The Locke Luminary Vol. I, No. 1 (Summer 1998) Part 4
Edited by Amanda J. Owens, Director of Legal Studies, and Dr. Charles K. Rowley, General Director
The Interest-Group Theory of Government
Robert D. Tollison, University of Mississippi
As a generalized idea about how the organized "few" win favors from government at the expense of the unorganized "many," the interest-group theory of regulation and government has been in the literature of economics and political science for a long time (Posner 1974). In the past twenty-five years, however, the interest-group theory has grown from an intuitive but loose idea about how government works into a rigorous theory of government with testable implications that are not nearly so obvious as the "few" versus the "many" logic would seem to suggest. Two economists paved the way for these developments. Olson (1965) first explored the important question (still pending today) of how interest groups overcome free riding behavior with respect to the "public good" provided by lobbying in order to organize for collective action. In other words, how do interest groups form, and how large are they? In a study of economic regulation Stigler (1971) later showed how to formalize the interest-group approach and, more importantly, how to test empirically propositions derived from such a theory. Subsequent contributions to this literature have been steady and cumulative, so that the interest-group theory can now claim a place as a serious competing explanation of the behavior of government and its agents.
The basic idea of the theory can be explained. Government activities are viewed as a process in which wealth or utility is redistributed among individuals and groups. Some individuals and groups are effective at organizing and engaging in collective action such that they are able, for example, to organize for less than a $1 in order to procure $1 of wealth transfers. These individuals and groups are net demanders of transfers. Other individuals and groups are in the inverse position -- it costs them more than a $1 to avoid giving up a $1. Rational behavior dictates that this second group of individuals will be net "suppliers" of transfers. The institutional framework of representative democracy and its agents represent the means of facilitating wealth transfers, that is, of pairing demanders and "suppliers" efficiently. There exists an equilibrium level of transfers in this theory, with deviations being mitigated through elections.
The modern interest-group theory has evolved in at least two directions. One branch has been termed Chicago Political Economy. This version, exemplified by Stigler (1971), Peltzman (1974), and Becker (1983), focuses on the impact of regulation and government on the allocation of resources, or what economists refer to as P (Price) and Q (Quantity). Peltzman (1974) developed a generalization of Stigler's (1971) theory of economic regulation in which he explained why government does not give out perfect cartels. The vote-maximizing regulator is, in effect, constrained to make trade-offs among a variety of interests such that politically determined prices are always the result of trade-offs or compromises at the margin. No one group gets all that it wants in this process. Becker (1983) posited a theory of pressure group competition in which such competition leads to the least-cost pattern and amount of transfers. The world, in other words, is as efficient, all else equal. This is presently a controversial and interesting idea in the literature.
The other branch of the interest-group theory has been termed Virginia Political Economy. Scholars in this tradition have focused on the impact of institutions on the wealth transfer process. Landes and Posner (1975) introduced the indepedent judiciary as an enforcer of long-term contracts between the legislators and interest groups. McCormick and Tollison (1981) showed the impact of legislative institutions (e.g., size) on the costs and benefits of lobbying. The Virginia approach adds to and supplements the Chicago approach.
The literature growing out of these earlier works is now quite large (Tollison 1988, 1991) and leads in numerous directions. Space does not permit a discussion of these various avenues of research. A small example will have to suffice.
In the interest-group theory consumer and producer interests are traded-off against one another. However, much economic regulation is driven by a different set of combatants. Much regulation is fueled by competitor versus competitor interests. The most obvious example of this type of regulation is where the producers of butter obtain a regulation raising the price of margarine. But this is not what is meant here; what is meant is competitor versus competitor in the same industry, that is, some butter producers against others.
The basic idea is straightforward. Firms in an industry are heterogeneous with respect to costs; the industry supply curve is upward sloping. This opens the door to possible regulations which impose relatively greater costs on higher-cost, marginal firms, causing some of them to leave the industry. All firms face higher costs as a result of direct regulation, but the exit of higher-cost firms raises market price in the industry. Depending upon relevant elasticities, the increase in price can outweigh the increase in costs for the lower-cost producers. If so, the regulation increases their wealth at the expense of both consumers and the higher-cost firms which had to leave the industry.
Marvel (1979) used this theory to explain the origin of the British Factory Acts in the 1830's. Contrary to the conventional wisdom that such laws were in the public interest because they limited the working hours of women and children, Marvel argues that the regulation of hours favored steam-mill over water-mill owners. The latter could only operate when the water flow was sufficient, and hence ran long hours when stream conditions were good. The hours restrictions curtailed the ability of the water-driven mills to make up for lost output when streams were high. According to Marvel's estimates, the resulting rise in textile prices transferred a significant amount of wealth to steam-mill owners, who could operate on a regular basis. The novelty of Marvel's argument is apparent.
Several points are worth making in concluding. First, one should not confuse the interest-group theory with Marxism. Simple-minded Marxism suggests that Capital always wins over Labor in the legislative process. The interest-group theory stresses the costs and benefits of organization and lobbying. Any group can win benefits from the state in the interest-group theory. Moreover, there is ample evidence that Labor, the elderly, small businessmen, and so on benefit from regulation. Nor is it always small groups that win at the expense of unorganized individuals. There are many quite large interest groups.
Second, the burgeoning literature on the social costs of rent seeking (Tullock 1967) forms the normative backdrop for the interest-group theory of government. The interest-group theory of government is about lobbying, and the theory of rent seeking is about the costs of lobbying. A short summary statement about the latter would be: there exists no clear agreement in the literature about how to model rent-dissipation processes, and so there is no clear agreement about whether such costs bulk large or small in real economies.
Third, and finally, none of the foregoing is meant to convey the idea or attitude that the interest-group theory is complete or settled. There are many issues yet to be satisfactorily addressed, not the least of which is how does the theory explain deregulation, privatization, and the relative declension of government. But the progress over the last twenty-five years has been remarkable, and, undoubtedly, scholarship will continue to be robust in this area.
Robert D. Tollison is the Robert Hearin Professor of Economics at The University of Mississippi, United States © The Locke Institute.
References
Becker, G.S. 1983. "A Theory of Competition Among Pressure Groups for Political Influence." Quarterly Journal of Economics 98 (August): 371-400.
Landes, W.M. and Posner, R.A. 1975. "The Independent Judiciary in an Interest Group Perspective." Journal of Law and Economics 18 (December): 875-901.
McCormick, R.E. and Tollison, R.D. 1981. Politicians, Legislation, and the Economy:
An Inquiry into the Interest-Group Theory of Government. Boston: Martinus-Nijhoff.
Marvel, H.P. 1977. "Factory Regulation: A Reinterpretation of Early English Experience." Journal of Law and Economics 20 (October): 379-402.
Olson, M. 1965. The Logic of Collective Action. New York: Shocker Books.
Peltzman, S. 1976. "Toward a More General Theory of Regulation." Journal of Law and Economics 19 (August): 211-40.
Posner, R.A. 1974. "Theories of Economic Regulation." Bell Journal of Economics and Management Science 5 (Autumn): 355-58.
Stigler, G.J. 1971. "Theory of Economic Regulation." Bell Journal of Economics and Management Science 2 (Spring): 3-21.
Tollison, R.D. 1988. "Public Choice and Legislation." Virginia Law Review 74 (March): 339-71.
Tollison, R.D. 1991. "Regulation and Interest Groups." In Regulation, ed. Jack High 59- 76. Ann Arbor: University of Michigan Press.
Tullock, G. 1967. "The Welfare Costs of Tariffs, Monopolies, and Theft." Western Economic Journal 5 (June): 224-32.
|
...