technological know-how between the Nobel Company and the State. In older, more established traditional industries, such as mining and iron production, or agriculture, the information gap was much narrower, since the Swedish state disposed of public servants with judicial expertise and also relied on the services of industry experts with specialist knowledge. When private companies were 4

5 invited to participate in the decision-making processes, competing interests were balanced through a public committee organization and referral procedures. This was however not the case when the explosives industry was regulated. Instead, the leading companies in the industry very soon came to provide the state with technical, economical and managerial expertise. A third, important distinguishing trait in the dynamite industry, was that it soon developed into an oligopolistic structure. Around 1900, three companies held 97 percent of the market, the Nobel Company being by far the largest of them (Andrén 1964).One of the other, AB Express-Dynamit, only marginally worked on the public market and served as an in-house producer of dynamite for a number of mines in northern Sweden. The remaining company, Gyttorp, was initially a fierce competitor to Nobel, but from 1902 the two started cooperating in a price cartel and in 1915 the companies merged in a joint company, named The New Nobel Company. Thus, it is fair to say that the Nobel dynamite company from ca1900 had a de facto monopolistic position in the industry, on the market and in technological competence. From harmless explosive oil to a ban on liquid nitroglycerine in 1868 raising the barrier s to entry Accidents related to the manufacturing and handling of nitroglycerine rose, not unexpected, with the increasing production. As a result, a legislation was developed already in 1865 concerning trade and transport of nitroglycerine (Swedish Statute Books, SSB, 1865:34). Despite efforts to, by law, try to control the risks associated with the product the accident sequence continued to increase. In 1866 a series of accidents occurred around the world and as a result, the substance was prohibited in many countries. In Sweden, it took, however, until 1868 before a prohibition on selling and to transport liquid nitroglycerine was introduced. The discussion to introduce the ban was prompted by two accidents that occurred this year. The first accident happened in Belgium and the other, which probably led to greatest fear among the Swedish population, occurred at the Nobel company s factory 5

6 where fourteen people were killed. The proposal for a nitroglycerin ban was initiated by the Stockholm County Administrative Board, which considered a prohibition necessary in order to reduce the fear among the city residents. The Nobel Company was not, however, late to agree, only a few days later, they also wrote to the State with a request for a general ban on all trade and all use of liquid nitroglycerine (Cabinet meeting errands, Ministry of Public Administration, Swedish National Archives). The company had previously emphasized that the liquid nitroglycerine was a relatively safe explosive and had also managed to convince the State that so was the case. In 1868, however, when the dynamite started to be produced and could serve as a substitute product, they changed its mind on the subject. In the proposal to the State the company meant that they found it both desirable and justified that the dangerous nitroglycerine was replaced by the harmless dynamite. It should be noted that the Nobel Company was given a patent on dynamite for thirteen years from 1867 to They, therefore, wanted the state to prohibit and with high amounts fine the trade and use of the substance. The company ś attitude had thus changed radically, and it was probably a strategic choice. A ban would not mean disadvantages for the company since the competitors production was limited to the liquid nitroglycerine as long as the dynamite patent pertained (Cabinet meeting errands, Ministry of Public Administration, Swedish National Archives). The strategy of the company was thus to try to convince the state that the risks associated with the liquid nitroglycerine were so high that a ban should be issued, a ban that practically entirely would keep out the competitors from the market in dual ways: first, the liquid nitroglycerine would be prohibited, and second, the Nobel Company would have a de facto monopoly on the dynamite market. The company might, however, have desired a ban for other reasons than to exclude the competitors from the market as well, namely for the common good. The dynamite was actually safer to use, and the company was keen to protect those who in various ways handled the dynamite and cared about the safety of their customers. With the dynamite the company got in a monopoly situation, but it also led to 6

