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The Logic of Collective Action

Special Interests and Economic Policy


There are a lot of government policies, like airline bailouts, that from an economic perspective don't 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 I've seen 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. I'll give a brief outline of The Logic of Collective Action and show how we can use the results of the book to explain economic policy decisions. Any page references come from the 1971 edition of The Logic of Collective Action. I'd recommend that edition for anyone who is interest in reading the book as it has a very useful appendix not found in the 1965 edition.

You would expect that if a group of people have a common interest that they'll 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 are very large number of producers of an identical good. Since the goods are identical, all firms end up charging the same price, a price which 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 firm's 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. We'll see on the next page that The Logic of Collective Action explains why this will not work either.

Be sure to continue to page 2

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