The+Logic+of+Collective+Action

Example of Rational Choice · Organizations are expected to further the common interests of their members, e.g. labor unions are expected to strive for higher wages for their members. · Individual + Common Interests: o Even if organizations also serve purely personal, individual interests, their primary function is to advance the common interest. · Public or collective goods are the characteristic organizational goods, as ordinary non-collective goods can always be provided by individual action
 * Olson, //The Logic of Collective Action: Public Goods and the Theory of Groups, p. 1-36// **
 * The Purpose of Organization **

· What are public goods? o They must be available to everyone if they are available to anyone, like national defense and lighthouses o Those who do not purchase or pay for any of the public or collective good cannot be excluded or kept from sharing in the consumption of the good. · In a perfectly competitive industry, firms have a __common interest__ in the higher price for the industry’s product. · But a firm also has an __individual interest__. A firm wants to sell as much as it can, until the cost of producing another unit exceeds the price of the unit. o If the price is greater than the marginal cost, then it is in the best interest for firms to increase production. However this causes supply to exceed demand, and the price falls. o The total revenue of the industry will decline but this does not mean that a firm hasn’t maximized their profits. § In fact, if a firm tries to instead decrease its production in order to keep the price from falling, it is likely to experience even a greater decrease in its profits, as it will still experience the lower price created by its competitors but now also have a smaller output. · This is an example of perfect competition, so all the firms are pretty small and the industry is big. Therefore any changes in output made by one small firm is unlikely to have an effect on the price in the industry as a whole. o Therefore if the firms in an industry are maximizing profits, the profits for the industry as a whole will be less than they might otherwise be. · The only thing that could prevent this is outside intervention, which is unlikely as it is not rational for a firm to waste time, energy and resources lobbying the government for intervention that would benefit the entire industry (as those that did not invest in lobbying will still reap the rewards of any protective tariffs or laws – **free rider problem**). · ** Group Theory: ** Implicitly assumes that private groups and associations operate according to different principles from those between firms in the marketplace or between taxpayers and the state. There are two variants of this theory: o ** Causal Variant ** : the traditional view is that private organizations and groups are ubiquitous and this is due to a fundamental human propensity to join groups. Does not draw distinctions between groups of different size. o ** Formal Variant ** : this variant of the traditional view also emphasizes the universality of groups as an aspect of the evolution of modern societies, not because of instinct or propensity.
 * Public Goods and Large Groups **
 * Example of how individual interests can conflict with a common interest **
 * Traditional Theory of Groups **