7 the common good. After only a few weeks the State issued the nitroglycerine ban. It is thus clear that the company succeeded in capturing the state and thereby also restricted the competition on the market. In this case, the company used a direct method to capture the state since they wrote directly to them and asked them to introduce a nitroglycerine ban. A new institutional framework Shifting power from regional authorities to The introduction of The Inspectorate of Explosives in 1897 The proclamation with the introduction of a nitroglycerine ban discussed in the previous section was replaced in 1869 with a new law that included rules for the manufacture and sale of nitroglycerine, dynamite, and other explosives (SSB 1869:64). In 1897, a new explosive act was introduced which replaced the previous regulations. In the new regulation, it was, among other things, stated that the explosives inspector should be given greater influence with the introduction of the Inspectorate of Explosives the same year (SSB 1897:102). It is clear that the instigation of the Explosives Inspectorate in 1897 was a result of a legislative process severely affected by different interests. On the one hand, there was the state ś discussion and instructions, on the other hand, the Nobel Company ś and the state ś common interests. But there was also, at this time, a lot of other actors who also wanted their specific interests to be meet. Before the introduction of the act of 1897 a protest meeting was arranged in 1894, where around forty actors expressed their discontent with the proposal of the act prepared by a committee appointed by the Royal Majesty. Professor Cronquist had been appointed to defend the commissioner s proposal. The meeting was initiated by A.E. Salwén from AB Express-Dynamit and by the managing director at Gyttorps Krutbruk A. Lundeberg (Örebro-meeting protocol, National Museum of Science and Technology s archive). Protests were mainly made against the fact that the explosive inspector should be given 7

8 greater influence. For example, regarding the right to pursue factory-scale production of explosives, protests were made since, according to the proposal, the County Administrative Board should have to conform to the inspectorate. Instead, the meeting attendees wanted the County Administrative Board to have the decision-making in their hand, just like they always have had. Cronquist responded that they with the paragraph referred to the establishment of a factory producing a new explosive of unknown composition and that the inspector then should be given the opportunity to evaluate the explosive in relation to public safety and decide whether it was too dangerous to produce (Örebro-meeting protocol, National Museum of Science and Technology s archive). The representative from AB Express-Dynamit meant that he got the impression that the regulation intended to make the inspector to an authority that would stand above the Royal Commissioner. He, therefore, meant that the meeting critically wanted to state that this paragraph should be modified so that the discretionary power in the future, as now, would belong to the Royal Commissioner in respective county. The discussion resulted in a resolution that the County Administrative Board also henceforth should implement the supervision over the order at the explosives factories without having to depend on the inspectors provisions (Örebro-meeting protocol, National Museum of Science and Technology s archive). The meeting resulted, on the representative of Gyttorps Sprängämnes AB initiative, in the appointment of a committee commissioned to prepare an amendment that they then personally handed over to the government. In the regulation introduced in 1897 it was stated, regarding the right to pursue explosive production, that just like before, an application should be sent to the Royal Commissioner in the county where the production was intended to be pursued, but the commissioner had to hear the inspector ś opinion before the application could be approved (SSB 1897:102). It is thus clear that all the actors were not satisfied with the introduction of an authority that 8

9 formalized the contact between the parties and which also was the first surveillance authority in the industry. Since the Nobel Company did not raise any direct objections against the proposal to introduce a state authority it is likely that they shared the state s view since it in practice would not imply as much concern for them as for other companies. Capturing trust and friendly regulations - the Nobel company and the explosives inspectorate some examples The explosives inspectors had a close relationship with the main actors in the industry and it is possible that they acquired large parts of their technical knowledge within the companies. In this section, an example is given of how such relationship could look like and which benefits it could lead to. Gottfried von Feiltizen, explosives inspector , had from the beginning a close relationship with the Nobel Company. After graduating as a chemist in 1895, he worked as an assistant to Alfred Nobel, and in 1905 he became technical director at the Nobel Company s dynamite factory. The close relationship between the Nobel Company and the inspector was probably later also a driving force behind the fact that the company to a certain extent managed to gain control over the market. There are several examples of the existence of a kind of interaction between the explosives inspector and the Nobel Company. In 1927 and 1930 the company wrote, for example, to the inspector to draw his attention to issues that the company considered being of great importance from a safety perspective. The company had received information that some explosives were handled under incorrect forms. The company encouraged the inspector to take measures to prevent, not only the, in the company ś meaning, disloyal commerce, but also against the obvious infringements of the law. The inspector also took measures as he contacted the company s in question and pointed out that they had to change their prospectus, he also sent a circular to the county administrative boards that aimed to bring an end to such misconceptions (Dossier regarding explosives, The Inspectorate of Explosives archive). 9

