by Filip Palda
THE CHALLENGE TO the view that political action comes without cost came from George Stigler. He wrote that an industry “which seeks political power must go to the appropriate seller, the political party. The political party has costs of operation, costs of maintaining an organization and competing in elections.” He was saying that to influence parties that had invested heavily in promoting certain policies you needed to invest equivalent sums to convince them a better way existed. A way that perhaps favored your industry. It was unrealistic to think that a politician or leader would intervene in some group’s interest without costly pressures being placed upon her. Whether you belonged to an anti-smoking lobby in California or a human rights movement in Zimbabwe, to gain influence you needed to exert pressure. The tobacco lobby, or leaders of Zimbabwe, would exert contrary pressure. The thrust and counter-thrust of politics costs money. There are no free rides on the road to optimal or any other sort of government policy. Perhaps this explains why political promises to improve the public good have little credibility. Such promises imply a harmony of interest among voters. Since political promises are so seldom kept, an absence of harmony may be discerned. The real political world is one of implacably opposed interests tuned to taking from others to improve their own lot. This does not mean everyone hates each other. It may equally well mean that people simply disagree on the means of doing good.
The notion that politics was not a free ride was the more general part of a sharper critique of government Stigler made throughout his article. Focusing on a branch of government intervention known as regulation he suggested that regulation in the US since the 1930’s had seldom served the public interest. Instead, by restricting competition it had kept prices high. Think of a quota on milk production. By limiting supply the quota raises prices and enriches farmers. The article became famous because it had the audacity to subject regulations in trucking, and professional licensing to empirical analysis suggesting that far from protecting consumers, these regulations raised the incomes of producers.
Asymmetry in costs
THERE IS NO doubt that casting doubt on the public benefit of regulations was an audacious, even defiant aim of his research. Stigler was almost the sole exponent of the view that government was not geared to serving the public interest. The only other notable like-minded thinkers were Gordon Tullock, who had started on these lines in 1967 with his article on rent-seeking. The assumption was present throughout the work of Mancur Olson in his 1965 opus The Logic of Collective Action. What distinguished Stigler from these fellow travellers was his quest to understand interest group success as a function of the transactions costs of organizing interest groups to influence government. In this sense he was pushing Coase’s theory of the firm into politics.
Such thinking was utterly alien in the early 1970’s which were still a time when prominent economists admired full-out government control of the economy. Nobel Prize winner Paul Samuelson actively praised the Soviet system of central planning. Even until 1989, when the Berlin Wall was toppling down, the 13th edition of his famous textbook Economics, was positing that “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and thrive.”
Yet to those who read Stigler’s article closely, its true contribution to political thought lay elsewhere than in the claim that regulation can favor private interests. Its claim to fame lay in being a theory predicting the optimal size of coalitions in politics, showing how economic conditions determined the types of intervention these coalitions favored, and explaining the factors that would mitigate political conflict and lead to economic efficiency. This smacked of a total theory of power.
Stigler’s explanation for optimal coalition size lay in the recognition that certain groups in the political contest had an inherent advantage over others. In a very subtle manner he was positing the existence of asymmetries in power. In language familiar to game theorists he specified the conditions of optimal coalition size based on these asymmetries. The search for a theory of coalition size is perhaps one of the Holy Grail’s of all social sciences. Asymmetry excites scientists from all fields. Where a fundamental asymmetry exists, distinctions can begin to be made between different constituents of the elements the theory is trying to explain. In physics “symmetry breaking” explains why certain fundamental particles acquire mass. In Stigler’s theory of politics, symmetry was broken by differences in the costs of getting different interest groups into action. At the risk of oversimplifying his thoughts, one can state that he believed that in democracies small groups with concentrated interests had an advantage over large groups with diffuse interests.
These aspects of political life may seem obvious but when you push the thought to its conclusion some surprising insights emerge. To compete with the inherent advantage of groups of small size and doted with concentrated interests, large groups may tactically lobby for power to be decentralized. If you can devolve power to the municipal level, small groups lose their advantage, because at that level, everyone belongs to a small group. At the municipal level the problem of coordinating group behavior is not likely to be corrupted by asymmetries in interests. Perhaps Stigler’s theory explains the unending tension between state and municipal interests. Certainly it provides us with one possible explanation of the forces forming not only interest groups but also the structure of municipal and state governments. In this sense his theory is in the best Coasian tradition of using the costs of coalition formation to understand the institutional structures we observe.
Asymmetry in gains
STIGLER RECOGNIZED IN passing that when trying to extract resources, small groups also face the problem that their gains from extraction are lower than the costs they impose on their prey. This asymmetry in gains and costs arises from the collateral damage arising from any predatory action. There will always be a certain amount of “wastage” when making off with loot. Economists are more genteel. They use the term “deadweight loss”. Whatever nomenclature one favors, the essence of the matter is that the success of different groups depends on their ability to keep the costs of organizing themselves low enough to counteract the outraged reaction of their targets. Targets feel the pain of extraction more keenly than beneficiaries feel the benefits of their depredations. This inbuilt asymmetry explained why small, powerful groups could not completely expropriate larger groups with diffuse interests. At one point the gain to small groups would be smaller than the loss to large groups and a political equilibrium would be achieved in which extractive activities settled into a fixed pattern.
What Stigler did not twig to was that if victims feel the loss more keenly than predators, then predators have an interest in keeping the collateral damage from their depredations at a low level. In other words, there is an incentive to minimize the damage from political clashes. Thus predatory interest groups may in fact enter into discussions with their victims and negotiate “Coasian deals” that lead to extractive policies that allow some benefit for predators while minimizing the collateral and utterly fruitless damage which may be felt by victims. This deadweight loss is of no benefit to predators. In fact it provokes outrage in their prey. Predators will get the most out of their victims by keeping these deadweight losses to a minimum.
Interaction of economics and politics
WHILE PAYING ATTENTION to the logistics of interest group formation, Stigler’s model of politics was at heart rooted in economic conditions. He believed that these conditions determined the form that government regulation would take. If faced with the competitive threat of substitute products, an industry would want to suppress these and encourage the production of complements to its output. As Stigler wrote “the butter producers wish to suppress margarine and encourage the production of bread. The airline industry actively supports the federal subsidies to airports; the building trade unions have opposed labor-saving materials through building codes.” The strength of Stigler’s article lies in part in the large number of e
xamples he provides to show that the shape of politics is determined by the shape of the market.
Are we all predators?
ACCOLADES SHOWERED ON Stigler for having the gumption to question the public interest theory of government and for presenting an embryonic theory of interest group formation. Yet some questions remained about his approach.
A careful reader of his work had to be troubled by the notion that politics is a combat zone in which government resources are disputed through rival investments by pressure groups. There seemed to be no public interest motive, no nobility in government present in his conception of public life. In a 1976 article that is among the most quoted in economics, Sam Peltzman added to the provocation by inferring that according to Stigler “The essential commodity being transacted in the political market is a transfer of wealth”.
Stigler was never quite this explicit. He wrote “political systems are rationally devised and rationally employed, which is to say that they are appropriate instruments for the fulfillment of desires of members of the society. This is not to say that the state will serve any person’s concept of the public interest: indeed the problem of regulation is the problem of discovering when and why an industry (or other group of like-minded people) is able to use the state for its purposes, or is singled out by the state to be used for alien purposes.” Still, the thought of government as an instrument for redistribution which may or may not serve the public interest is present in the above passage.
The claim that government exists purely to redistribute resources is bound to outrage and puzzle. Yet, viewed logically, the claim is difficult to refute. It follows from the definition of government. Government takes from some and gives to or spends on behalf of others. Those others may include those who pay the bill or may not. No matter what the identity of the recipients and contributors this is what by definition government does. In an otherwise scathing critique of Stigler’s research program, Robert Tollison had no problem with the view that in Chicago political economy “… the state is a mechanism which is used by rational economic agents to redistribute wealth. Wealth transfers are the essence of regulatory and governmental behavior in this approach. Governments may, in fact, produce some real goods and services, but these are by-products of effective schemes for wealth transfers.”
Bonum publicum emergit ex iniquitate
HOW DID STIGLER assess the autonomous, cynical functioning of government policy that his model predicted? His essay gives conflicting hints. One part argues that regulation serves private interests who “capture” government representatives to serve the industry’s purposes. Nothing really good seems to be coming out of this view of the political world. Yet another part of Stigler’s essay hints at the possibility of a Pareto-Optimum in politics. Here are the words: “We assume that political systems are rationally devised and rationally employed, which is to say that they are appropriate instruments for the fulfillment of desires of members of the society.” The phrase is cryptic but loaded with meaning. It challenges the reader to take up Stigler’s embryonic view of politics, as seen through the lens of Pareto-efficiency, and bring it to its logical conclusion.
This bent towards a belief in Pareto-efficiency was due to Stigler’s immersion in a school of economics that insisted on three immutable beliefs. Melvin Reder has described these somewhat infelicitously as “tight prior” views. What had to be present for a complete model of any sort of social relation was first the notion that individuals seek what is best for them. The second was that they undertake this quest for self-fulfilment subject to constraints. The third requirement of a theory was that it had to show how individual optimizing decisions coalesced into equilibrium that engaged all other individuals. The definition of equilibrium favored in economics is one in which everyone in society adopts a strategy which, given the assumed strategies of all other people, he or she feels no point in changing. Economists call this Nash equilibrium. Under certain circumstances it can be Pareto-optimal, meaning that resources cannot be reallocated in such a way that at least one person benefits without harming anyone else. Chicago tight-prior was not logically limited to private markets. Its power lay in the presumed ability of its postulates to describe all manner of resource allocations, be they private or public.
Stigler could not quite bring himself to elaborate on efficiency implications of his model. Twelve years had to pass before someone took up the challenge. When Gary Becker published his 1983 paper formalizing Stigler’s thoughts and drawing them together in a coherent mathematical model the conclusion was explosive. Subject to certain qualifications, political systems tended not to be wasteful. They might even converge in their outcomes to the sort of results envisioned by the cost-benefit analysts of the 1930’s. Out of conflict and violence efficiency in the public interest could emerge. Bonum publicum emergit ex iniquitate.
Efficiency also implied that economists should stop giving advice to government. Through the struggles of competing interest groups efficiency had already been attained, though perhaps in a form that was difficult for economists to perceive. Milk quotas, pork-barrel construction projects, trade-destroying tariffs could serve, against every lesson economists had been taught in the classroom, to enhance economic efficiency when perceived against the backdrop of political struggle. How these strange insights arose is the subject of the next chapter, where we tackle Gary Becker’s model of power. For now we need to draw together what we have seen of Stigler’s first shot at a total theory of power.
Summary
STIGLER DID NOT crank out a complete theory of power. His main interest was in discovering whether regulation was in the public interest. When he discovered the answer was “no” he perceived new dots which he tried to connect. The theory he attempted flapped its wings. Though it was not fully fledged it comprised three key insights that later researchers would fuse into a grander structure.
Stigler’s first insight is that government action is not a free good. August personages taking counsel whispered into their ears by messengers from Apollo are not the people we find in charge of government. Real world government agents are subject to interest groups exerting pressure upon them in order to seize control of the public purse or at very least to have a dip at the trough. Inspired by the general Chicago doctrine of “tight prior” Stigler hinted that these conflicts between interest groups might produce policies that could be considered economically efficient. This convergence towards efficiency would have the consequence that economists could forget about giving government advice. An efficient government would have converted all ideas on how to behave efficiently long before an economist had arrived on the scene to notice that some big bills had been left lying on the sidewalk.
The second insight was that two asymmetries influenced the structure of interest groups and the policies they pushed. Small groups with concentrated interests had an inbuilt advantage over large groups with diffuse interests. To the cab driver the loss of restrictions on the number of cabs can mean a reduction of thousands of dollars of revenue. To her fare greater competition between taxis might mean a savings of a few dozen dollars a year. Perhaps this is why a rail line skirts Miami Airport but does not stop there.
Yet small groups, or any group in fact that seeks to feed on others faces the harsh reality that its financial gain will be less than the financial harm it imposes on its victims due to collateral damage. The balance of these two asymmetries determines the structure that interest groups will take, the division of power between levels of government, and the types of redistributional policies undertaken. Redistribution that imposes severe collateral damage will be shunned in favor of more efficient means of extraction.
The third insight was that economic and political structures are deeply intertwined and mutually determining. If a firm such as an aerospace giant has no rivals in its country it will lobby government for direct cash subsidies. Firms with rivals would be better off simply keeping them out, so their best strategy would be to lobby for laws that restr
ict entry to their industry such as a production quota.
Political parties form in order to create and preserve a brand name that voters can easily recognize. These brand names are especially important to uneducated voters and surprisingly also to voters who earn high salaries and do not have the time to educate themselves on the particulars of party platforms. Parties also form when voters are deprived of alternate instruments for expressing their preferences such as citizens’ initiatives. The causality from economics to politics also runs in the reverse direction. Direct democratic instruments lower the cost to citizens with diffuse interests of expressing their preferences. This allows them to better protect themselves against the extractive efforts of small groups with concentrated interests. Thus a country with a strong tradition of direct democracy will also see fewer small economic interests closing markets to competition.
This third point of Stigler’s is perhaps his most profound. The joint determination of economic and political structure is a very difficult concept to grasp. It arises from the economist’s notion of equilibrium between competing interests. And it is to an examination of this equilibrium to which we turn in the next chapter where we shall examine Gary Becker’s effort to unite Stigler’s and Coase’s thoughts into a coherent and ultimate theory of power.
Further reading
Becker, Gary S. (1983). “A Theory of Competition Among Pressure Groups for Political Influence.” The Quarterly Journal of Economics. 98:371-400
Coase, Ronald H. (1960). “The Problem of Social Cost.” Journal of Law and Economics. 3: 1–44.
Harberger, Arnold C. (1971). “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay.” Journal of Economic Literature. 9:785-797.