The Rise and Decline of Nations Ch. 3: The Implications of the Logic of Collective Action

1. The Rise and Decline of NationsCh. 3: The Implications of the Logic of Collective Action Alexander Tabarrok January 2006

2. Implications of the Logic of Collective Action • There will be no countries that attain symmetrical organization of all groups with a common interest and thereby attain optimal outcomes through comprehensive bargaining. • Some groups are easier to organize than other groups. For example, small, homogeneous groups with access to selective incentives are easier to organize than larger, hetereogeneous groups. • (In what countries are farmers well organized and political powerful? In what countries are they weak?) • Organized groups have more political power than unorganized groups. • Since not all groups are organized there is no hope for a bargain in which everyone comes to the table and optimal outcomes are hammered out. • Note: What is a (Pareto) optimal outcome? It’s one where all mutually beneficial gains from trade have been exhausted so at a Pareto optimal outcome no group (individual) can benefit without harming another group (individual). (Recall what Coase Theorem says about bargaining and P. optimality). • Non-optimal outcomes mean that some policies will be passed that benefit one group less than they harm another group. E.g. Trade restrictions.

3. Implications of the Logic of Collective Action • Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time. • Organizing groups takes time. • The first really succesful labor union was not established in Great Britain until 1851 nearly a century after the start of the industrial revolution. It took another 70 years for labor unions to become the norm. • It often takes a unique event a “big push” to establish a group for collective action. In the United States labor unions became common only with the advent of World War II. • Farmers in the United States were not organized until the early twentieth century. • Once a group is established, however, it tends to be long-lasting (so long as the society is stable with unchanged boundaries). • The March of Dimes was established to eliminate Polio. Polio was eliminated but the March goes on (now devoted to infant health).

4. Implications of the Logic of Collective Action • Members of “small” groups have disproportionate organizational power for collective action and this disproportion diminishes but does not disappear over time in stable societies. • Small groups always have disproportionate power but some large groups will be organized over time in a stable society so the disproportion may diminish over time but will not be eliminated.

5. Implications of the Logic of Collective Action • On balance, special-interest organizations and collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive. • Most SIGs are small relative to the society that they are a part of. Consider a SIG that represents 1% of the population and suppose that there is some public policy that would increase social efficiency by $50 per person and cost $1 per person (a very beneficial policy). Does the SIG have an incentive to lobby for this policy? • Not much! Even though the policy is highly beneficial to society the SIG will receive only 50 cents of every $50 of benefit thus the SIGs incentives to lobby for the policy are very low relative to the true benefit. • Suppose that there is some policy that costs society $50 for every $1 it aids the SIG. Will the SIG have an incentive to lobby for the policy? • Quite possibly yes! Even though the policy is very costly to society it benefits the SIG thus the SIG has an incentive to lobby for the policy which is very large relative to the true benefit (which is negative). • On average, therefore, SIGs are distributional – they are about dividing the pie not growing the pie. • The more pie-dividing going on the more divisive the society!

6. Implications of the Logic of Collective Action 5. Encompassing orgs. have some incentive to make the society in which they operate more prosperous, and an incentive to redistribute income to their members with as little excess burden as possible, and to cease such redistribution unless the amount redistributed is substantial in relation to the social cost of the redistribution. • An encompassing organization is simply an organization that is very large relative to society. (e.g. As we will discuss later in some countries, for example, labor unions can represent a third or more of the population) • By the reverse logic of implication 4 an encompassing organization will take into account a significant portion of the costs that it imposes on society. • E.g. A group that represents 1/100th of society will be in favor of policies that give it a dollar and cost society $50. • A group that represents one half of society will not be in favor of these policies.

7. Implications of the Logic of Collective Action • Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining tables, and more often fix prices than quantities. • Consensual bargaining takes time. Holdouts and strategic bargaining slow things down. • Since consensual bargaining is often too costly groups establish rules and regulations which “protect” members but slow decision making. • Bottom line – it takes longer for a group of size N to make a decision than for N people to each make 1 decision.

8. Implications of the Logic of Collective Action • Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, thereby reducing the rate of economic growth. • This is the dynamic version of implication 4. Change is a threat so distributional coalitions tend to want to slow down the adoption of new technologies. • E.g. the railroads had it pretty good before trucks entered the picture so they lobbied for the regulation of trucking. • Unions want to avoid technologies that are beneficial for society but that threaten jobs – e.g. the replacement of auto workers by robots. • Microsoft wants to prevent Google from developing new technologies that threaten its base. • Old firms lobby to be bailed out and protected from competition from new technologies or foreign firms.

9. Implications of the Logic of Collective Action • Distributional coalitions, once big enough to succeed, are exclusive and seek to limit the diversity of incomes and values of their membership. • In order to keep up wages the American Bar Association wants to limit the number of new lawyers and to prevent, for example, paralegals. • The AMA wants to limit the number of new doctors. • Homogeneous groups are easier to manage as well as control so coalitions seek to remain homogeneous. The American Association of Retired Persons would not want to expand to be the American Association of Retired and Young Persons.

10. Implications of the Logic of Collective Action • The accumulation of distributional coalitions increases the complexity of the regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution. • Regulatory complexity grows due to lobbies, in a continual process of loophole discovery, closing, discovery, closing and adapting to new threats. • Prior to the Microsoft’s antitrust trial it didn’t have much of a Washington office and neither did much of Silicion Valley. Now every major player spends a lot of money in Washington and CEOs fly here to schmooze all the time. • A society where CEOs spend a lot of time schmoozing rather than developing new products is a different type of society.