· Small groups can provide themselves with collective goods without relying on coercion or any positive inducements apart from the collective good. Why? o Because in a small group, each of the members (or at least one), will find that the benefits of having the public good for the entire group is greater than the cost of providing some of the good – even if that member ends up paying for the entire good. o Since the group is small, each member gets a substantial portion of the total gain – therefore the collective good can be provided by voluntary, self-interested actions of the member of the group. The total gain depends on: § The rate or level at which the collective good is obtained § The size of the group (not just the number of members, but also how much each individual values a unit of the collective good) o HOWEVER, this doesn’t mean that the collective good will be provided at the optimal level [1] – the amount of the collective good that would be in the best interest of the group as a whole to have. § Why this suboptimality? The inherent nature of a public good, where it is impossible to avoid the free-rider problem. § In addition, the larger the group, the farther it will fall short of providing the optimal amount of the collective good § In small groups, there is a surprising tendency for the exploitation of the great by the small · This could explain why international organizations aren’t given optimal amounts of resources, why large countries bear disproportionate shares of the burdens of organizations like NATO and the UN Exclusive and Inclusive Groups - The group theory is not only about cost/gain. Movements in and out of the group are also important. - An increase in the size of a market group is likely to bring in more competition. In nonmarket groups, larger size means lower costs. - The main difference is caused by the fact that market collective good is fixed in supply (and nonmarket is not). - __Exclusive collective good:__ If the members of a group want to reduce the size of the group due to a fixed benefit, it is called an exclusive collective good(by the article). __Inclusive collective good:__ If the supply of the collective good increases by the size of the group, it is called an inclusive collective good. - So, groups might want to expand/reduce their size based on the nature of the collective good. - And of course the outcomes of participation/non-participations are quite different in exclusive/inclusive collective goods. (The chapter keeps comparing prices in free market with lobbying in free market) A Taxonomy of Groups - Size of the group changes the behavior and //strategic interaction// of the members. o For instance, in a group where the group is not so small that one member can purchase/get the collective good but is still small enough that each member’s contribution is importance for the outcome – strategic interaction is relatively more important due to mutual dependency. (What will happen if one stops contributing?) o If the group is so large that single contributions are not meaningful, we end up with another free rider problem. There rises a need for coercion in order to make sure members contribute and there is a collective good. o There can be a group which has members with unequal degrees of interest in the collective good. (This reminds me of EU) - The main question asked in this part is when we need of an informal coordination in a group and when we need a formal organization. o Small groups can go informal. o The need for a formal agreement increases as the size of the group increases. (though this increases the cost of forming a group) - There are three factors that keep larger groups from furthering their own interests o The reward for acting together is not optimal. o The share of collective good is small (not enough to share the burden – oligopolies within the group might be more advantageous.) o The organizational costs are high. - Pure monopoly, Oligopoly, Atomistic Competition (Market) - Privileged groups, Intermediate groups, Latent (Nonmarket) Long story, short: The chapter talks about group size, structure, and the nature of the collective good. And then it explains why individuals should form groups. The examples I had in my mind were UN, OPEC, our study group, and a hypothetical undergrad study group of 100 students each reading 5 pages a week. (nonmarket, market, small size, large size). Two important concepts to know are economies of scale, and the problem of free rider. Group Size and Group Behavior The coherence and effectiveness of small groups - Your contribution to collective good gets smaller as the group gets larger. This also means you won’t bother to try harder to get your voice heard, to advance the collective good etc.. - If you want action, get a small group (John James’s study) - As the stockholder example shows, individuals don’t have ‘significant’ power in larger organizations and groups. Problems of the Traditional Theories - __HERE IS THE DEAL:__ Traditional theories cannot be used to understand large scale groups because they are based on small groups. Group size is one of the important factors affecting the group behavior (and everything else about the group). - Functional theories explain the existence of large groups but not the incentives for individuals to join the group. - The degree of consensus is overlooked in traditional theories. Social Incentives and Rational Behavior - So, let’s assume there is no economic (or functional let me say) incentive to join a group. There might still be a social incentive. (i.e. Even if you believe you can handle the readings by yourself, as the rest of your cohort is in the study group, you will still want to join) - Social status and social acceptance are individual goods. - Social sanctions and social rewards are selective incentives. - Small groups are luckier as they have economic and social incentives. Olson 132 – 167, Chapter VI: The “By-Product” and “Special Interest” Theories i. Natural channel through which farmers could get aid/edu ii. Controls a vast variety of business institutions that normally provide special benefits to members
 * Small Groups **
 * Olson, //The Logic of Collective Action: Public Goods and the Theory of Groups,// pp. 37-65 **
 * 1) The “by-product” theory of large pressure groups: Why do we have large groups if they are not securing collective goods?
 * 2) “They have the authority and capacity to be coercive”
 * 3) “They have a source of positive inducements” for individuals (133). //“Such an organization could make a joint offering or ‘tied sale’ of a collective and a noncollective good that could stimulate a rational individual in a large group to bear part of the cost of obtaining a collective good” (134). =//**Bi-product theory**
 * 4) Labor Lobbies
 * 5) Labor unions are politically powerful, which is a by-product of their industrial activities. When they abandoned the political arena to deal directly with employers was when the became effective: their power is not central but rather stems out of their work
 * 6) Professional Lobbies
 * 7) Role of coersion: they are powerful enough to make things happen
 * 8) More importantly: noncollective benefits i.e. medical malpractice and AMA, or AMA Journal = tiered sale to help individuals bear the cost.
 * 9) “Special Interest” Theory and Business Lobbies
 * 10) //“The high degree of organization of business interests…the power of these business interests, must be due in large part to the fact that the business community is divided into a series of (generally oligopolistic) ‘industries,’ each of which contains… a fairly small number of firms” (143).//
 * 11) Special interests receive disproportionate power because they are organized into oligopolistic groups.
 * 12) Government Promotion of Political Pressure
 * 13) If the government can get things to happen with the help of large associations (i.e. farm bureau, which is providing a noncollective good to its members in the form of extension services), then it supports political pressure.
 * 14) Farm Cooperatives and Farm Lobbies
 * 15) The example of Illinois: it was controlled by a lobbying/legislative organization, it generally restricts the benefits of trading with it to members of that lobbying/legislative organization. COERSION
 * 16) Success in American Farm Bureau Federation
 * 1) “Noneconomic” Lobbies
 * 2) i.e. social, political, religious, philanthropic, veteran objectives: the theory still applies
 * 3) not philanthriopic lobbies or religious lobbies (where the interests represented are not the interests of the members): they are seen as “irrational” or “nonrational” (161).
 * 4) “Forgotten Groups” – Those who suffer in silence
 * 5) i.e. migrant farmers, taxpayers, etc. will never organize //“because the gains from group action would exceed the costs” (166).//

- Two types of articles that the author wrote after the book: economics based and other - In small groups, externality should not be ignored. - Small groups will provide less than optimal collective good, and there will be an ‘exploitation of the great by the small’. (Greater powers will get larger shares). - This model conflicts with Lindhal’s model (voluntary theory of public exchange.   - Thinking about collective good in nation state, one should consider the scope, domain, or clientele of the good. – Not every good is provided to everyone in the nation-state and to no one outside.    - The Principle of Fiscal Equivalence: (As far as I can understand) If a jurisdiction is too small to get all the services or too large that some of the citizens don’t get services, there is a need for political/jurisdictional re-adjustments.    - The author claims that externalities and collective goods are going to have greater importance in the United States (Climate change and health care? – this was not a bad claim for 1971)   o The numbers of problems requiring government action is increasing.    o The existing measures of welfare or well-being will not be effective.    o An increase in collective goods and externalities can add to the amount of divisiveness and conflict in a society (Was Glenn Beck inspired by this book? I am really curious right now!)   - Parsonian sociology (voluntary contribution etc) should not be used to explain modern economy. Modern economic approaches focus on behavioral patterns (?).    - Entrepreneur (or a political entrepreneur) should be concerned with the special difficulty of providing collected goods. In other words, she should understand the group behavior and act accordingly. (The last sentence is my conclusion)    - Entrepreneurs might have different roles in different group types.
 * Olson, //The Logic of Collective Action: Public Goods and the Theory of Groups,// pp. 167-178 (aka Appendix) **

[1] What is the optimal amount of a collective good? When the rate of gain to the group, multiplied by the fraction of the group gain the individual gets, equals the rate of increase of the total cost of the collective good. A way to achieve optimality is to share the marginal cost of additional units of the collective good in exactly the same proportion as the additional benefits.