What are the common wages of labor depends every where upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.
It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily.. (Smith [1776] 1976: 83-84)
One of public choice’s key insights is that outcomes in political markets differ from those in ordinary markets, not because the behavioral motivations of individuals are different in the two settings, but because of fundamental differences in the institutional frameworks within which rational actors pursue their self-interests. One implication of this line of reasoning is that group action differs markedly from individual action. Shared goals and joint responsibilities create indivisibilities that, we shall see, represent the most distinctive feature — and the most important barrier — to the mobilization of political influence in the interest-group society.
Private choices take place within the context of a system of well-defined, well-enforced and transferable property rights that generate price and profit signals to which individuals have powerful incentives to respond; public choices take place within the context of ill-defined, contractually unenforceable and non-tradable property rights that force decision makers to act without the benefit of explicit market indicators. Private choices are unilateral; public choices are multilateral. Private choices entail consequences that are for the most part borne by the decision maker himself; the benefits and costs of public choices must be shared with others. Individuals participate in private transactions voluntarily; in politics, decisive factions access the coercive powers of the state to compel the obedience of indecisive factions. Private exchanges are positive-sum; exchanges mediated by the public sector may be zero-sum or, more frequently, negative-sum. Competitive markets supply buyers and sellers with alternatives to which they readily can turn; monopoly in the public sector provides limited options among which the costs of switching tend to be high.
In the private sector, decision makers make choices without first obtaining the approval of others. Under open market conditions, sellers decide independently of their rivals what products to offer, which features to include, and what prices to charge. Buyers likewise act on their own accounts in deciding what products to purchase, which sellers to patronize, and what prices to pay. Each seller strives to maximize his profits by reference to firm-specific revenue and cost functions, and each buyer strives to maximize his utility by consulting his income-constrained personal preference orderings. Outcomes in ordinary markets, in short, emerge from the interactions of autonomous economic agents seeking only their own private gains.
While decisions in the private sector are the result of individual action, decisions in the public sector demand collective action. Depending on the voting rules in place, a democratic society cannot act without the concurrence of a plurality, a majority, or a supermajority of the citizenry. Collective action problems arise most frequently in the provision of pure and impure public goods — national defense, highways, clean air, parks, and so on — which provide benefits to a group of individuals, but which no one of them has the independent capacity to finance (Azfar, 2001: 59). Nevertheless, in modern western democracies the realm of collective action has expanded far beyond the provision of public goods to include pensions, health care, education, the dole, and the many other ornaments of the dirigiste welfare state. Global environmental treaties and military alliances elevate collection action to the level of the nation-state.
The logic of collective action helps to identify the groups that will tend to be successful politically. Prior to 1965, it was widely assumed that ‘groups of individuals with common interests .act on behalf of their common interests much as single individuals are often expected to act on behalf of their personal interests’ (Olson, 1965: 1). That monolithic view of group action, which ignored the diversity of the interests of group members, was exploded by Mancur Olson’s seminal contribution to the public choice literature. Olson recognized that, unlike individual action, group action requires the agreement of others. Because each member of a group is a rational actor, his personal interests will not coincide perfectly with those of his fellows. The insight that not every group member will necessarily gain the same benefits from — nor bear the same costs of — collective action made possible a richer analysis of the behavior of groups seeking to exploit political processes for their own ends.
Olson’s logic suggests that the most effective collective actors will be groups that are relatively small and composed of individuals with relatively homogeneous interests. Small group size raises the expected per capita return to group membership, thereby giving its members greater personal stakes in the group’s success. Suppose that collective action promises a total benefit of $1,000,000 and that the members of the group will share the benefit equally. It should be obvious that the incentives to participate in collective action will be stronger when 100 members will divide the benefits than it would be in a group having 1,000,000 members. In the first case, each member can anticipate a gain of $10,000 if the group is successful; the expected per capita gain in the second case is only $1. Since no member of a group rationally will invest more of his own resources in collective action than he expects to gain, small groups will have comparative advantages as collective actors. Their members will supply more effort on the group’s behalf, contributing more time and money to achieving the group’s goals than otherwise. Small groups also face lower costs of monitoring and controlling free riding. Each group member has incentive to collect his share of the group’s gains while avoiding his pro rata costs of supporting the activities necessary to attain the group’s objectives. Such free-riding behavior is easier to detect, and sanctions against it (including expulsion from the group) are easier to impose, when the group is small than when it is large.
Small groups also have lower decision-making costs, an advantage reinforced by homogeneity of members’ interests. Group heterogeneity creates differences of opinion that make it more difficult to reach agreement on common courses of action, and creates opportunities for the membership’s majority to take advantage of the minority (what Buchanan and Tullock, 1962, call the external costs of collective decision making). Voluntary association, voting-with-the feet (Tiebout, 1956; Hirschman, 1970), and the ability to clone groups as demand warrants means that diversity of tastes and preferences amongst individuals will tend to promote diversity amongst groups rather than diversity of group membership. People will tend to associate with others who are like-minded in the sense of assigning similar values to the benefits they anticipate from collective action. There is thus much common ground between Olson’s logic and the economic theory of clubs (Buchanan, 1965; Cornes and Sandler, [1986] 1996; Anderson et al., 2001).
Groups engaged in political action frequently were organized initially for some other purpose. Recognizing that many of the costs of group formation are start-up costs, Olson proposed a ‘byproduct theory’ of collective action. Once a group has been organized for any reason — individuals with common interests on some issue have been identified and contacted, a membership list has been compiled, dues have been paid, the association’s officers have been elected, and office space has been leased — the cost of redirecting the group’s efforts to the political arena is relatively low. Political action becomes a byproduct of the organization because start-up costs have already been borne in the process forming the association for some other (non-political) purpose. Indeed, for whatever reason organization is undertaken, lobbying for special-interest legislation becomes a relatively low-cost byproduct of being organized. Workers, for example, may organize to bargain collectively with employers and then find it relatively easy to open an office in the national capital to advocate higher minimum wages. (As a matter of fact, Olson devoted an entire chapter to the collective action problems of labor unions; see Sandler, 1992: 113-114, for a succinct summary.) A business firm is another example of an organization whose resources can be redeployed at low cost for political lobbying purposes, such as seeking the enactment of protectionist trade policies or ‘right-to-work’ laws. Lawyers may agree collectively to a code of ethics to address such matters as attorney-client privilege and then proceed to adopt provisions in their organization’s code that, by banning advertising, for example, restrict competition among lawyers and raise their fees. The National Collegiate Athletic Association (NCAA) organizes to control violence and reduce player injuries in college sports, and then lobbies for exemption from the antitrust laws in order to capture rents from student-athletes. Industry trade associations, agricultural cooperatives, private charitable trusts, groups of individuals afflicted by the same disease, and organizations of retired people are a few of the many groups that, once formed, are well-positioned to act politically.
A key point of contention in the literature is whether individuals can be motivated to join such organizations in the absence of coercion (e.g., laws mandating ‘closed shops’) and, moreover, to supply the funds necessary to finance the group’s political activities. Lobbying is, after all, itself a public good and free riding consequently will plague its provision. It is Olson’s attentiveness to the ‘pub-licness’ of shared political goals and, hence, the formidable barriers effective factions must overcome, that distinguishes his logic of collective action from the efficiency theories of pressure-group politics put forward by Becker (1983, 1985) and Wittman (1989, 1995).
Olson advanced a theory of ‘selective incentives’ to address the free-riding problem that disadvantages collective action relative to individual action. According to that theory, an association provides a private good or service to its members that cannot be purchased competitively elsewhere. By tying this good or service to membership and monopolistically pricing it above cost, the association can raise money to underwrite its lobbying activities. The Sierra Club, among the most venerable organizations of American ‘greens’, sells calendars to its members, for instance. Membership in the American Association of Retired Persons (AARP) provides access to a group life-insurance policy and to discounts on prescription drugs and travel packages. The members of BUND, the German affiliate of Friends of the Earth International, get to purchase automobile insurance at favorable rates because, as the organization’s publicity materials state, ‘we know that you… will drive especially responsibly and environmentally friendly’. The NCAA supplies member schools with a schedule of regular-season games and post-season tournaments.
Olson’s byproduct theory was originally dismissed by George Stigler (1974), who argued that there is no good reason for assuming that interest groups will have monopoly power over the provision of particular private goods to their members. How, then, could they generate monopoly rents to finance their lobbying activities? One answer overlooked by Stigler is that many interest groups creatively use their tax-exempt status under section 501(c)(3) of the Internal Revenue Code to reallocate monies raised for legitimate organizational activities to support their political agendas (Bennett and DiLorenzo, 1998). The basic point, however, is that Olson’s hypothesis about the use of selective incentives is testable; it simply cannot be dismissed as a theoretical curiosity. It is entirely plausible, for example, to argue that the demand for Sierra Club calendars is downward sloping and that the Sierra Club therefore has sufficient monopoly power in the calendar market to finance many of its lobbying activities with the associated rents. Moreover, the point goes well beyond the trivial example of calendars to such selective benefits as group insurance policies, a variety of member discounts, and, in some cases, such as the American Medical Association, the right to practice one’s profession.
Mulvey (1994) investigated the use of selective incentives by the AARP, and found that they are directly related to association membership, which is a proxy for interest-group clout. She also found support for the fungibility of organizational funding as between tax-exempt activities and (non-exempt) political lobbying. This limited evidence suggests that Olson’s byproduct theory of interest-group formation may be more empirically relevant than commonly assumed, but additional research along these lines is nevertheless needed.
Public choice economists know very little about the dynamics of interest-group formation (but see Wagner, 1966, who suggests that political entrepreneurs play creative roles in this regard). No matter their origins, the logic of collective action nevertheless suggests that small, cohesive factions will tend to dominate the democratic political process. Because such groups are in position to supply votes, campaign contributions, and other forms of support to politicians and policy makers, these officials will respond favorably to their demands. The mass of voter-taxpayers is everywhere at a disadvantage in the competition for wealth transfers that characterizes interest-group politics. Just as it is not worth spending more than $1 to gain $1, it is not worth spending more than $1 to avoid having $1 expropriated for transfer to a politically more effective group. Owing to their large numbers, their lack of organization, and their inability to articulate a coherent political agenda, the polity as a whole predictably will be vulnerable to a ‘tyranny of the minority’. It is thanks to Mancur Olson that we now understand why this plain fact of democratic politics seems so obvious.