10 The good relationship between the state and the company was thus manifested in that the company, to some extent, managed to limit the competition on the market by pointing out inadequacies of other companies and explosives. As the examples above show the inspection also took measures after the company had directed the inspectorate ś attention to the problems which probably meant that it became more difficult to market these explosives. The fact that the Nobel Company managed to capture the inspectorate and make them aware of these problems meant, however, also some positive aspects. The inspectorate could, for example, take measures against law infringement and the lack of security that could have led to an increased accident rate among the explosives users. The relationship between the Nobel Company and the explosives inspector also led to the arrangements of activities that benefited, not only the company and the inspectorate but also the common good. On the initiative of the company, various educational courses were, for example, arranged where dynamite users received training in the handling, storage, and transport of explosives (during the summer of 1932, two courses for rock blasters were, for example, held at the company ś factory at Gyttorp). Despite the fact that the company did not receive any government grant for the courses and had to bear all the expenses themselves the courses continued annually for many years (Dossier regarding explosives, The Inspectorate of Explosives archive). The arrangement of courses might have been a strategy from the company ś side to gain advantages over other companies and through education build up brand loyalty. Another factor might have been that the company wanted to create a deeper cooperative relationship with the inspectorate. This is also a clear example of regulatory capture where the Nobel Company used an indirect method by capturing the staff of an authority. Here a long-term relationship was established between the company and the explosive inspector which led to benefits for the company since they, for example, thereby managed to limit the competition on the market. This capture led, however, also to the common good since the arrangements of courses etc. led to a decreased accident rate for many dynamite users. 10

11 The theft of dynamite from dynamite storages like stockpiles magazines was a perennial problem. In 1936, there was a series of thefts within Stockholm County, which made commissioner Bergenfelth turn to the Inspectorate of Explosives with a request to introduce more appropriate depositories. The explosives inspector turned to the Norwegian inspector and got a drawing of the caskets used in Norway, he then contacted the Nobel Company and wondered if they could acquire such a casket, in order to test it. In August, the company wrote back to the inspectorate and meant that they had a lot of objections against the casket. Instead, they attached a drawing of a casket developed by the company, which they meant met high standards (Dossier regarding explosives, The Inspectorate of Explosives archive). The work did not, however, led to any change, but it was the initial stage of the formation of a development pair around the technological development of new explosives caskets. In 1941, the question was raised again and the Swedish trade minister convoked an expert committee to study the issue. In December the same year, the committee presented a memorandum containing proposals for more stringent technical prescriptions for the storage of explosives. During their investigation, it also became clear that some changes were needed in the regulation from 1928 and they recommended that a comprehensive change should be done as soon as possible. In the memo, it was emphasized that the explosives magazines should be caskets of a special construction. The description of a reliable explosive casket is very similar to the caskets produced by the Nobel Company and the inspectorate already in In order to provide the market access to such caskets, the inspectorate met an agreement with the Nobel Company, who by requisition could provide recommended caskets. They left it, however, open to other companies to produce caskets but mentioned that the procedure to get them approved was severe and that that the high requirements meant high costs of production (Information material, The Inspectorate of Explosives archive). Any applications for the approval of caskets from other actors have not been found in inspectorate ś archive. It was probably much easier to buy a casket than 11

12 to undergo the strict control procedure and the profit of such an investment would be difficult to recoup when the Nobel Company already was on the market. The committee also presumed that some changes needed to be taken in the regulation. They, therefore, submitted a proposal to the committee regarding the revision of the explosives regulation from In the new regulation that later was founded in 1948, the rules concerning the storage of explosives were improved in a way that had been suggested by the 1941 years committee (Official Reports of the Swedish Government, SOU, 1948:8). By the time of the decision making the Nobel Company thus had, through their cooperation with the explosives inspector, obtained certain privileges over the other actors. Through their expertise in this area, the company managed to convince the explosives inspector that the caskets produced by the company were safer than the one the inspector had in mind when the question was raised. The collaboration later led to that similar caskets that were developed by the Nobel Company were the caskets that came to be required by law. There was also a collaboration between the Nobel Company and the explosives inspector regarding the development of vehicles for the transportation of dynamite. In 1926, the company managed to, under certain conditions, get permission to transport explosives by truck despite that it was prohibited by law. The company had designed a truck for this purpose in collaboration with the inspector. The inspector also approved the company s application before it was forwarded for evaluation which probably was a contributing factor for its approval. Later, with the 1928 year explosives regulation, it became permitted to transport smaller quantities explosives by truck as long as the vehicle had been inspected by the explosive inspector and was in line with the rules of a circular drafted by the inspectorate. Since the company and the inspector had developed the rules concerning the vehicles construction in a kind of collaboration, the company also here had an advantage over the competitors who wanted to construct such a vehicle (Information material, The Inspectorate of Explosives archive). 12

