The Logic of Collective Action by Mancur Olson

There are a lot of government policies, like airline bailouts, that from an economic perspective dont make any sense at all. Politicians have an incentive to keep the economy strong as incumbents are reelected at a much higher rate during booms than busts. So why do so many government policies make such little economic sense? The best answer to this question comes from a book that is almost 40 years old: The Logic of Collective Action by Mancur Olson explains why some groups are able to have a larger influence on government policy than others. In this brief outline, the results of The Logic of Collective Action are used to explain economic policy decisions. Any page references come from the 1971 edition. It has a very useful appendix not found in the 1965 edition. You would expect that if a group of people has a common interest that theyll naturally get together and fight for the common goal. Olson states, however, that this is generally not the case: But it is not in fact true that the idea that groups will act in their self-interest follows logically from the premise of rational and self-interested behavior. It does not follow, because all of the individuals in a group would gain if they achieved their group objective, that they would act to achieve that objective, even if they were all rational and self-interested. Indeed unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests.(pg. 2) We can see why this is if we look at the classic example of perfect competition. Under perfect competition, there is a very large number of producers of an identical good. Since the goods are identical, all firms end up charging the same price, a price that leads to a zero economic profit. If the firms could collude and decide to cut their output and charge a price higher than the one that prevails under perfect competition all firms would make a profit. Although every firm in the industry would gain if they could make such an agreement, Olson explains why this does not happen: Since a uniform price must prevail in such a market, a firm cannot expect a higher price for itself unless all of the other firms in the industry have this higher price. But a firm in a competitive market also has an interest in selling as much as it can, until the cost of producing another unit exceeds the price of that unit. In this there is no common interest; each firms interest is directly opposed to that of every other firm, for the more the firms sell, the lower the price and income for any given firm. In short, while all firms have a common interest in a higher price, they have antagonistic interests where output is concerned.(pg. 9) The logical solution around this problem would be to lobby congress to put in place a price floor, stating that producers of this good cannot charge a price lower than some price X. Another way around the problem would be to have congress pass a law stating that there was a limit to how much each business could produce and that new businesses could not enter the market. Well see on the next page that The Logic of Collective Action explains why this will not work either. The Logic of Collective Action explains why if a group of firms cannot reach a collusive agreement in the marketplace, they will be unable to form a group and lobby the government for help: Consider a hypothetical, competitive industry, and suppose that most of the producers in that industry desire a tariff, a price-support program, or some other government intervention to increase the price for their product. To obtain any such assistance from the government, the producers in this industry will presumably have to organize a lobbying organization... The campaign will take the time of some of the producers in the industry, as well as their money. Just as it was not rational for a particular producer to restrict his output in order that there might be a higher price for the product of his industry, so it would not be rational for him to sacrifice his time and money to support a lobbying organization to obtain government assistance for the industry. In neither case would it be in the interest of the individual producer to assume any of the costs himself. [...] This would be true even if everyone in the industry were absolutely convinced that the proposed program was in their interest.(pg. 11) In both instances, groups will not be formed  because the groups cannot exclude people from benefiting if they do not join the cartel or lobbying organization. In a perfect competitive marketplace, the level of production of any one producer has a negligible impact of the market price of that good. A cartel will not be formed because every agent within the cartel has an incentive to drop out of the cartel and produce as much as she possibly can, as her production will not cause the price to drop at all. Similarly, each producer of the good has an incentive not to pay dues to the lobbying organization, as the loss of one dues paying member will not influence the success or failure of that organization. One extra member in a lobbying organization representing a very large group will not determine whether or not that group will get a piece of legislation enacted that will help the industry. Since the benefits of that legislation cannot be limited to those firms in the lobbying group, there is no reason for that firm to join. Olson indicates that this is the norm for very large groups: Migrant farm laborers are a significant group with urgent common interests, and they have no lobby to voice their needs. The white-collar workers are a large group with common interests, but they have no organization to care for their interests. The taxpayers are a vast group with an obvious common interest, but in an important sense they have yet to obtain representation. The consumers are at least as numerous as any other group in the society, but they have no organization to countervail the power of organized monopolistic producers. There are multitudes with an interest in peace, but they have no lobby to match those of the special interests that may on occasion have an interest in war. There are vast numbers who have a common interest in preventing inflation and depression, but they have no organization to express that interest. (pg. 165) In a smaller group, one person makes up a larger percentage of the resources of that group, so the addition or subtraction of a single member to that organization can determine the success of the group. There are also social pressures which work much better on the small than on the large. Olson gives two reasons why large groups are inherently unsuccessful in their attempts to organize: In general, social pressure and social incentives operate only in groups of smaller size, in the groups so small that the members can have face-to-face contact with one another. Though in an oligopolic industry with only a handful of firms there may be strong resentment against the chiseler who cuts prices to increase his own sales at the expense of the group, in a perfectly competitive industry there is usually no such resentment; indeed the man who succeeds in increasing his sales and output in a perfectly competitive industry is usually admired and set up as a good example by his competitors. There are perhaps two reasons for this difference in the attitudes of large and small groups. First, in the large, latent group, each member, by definition, is so small in relation to the total that his actions will not matter much one way or another; so it would seem pointless for one perfect competitor to snub or abuse another for a selfish, antigroup action, because the recalcitrants action would not be decisive in any event. Second, in any large group everyone cannot possibly know everyone else, and the group will ipso facto not be a friendship group; so a person will ordinarily not be affected socially if he fails to make sacrifices on behalf of his groups goals.(pg. 62) Because smaller groups can exert these social (as well as economic) pressures, they are much more able to get around this problem. This leads to the result that smaller groups (or what some would call Special Interest Groups) are able to have policies enacted that hurt the country as a whole. In the sharing of the costs of efforts to achieve a common goal in small groups, there is however a surprising tendency for the exploitation of the great by the small.(pg. 3). Now that we know that smaller groups will generally be more successful than large ones, we understand why the government enacts many of the policies it does. To illustrate how this works, well use a made-up example of such a policy. Its a very drastic over-simplification, but its not that far out. Suppose there are four major airlines in the United States, each of whom is near bankruptcy. The CEO of one of the airlines realizes that they can get out of bankruptcy by lobbying the government for support. He can convince the 3 other airlines to go along with the plan, as they realize that theyll be more successful if they band together and if one of the airlines does not participate a number of lobbying resources will be greatly diminished along with the credibility of their argument. The airlines pool their resources and hire a high-priced lobbying firm along with a handful of unprincipled economists. The airlines explain to the government that without a $400 million dollar package they will not be able to survive. If they do not survive, there will be terrible consequences for the economy, so its in the best interest of the government to give them the money. The congresswoman listening to the argument finds it compelling, but she also recognizes a self-serving argument when she hears one. So shed like to hear from groups opposing the move. However, its obvious that such a group will not form, for the following reason: The $400 million dollars represents around $1.50 for each person living in America. Now obviously many of those individuals do not pay taxes, so well assume that it represents $4 for each tax-paying American (this assumes everyone pays the same amount in taxes which again is an over-simplification). Its obvious to see that its not worth the time and effort for any American to educate themselves about the issue, solicit donations for their cause and lobby to congress if theyd only gain a few dollars. So other than a few academic economists and think tanks, nobody opposes the measure, and it is enacted by congress. By this, we see that a small group is inherently at an advantage against a larger group. Although in total the amount at stake is the same for each group, the individual members of the small group have much more at stake than the individual members of the large group, so they have an incentive to spend more time and energy trying to change government policy. If these transfers just caused one group to gain at the others expense, it wouldnt hurt the economy at all. It wouldnt be any different than someone just handing you $10; youve gained $10 and that person lost $10, and the economy as a whole has the same value it had before. However, it does cause a decline in the economy for two reasons: The cost of lobbying. Lobbying is inherently a non-productive activity for the economy. The resources spent on lobbying are resources that are not being spent on creating wealth, so the economy is poorer as a whole. The money spent on lobbying could have been spent buying a new 747, so the economy as a whole is one 747 poorer.The deadweight loss caused by taxation. In the article The Effect of Taxes on the Economy, its illustrated that higher taxes causes productivity to decline and the economy to be worse off. Here the government was taking $4 from each taxpayer, which is not a significant amount. However, the government enacts hundreds of these policies so in total the sum becomes quite significant. These handouts to small groups cause a decline in economic growth because they change the actions of taxpayers.