13 It is clear that a form of regulatory consensus developed between the company and the inspectorate around the technical development which gave the company certain privileges over the other actors. What distinguished this development pair from other that have been described in the Swedish history description was that it here was the company alone that stood for the technological development, it thus did not occur in cooperation between the state and the company. Instead, it was the rules that were drafted in collaboration between the company and the explosives inspection. It is true that the traditional Swedish iron works, saw mills and early manufacturing industries often took responsibility for the well-being of the workforce and, among other things, provided housing and other facilities for the families a kind of traditional selfregulation. This was also services the Nobel Company provided. Something that distinguished the Nobel Company from other contemporary industries was that the company also was engaged in the safety of its customers and the public in general. For example, the Nobel company presented and distributed its own security brochures with clear instructions of the safest use of dynamite, and printed safety instructions on the boxes in which the products were packed and transported. The company also organized education aiming at increasing the safety for the dynamite users. These kinds of activities were not required or regulated by law but were very early initiated and upheld by the company. Discussion Why did the mature companies not succeed in keeping their positions? One explanation is the strong regional character of the established industry. The Nobel Company early on acted on a national market, not depending on the traditional regional agreements between mining and explosives industries. Ongoing technological research and new and improved patents the Nobel Company participated in, led to an increasing disparity in practical and technological know-how and scientific knowledge between the Nobel Company and the government. In older, established traditional industries, such as mining and iron production, the knowledge gap was much narrower, since the Swedish government relied on public 13

14 servants with practical and judicial expertise. With the new explosives, nitroglycerin and dynamite, the government became dependent on the Nobel company to provide technical, practical and managerial expertise in building a new regulatory framework needed for the growing industry. Unlike the other actors, the Nobel Company communicated with the government to influence future legislation. Was this relation between a company and the state a unique situation during the Swedish industrialisation? In some aspects it wasn t. Since the 17 th there was an industry body, Bergskollegium, consisting of industry representatives who assisted the state in matters relating to iron management. However, there had been no similar body within the black powder industry. In the case of other technological innovations under industrialization, such as the telephone and the railways, were regulated by the government and parliament. No cooperative bodies were instigated here. More research is however needed to determine how common it was with similar cooperative relationships between the state and private companies during this time period. 14

15 References Andersson-Skog, Lena (2000), National patterns and the regulation of railways and telephony in the Nordic Countries up to Scandinavian Economic History Review, Vol. 48(2), pp Andersson-Skog, Lena, Magnusson, Lars (2014), Del 1. Samhällsdynamik och industrialisering, pp In Larsson, Mats (ed.), Det Svenska Näringslivets Historia Dialogos Förlag. Stockholm. Andrén, Erik, (1964), Nitroglycerin Aktiebolaget Nordisk rotogravyr, Stockholm. Becker, Gary S (1983), A Theory of Competition Among Pressure Groups for Political Influence. Quarterly Journal of Economics 98: Bergquist, Ann-Kristin (2007), Guld och Gröna Skogar? Miljöanpassningen av Rönnskärsverken Umeå Studies in Economic History, 36, Umeå University, Umeå. Dahlström, Malin (2015), Konkurrens, Samarbete och Koncentration. Kalkstens- och Cementindustrin i Sverige University of Gothenburg. Fridlund, Mats, (1999), Den gemensamma utvecklingen: Staten, storföretaget och samarbetet kring den svenska elkrafttekniken. Förlag Brutus Östlings bokförlag symposion, Stockholm. Funke, Michael (2015), Regulating a Controversy: Inside Stakeholder Strategies and Regime Transition in the Self-Regulation of Swedish Advertising Uppsala Studies in Economic History, 102. Uppsala: Acta Universitatis Upsaliensis. Hady, Daniel C, (2006), Regulatory Capture in Banking. International Monetary Found. Latzer, Michael, Natascha Just, Florian Saurwein & Peter Slominski (2003), Regulation Remixed: Institutional Change through Self- and Co-regulation in the Mediamatics Sector, Communications & Strategies, 50 (2): Lundström, Ragnhild, (1974), Alfred Nobel som internationell företagare: Den nobelska sprängämnesindustrin Tofters Tryckeri AB, Östervåla. Peltzman, Sam (1976), Toward a More General Theory of Regulation. Journal of Law and Economics 14: Posner, Richard (1974), Theories of Economic Regulation. Bell Journal of Economics and Management Science 5: Sabo, Josefin & Andersson-Skog, Lena (2017), Dynamite Regulations. The Explosives Industry, Regulatory Capture and the Swedish Government International Advances in Economic Research (2017) 23: Smyth, Russel & Söderberg, Magnus (2010), Public interests versus regulatory capture in the Swedish electricity market. Journal of Regulatory Economics, Vol 38 (3), pp Stigler, George (1971), The Theory of Economic Regulation. The Bell Journal of Economics 2: