January 16, 2003

Chapter 12

Political Parties and Pressure Groups

The purpose of this chapter is to discuss two types of organizations that affect lawmaking. The first is the political party. Part one of the chapter presents a functional definition of the political party. It goes on to show how U.S. political parties help in elections, how they help legislators pass laws, and how they act as conduits for members of the collective to influence legislation. Besides the political party, another organization that helps individuals influence laws is the pressure group. Part two shows how voters in the U.S. influence legislators and political parties by organizing themselves into pressure groups.

1. POLITICAL PARTIES

Definition

     We define a political party as an organization that supplies three kinds of services: (1) helping legislative candidates get elected, (2) helping legislators get bills passed, and (3) helping members of the collective influence legislation. This is a functional definition. It is based on the services, or functions, the party performs for major functional classes of people in the democratic political system. In everyday life, some people join political parties for the joy of social interaction, for moral reasons, to make business contacts, and for any number of other non-political reasons. At the moment, these reasons for joining a political party seem relatively unimportant. As a result, we disregard them. If their importance grew substantially, however, we would have to consider them.

     From the point of view of public choice, the political party is a kind of non-profit firm. Some employees of the firm are paid salaries and others are rewarded either with jobs in some government department or in other ways. The purpose of this section is to discuss the three services in greater detail.

Helping Candidates Get Elected

     We discussed elections in Chapter Eight. We pointed out that in trying to get elected, candidates would have to decide on a platform, tell voters about it, and try to achieve credibility for their promises. We also pointed out that they might be able to gain by persuading voters to change their vote through campaign spending. However, we did not discuss the methods that candidates might use to organize their activities. Indeed, by failing to discuss these, we implicitly assumed that when candidates try to get elected, they act independently. It is evident, however, that they might hire others to be their agents in this activity. Independent candidates -- i.e., candidates who are not members of a political party -- typically do hire agents. However, most candidates are members of a political party. In this subsection, we first show the political party's role in helping candidates get elected. Then we discuss the history of the political party in U.S. elections.

How the Political Party Helps Candidates

     Today, most students of democracy take the political party for granted. To understand the function of helping candidates get elected, we make up a story about how it would emerge from a situation in which no parties initially exist. Imagine that there are no political parties. Each candidate is an independent. Assume at first that the election system used for legislators is a single nationwide constituency, as described in Chapter Six. For example, assume that 100 legislators must be elected in one national election. There are no separate voting districts. Each voter has 100 votes of equal weight which he casts for the top 100 candidates of his choice. We can assume that there are five hundred candidates.

     From one point of view, each candidate under these conditions is in competition with every other candidate. Thus some candidates would want to differentiate themselves from the others in order to maximize their votes. On the other hand, for candidates who have similar platforms, there is jointness in advertising supply. This means that effective advertising by two candidates costs less if it is carried out jointly than if it is produced separately. Candidates who join together can pool their resources. For example, a combination of two candidates could send twice as many letters to voters or they could send larger and/or more attractive letters to the same people. There is also jointness in the supply of election strategies. Candidates who pool their resources could more effectively survey voter opinion in order to identify an appealing platform. They could also devote more resources to identifying campaign contributors. Finally, they could hire more agents to help them.

     Just as two candidates have an advantage over one, three have an advantage over two, and so on. It follows that in a single nationwide constituency, political parties would have a tendency to form because of economies of scale in the activities that enhance candidates' prospects for getting elected.

     Now suppose that the population is divided entirely into single- representative voting districts. Only one candidate is elected in each of the one hundred districts. Each candidate would try to use what she regarded as the most successful advertising and election strategies. Accordingly, she would be anxious to hire the best agents to help her. Put yourself in the shoes of an agent who had invented a successful ad campaign or election strategy. Assuming that it cannot be inexpensively copied, your talents would be in high demand in different districts. You would have an incentive to expand so that your campaign or strategy can supply the demands of many candidates, in different districts, at the same time. If you are successful, you would be like a political party. As before, political parties would have a tendency to form because of jointness in the supply of advertising and election strategies.

     These factors -- (1) jointness of supply in advertising and (2) jointness of supply in providing election strategies -- are the main reasons why parties form to help candidates get elected. We do not mean to imply that it is impossible to get elected without joining a political party. Under the single-representative district system especially, there may be large differences among districts. The election strategies that are successful in some districts may not be successful in others. Also, it is possible that many voters would object to the platforms of the parties or to the very idea that they are being manipulated by advertising and elections strategies. These appear to be exceptions, however; they do not contradict the central idea.

     A presidential or prime minister candidate can be a kind of rallying feature for a political party. Consider first a presidential system. For simplicity, suppose that the legislature is chosen from single-representative districts. The president, however, is chosen by popular election. Then the president is like a representative of all the districts together. If representatives from each district join in a political party with a presidential candidate, they can realize gains from jointness in advertising and in political strategies. Now suppose that there is parliamentary system in which the prime minister is chosen by the elected legislators. In this case, a voter's vote for a particular representative may not only be a vote for him but also a vote for the prime minister candidate who the voter expects the representative to support. Gains from jointness can be realized by representatives who join in a party with an incumbent prime minister or a popular challenger.

     Party workers who help candidates get elected must be paid. This can occur in two ways. First, they can be rewarded by being appointed by the successful candidates to government posts. Second, they can be paid wages. The money ordinarily comes from campaign contributors who stand to benefit from legislation or executive decisions made in their favor.

     With these ideas in mind, we now shift to a discussion of the role of political parties in the history of U.S. elections.

The Political Party Roundup: Early U.S. Elections

     In 19th century U.S. elections, it was not unusual to see candidates in local elections showing up at popular places on election day with boxes of cigars, bottles of beer, or even small sums of money. They would give these things to all the voters who accompanied them to the polls and agreed to vote for them. In other words, the candidates tried to round up voters and herd them to the polls, like a cowboy might round up cattle. As time passed, in national elections, and in larger local elections, political parties came to replace candidates in the round up. A candidate would, in effect, pay the party to round up voters and herd them to the polls.

     The roundup services became most important following the fourteenth constitutional amendment in 1868. Among other things, this amendment extended the voting franchise from male property owners and other wealthy males to all male citizens. Prior to that time, voting privileges reflected the constitution framers’ fears of universal suffrage. The framers believed that if poor citizens were allowed to vote, they would vote for politicians who promised to redistribute wealth and to interfere with trade and business on behalf of the poor. The framers were themselves relatively wealthy and typically reliant on relatively free markets for their income. So they opposed this. In addition, the most influential framers subscribed to Adam Smith's belief that free enterprise benefits practically everyone. Universal suffrage might lead to laws that would hamper trade. Some framers saw themselves not only as promoters of their own selfish interests but also as builders of a new democracy and market economy.

     After 1868, parties not only rounded up new voters, they also paid for publicity, such as posters, banners, favorable news reporting, and rumor-spreading. They also helped immigrants become voters, stuffed ballot boxes by instructing members to vote twice under different names, threatened to harm people who voted for other parties, and threatened opponents. Broadly speaking, they used whatever tactics, both legal and illegal, that they believed would help their candidate get elected.

     The most effective political parties developed local branches in the most important voting districts. In this way they could provide services for candidates in large local elections and especially in state and national elections.

     In thinking about these times, we should keep in mind that there was no radio or television, that many voters did not (or could not) read newspapers, and that newspapers were typically more partisan than they are today. Even if voters wanted to find out about candidates, many of them had no effective way to do so.

The Screening Service

     Many voters were not apt to be swayed by cigars or beer or to be intimidated. Moreover, in more competitive districts political parties often agreed with each other not to use intimidation and other costly methods of competition. To attract voters to relatively unknown candidates in such cases, parties tried to acquire reputations for backing other candidates who were already well known and popular. To do this, they offered discounts to popular candidates who joined the party. Indeed, the party leaders might even give the candidate a reward for joining. The party leaders realized that if they could attract particularly popular candidates, their productivity in producing votes for other candidates would rise. Accordingly, it could demand that candidates provide higher benefits for its members. By following this policy, the party performed a screening service. To the extent that it was correct in its predictions, the party screened out many candidates that could not become popular enough to win.

The Spoils System and Campaign Contributions

     How could legislative candidates afford to pay political parties to help them get elected? One answer was the so-called “spoils system," based on the saying about war: "To the victor go the spoils." At this time in history, the legislature had the power to replace most government employees with those if its own choosing. Thus, a newly-elected legislature could pay off political party activists by appointing them to jobs in the new government. The spoils system was instituted at the national level in 1828 under the leadership of newly elected president Andrew Jackson. It replaced the previous system in which government jobs were held almost exclusively by elites and landowners.

     Although the system was instituted by a president, the allocation of the spoils came to be controlled throughout most of the 19^th century by the legislature through committees. Committees were formed to oversee and determine the budgets of major government departments. Until the early 20th century, presidents ordinarily had relatively weak powers compared with the legislature. Thus majority party members of legislative committees could reward some of the people who helped the party by commanding the government agency they oversaw to hire those people in the new government. For example, the committee that oversaw the immigration bureau could demand that the bureau replace existing workers with new ones who had helped in the election campaign. The spoils system began to decline in importance later in the century but was still strong enough to allow President Franklin Roosevelt in 1932 to appoint a great number of government officials to carry out his New Deal policies during the Great Depression.

     A second means of paying off campaign helpers was through campaign contributions. We have seen that economic policies can have substantial effects on the incomes of particular individuals. Such policies include passing laws that protect businesses from competition, choosing the method of financing the government (whether to borrow or tax, and which type of tax to impose), granting special monopoly franchises, and selecting firms to receive government contracts. In addition, legislators are in an advantageous position to know about plans for future policies. By disclosing information about the future location and nature of large government projects, for example, they can enable speculators to earn large profits. Naturally, the prospective beneficiaries are willing to pay, either in money or favors. In other words they are willing to make campaign contributions, which can be paid to political parties.

Campaigning in Modern Times

     Around the turn of the century, several events converged to reduce the ability of political parties to help candidates get elected. First, the secret ballot and other tightening of restrictions on ballot manipulation reduced the opportunities of parties to help in the election process. Second, Congress passed legislation strengthening the civil service and instituting a merit system. This reduced the spoils to be distributed after an election and correspondingly reduced the power of political parties. Third, the rise of pressure groups gave candidates opportunities to get election assistance from outside party channels. Fourth, the media became more important, especially in presidential elections. This was due partly to improvements in communication technology and partly to increases in the voting population. These changes greatly enhanced the election prospects of a charismatic presidential candidate. They correspondingly reduced the dependence of such candidates on a party. Indeed, the changes made the party’s success increasingly dependent on its selecting a candidate who was pleasing to the media.

     In modern democracies, the roundup still occurs in some form. Direct payments of money or giving of gifts to voters is rare, however, because of the secret ballot and public sentiment against it. Today political parties and the candidates themselves invest most of their money trying to tell voters about their personalities and about their policies compared with those of their rivals. Long before election day, candidates begin by giving speeches to clubs and other organizations. They mail out letters describing themselves and soliciting votes. They try to get endorsements and coverage of their activities from popular newspapers and magazines. They try to get invited to popular radio and television talk shows. They buy radio and TV time to advertise themselves. And they hire people to communicate by computer. Their aim is to reach the largest number of voters with a message that is more favorable than that of a rival.

     Corresponding to the decline in importance of the roundup has been the rise in importance of the screening aspect of political parties. The leaders of a political party are especially concerned to assure that a candidate’s positions on issues are consistent with the other legislators who the party has customarily endorsed. By doing this, the party leaders save voters some of the cost of finding out the candidate's viewpoints on issues and on rivals.

Parties and Ideology

     In Chapter Eight, we defined a platform as a set of positions on a set of different issues. For example, a candidate's platform may consist of his preferred budget size for each of the government departments. Since a party's positions on many issues are difficult to remember, the party might adopt an ideology. The conservative party, for example, might represent a platform of high budgets for national defense and police but low budgets for welfare programs. The ideology would be to conserve the traditions of the past. By identifying herself with the conservative party and its ideology, a candidate makes it easier for voters to remember her positions.

Political Parties as Centers for Logrolling

     After a candidate gets elected, she becomes a member of a legislative team, or club. The party begins to function as a club the main purpose of which is to facilitate logrolling and other deal-making.

     Imagine that you have just been elected to the U.S. House of Representatives for the first time and that you are a member of a political party. One of your first activities after moving to your new job will be to attend a reception for newly elected party members. The wheeling and dealing often begins here. Senior legislators will introduce themselves and describe their special status as members of important committees that can help you get bills passed. "If you want help or information about agriculture (national defense, education, health, etc.), just phone me, drop by my office, or make an appointment for lunch," a senior legislator will say. "I am confident that I can accommodate you." He and other party members will try to demonstrate how party cooperation has helped previous new legislators get legislation passed.

     As time passes and you become more familiar, senior party members will occasionally visit you seeking support for their bills and offering to support bills that you favor. They may also point out opportunities to obtain campaign contributions from wealthy individuals and pressure groups and they may offer to arrange meetings with them. As a first-time legislator, you may be surprised at all this attention. But it is a normal part of the political party system. It reflects the fact that your right to vote on legislation is valuable. Being a member of a political party increases the value of your vote by offering logrolling opportunities. Such opportunities are not so readily available to independent legislators.

     Consider a practical example of logrolling. Suppose that you are a legislator and that someone proposes a bill to launch a new weather satellite. Suppose further that your voting district contains a disproportionately large number of farmers, shippers, and/or transportation companies. Compared with voters in other districts, the voters in your district would expect to gain more from the satellite. Thus, under pressure from your constituency, you would plan to vote for the bill. If your research informs you that there are not enough votes for the bill to pass, then you could seek out logrolling partners in your party. For example, you might find a legislator who wants your vote to support the expansion of a military base in his district.

     As pointed out in Chapter Ten, the same effects can be achieved by implicit logrolling, or issue-combining. Instead of voting on two separate bills -- the satellite and the military base -- legislators could combine the two issues into one bill.

Parties as Conduits for Influence

     Let us consider the political party from the viewpoint of campaign contributors. A prospective campaign contributor expects to benefit from legislation voted on by legislators. Since passing a law requires a coalition of legislators, a contributor who wanted to assure that a favorable bill would be passed could contribute to the campaigns of a number of different legislators. But she would find it much simpler to contribute to a party. In exchange for the contribution, the party director would agree to facilitate the logrolling and other interaction necessary to get a favorable bill passed. By offering this service to campaign contributors, the party takes advantage of its strategic position to broker deals among party members.

     Of course, a contribution to the party is not as direct. Suppose that a contributor has a choice between contributing $100,000 to the campaigns of ten different legislators or contributing $1,000,000 to the party. By threatening to shift his $100,000 to an opponent, the contributor can directly influence the candidate. However, by threatening to shift the $1,000,000 to another party, he can only influence the party leaders.

     On the other hand, indirectness may be an advantage. In the first place, a candidate may not want constituents to discover the source of the contributions. In the second place, a candidate may prefer that contributions be made to the party in order to more efficiently reward party workers who helped her get elected.

2. PRESSURE GROUPS

     A pressure group is a collective whose members want to influence laws. Examples are groups of private companies (steel manufacturers, milk producers), unions (auto workers, mine workers), crafts (plumbers, electricians), professions (doctors, lawyers), government contractors (construction companies), government bureaus (public schools, police departments), ideologues (environmentalists, anti-abortionists, religious fundamentalists), taxpayers, consumers, recipients of public goods, and others. Joining together in a pressure group enables individuals to pool their resources.

A pressure group can use a variety of methods to influence laws. First, it can merely inform legislators of its members' preferences. Second, it may give money or time to help with an election campaign. Third, its members may threaten, as a group, to vote as a bloc. In using this method, the pressure group acts as a two-edged sword. On the one hand it promises to help a cooperative legislator. On the other hand it threatens to harm a non-cooperative legislator. Fourth, a pressure group may facilitate legislation by writing bills and helping legislators make logrolling agreements. Finally, a pressure group may attempt to influence members of the executive branch, who have some law making input (because of the veto threat and power to introduce bills through the political party) and who can, in some measure, decide the strength and effectiveness of law enforcement.

     In the more developed democracies pressure groups are a major source of legislators' campaign contributions. In the U.S. they have enabled legislators to gain an increasing amount of independence from political parties. Also in the U.S. pressure groups have often formed political action committees, or PACs. Under the law, such committees are non-profit and, therefore, untaxed businesses whose main purpose is to raise funds to be contributed to the campaigns of candidates. PACs may be formed by single individuals. Consequently they are not necessarily pressure groups. In parliamentary systems, pressure groups typically align themselves with a party and not with particular candidates.

     The purpose of this part is to describe the pressure group in greater detail. We show the relationship between pressure groups and interest groups, we identify different types of pressure groups, we show why individuals have incentives to form pressure groups, we discuss the reasons why some groups succeed and others fail, and we make some tentative hypotheses about the effect of pressure groups on the efficiency of legislation.

Pressure Groups and Interest Groups

     It is important to distinguish between pressure groups and interest groups. A free society typically contains many interest groups that do not qualify as pressure groups. Book clubs, bowling leagues, swim clubs, church organizations, newcomers' clubs, and homeowners' associations do not normally try to influence legislators, political parties, or candidates. However, sometimes an interest group is also a pressure group. Sometimes a group begins as only an interest group and then becomes a pressure group. And sometimes a pressure group offers interest group services. Because of this potential relationship, we begin our analysis of the pressure group by discussing the interest group.

Interest Groups vs. Businesses that Supply Club Goods

     All non-pressure interest groups are substitutes for profit-seeking businesses that supply club goods. We discussed club goods in Chapter Eleven. These goods have the characteristic of jointness in the sense that additional persons can enjoy the service at a low or negligible cost up to a point. Unlike the hypothetical case of the pure public good, consumers of club goods can be excluded. Thus club goods can be provided by businesses, although there is some inefficiency due to the jointness. Examples of club goods that can be supplied by either interest groups or businesses are exercise facilities, schooling, drug and alcohol therapy, facilities for playing cards and other games, and computer information.

     Why are not all club goods supplied by businesses? In other words, why do interest groups emerge to supply club goods? One reason is trust. Suppose that a group of neighbors join together and establish a homeowner's association in order to supply street maintenance. Because they are neighbors, they already have a good idea which members are most trustworthy and competent at making decisions for the group. As a result, they can confidently elect one of their neighbors and entrust him with the power to make binding decisions about members' dues and which services to provide. Of course they would place some limitations on the neighbor's power. If an outside business tried to offer the same service for a price, the consumers may not trust the firm to supply high quality service at the lowest price. Remember that when agents must be used to make decisions that have joint effects, each joint beneficiary of the decision has an incentive to supply only an inefficiently low amount of monitoring. Thus, one reason why clubs emerge to supply club goods is that monitoring a neighbor is often less necessary and/or less costly than monitoring an outside firm.

     A second reason is that an interest group may be better able to discriminate in price and thus raise more revenue than a business. In the example of the homeowners' association, community members may know enough about each others' demands to more easily establish and collect a discriminatory tax on members.

     A third reason is that a business is typically subject to a profits tax while a club is not. In the case of a club, all the profits go to the members in the form of lower club fees or a higher quantity or quality of services. A business must normally give up some of its profits to the tax collector. Forming a club is a means of tax avoidance.

The Non-Profit Corporation

     Some interest groups become non-profit corporations. We give them this name because, although they earn income by charging fees in excess of their expenses, they meet certain legal requirements that exempt them from taxes. Theoretically the income they earn is used either to reduce membership fees or to provide more, or higher quality, of service. In practice, the income is often used to pay managers and workers more than they otherwise could earn. A non-profit corporation has no stockholders or profits. However, it does have a board of directors whose job is to select a manager (executive director), to decide on his pay, and to oversee the manager and the corporation in general.

     To understand the incentive to form a non-profit corporation, put yourself in the shoes of an entrepreneur who believes that there is a high demand for some service, say psychological counseling for people experiencing problems with their marriage. You could hire psychologists and form your own counseling company. However, if you were the personal owner, you would be fully liable for any debts incurred by the company. If the company could not pay off its debts, creditors could place a lien on your personal property. You may not want to take this risk. To avoid it, you could form a corporation, which has limited liability. The problem with this arrangement is that in most countries, you would have to pay a corporation income tax. To avoid this tax, you could form a non-profit corporation and, with the help of an obliging board of directors, get appointed its executive director with a fat salary. There is a disadvantage, of course. If you formed a private company, you would benefit directly from any increase in profit that you generate. To benefit in a non-profit corporation, you would have to first convince the board of directors that you deserved an increase in salary.

Interest Groups Relevant Only If They Are Also Pressure Groups

     Public Choice theorists are concerned with interest groups only to the extent that they are also pressure groups. Many of them are, of course, because it is typically less costly for individuals who are already members of an interest group to act as a pressure group. For example, workers may join together in an interest group because they want to persuade an employer to raise wages (a union). After they achieve this goal, the employer may begin to make losses. To help the employer earn more income so that he can afford to pay the higher wages, the members may decide to use the group's resources to try to persuade lawmakers to pass a law that reduces competition in the markets for their employer’s products. Examples are laws that impose a high tariff on imports or that require competitors to pay higher costs.

     It is also possible that a pressure group will form first and that it will later become an interest group. For example, the doctors of a community may join together in order to prevent competition from newcomers by pressuring politicians to allow them to set professional licensing standards. After succeeding in this, they may recognize that they have a common interest in education, in providing training facilities for assistants, or in buying resources collectively. The group may continue as a pressure group but also provide other services that have nothing to do with laws.

The Logic of Pressure Groups

     The reason why people perceive benefits from forming a pressure group is that practically all government decisions to intervene in the market economy yield benefits to some individuals but harm to others. As we pointed out in Chapter Eleven, the legislature's task is to make laws relating (1) to public goods and (2) to other market failures. Practically speaking, all laws of this sort have many supporters and many opponents because some people stand to gain and others stand to lose. Both those who expect to benefit and those who expect to be harmed have an incentive to join together with other similarly-positioned individuals. Suppose that the legislature only had to decide on the quantity of a single pure public good to be supplied according to a fixed-share tax scheme. In this simplest case, if there was no campaign spending or pressure group activity, the outcome would depend only upon the location of the median voter. However, if citizens anticipate the median voter outcome, those on both sides would have an incentive to form pressure groups. We showed in Chapter Ten that there would be tendency for vote buying to bring about a more efficient outcome if the costs of making transactions were zero. But buying the votes of legislators is illegal. Pressure group activities are not. If it is easier or less costly for voters on one side of the median voter to form an effective pressure group than voters on the other side, the less costly side will have an advantage, other things equal. Thus, if pressure groups exist, the actual quantity of the public good that is chosen by legislators’ voting would depend partly on the relative cost of organizing effective pressure groups.

     Besides deciding on public good supply and on the correction of market failure, legislators decide the distribution of the tax burden, they cause impure public goods to be supplied, they choose among alternative methods of supply, they redistribute wealth, they deal with externalities, and they buy contiguous property. Individuals who expect to be affected by each of these decisions have incentives to form pressure groups.

     With so many different reasons to form pressure groups, it is not surprising that Public Choice theorists do not have a comprehensive general theory of the influence of pressure groups on legislation. Other reasons for the absence of a general theory are that some pressure groups are also interest groups and non-profit corporations. The analysis of these is very complex.

     The theories that Public Choice theorists have developed deal mainly with the relative success of producers, consumers, and labor unions in influencing legislation. Distribution of the tax burden, local public goods, redistribution of wealth, externalities, etc. have received less attention and have been treated separately. Since this is not a book about pressure groups, we cannot discuss all of these different and diverse topics. However, we can achieve a basic understanding of the problems faced by individuals who want to form a pressure group. This was the topic of one of the early classic books in Public Choice, Mancur Olson's The Logic of Collective Action (1965).

Olson's Model of Collective Action

     Olson's book is the earliest and best known contribution to pressure group theory in Public Choice. An effective way to understand how Olson's theory relates to legislation is to imagine at first that legislation is mainly a means through which individuals can exploit each other. There are many examples. Domestic producers in a particular industry may want a law to impose a tariff on imports. If they are successful, their gains ordinarily come at the greater expense of consumers of the tariffed products. Members of labor unions may want laws to prohibit employers from hiring substitute workers during a strike. Public school teachers may want larger education budgets in order to protect their jobs or to raise their pay. Elderly citizens may want higher government grants or medical care at the expense of ordinary taxpayers. And the citizens of a town may want the government to build a military base nearby at taxpayers' expense. In each case, there is a relatively small group that benefits from the law. However, the benefit comes at the expense of others in the larger collective. Thus we call the law exploitative.

     In discussing pressure groups that may form to support or oppose exploitative laws, Olson pointed out that because the benefits to members of a prospective pressure group are joint, there is a free rider problem. Consider a set of business firms in a particular industry whose owners believe that they can benefit from a higher tariff. Suppose that some of the firms join together in a pressure group in order to pressure the legislature to pass a tariff bill. After the bill is passed, even the firms that did not join the group will gain. They will have been free riders (see Chapter Three). Recognizing this in advance, firms will have only a small incentive to join the pressure group.

     The free rider problem is less significant when the number of beneficiaries from a law is small. It follows, other things equal including the total benefits to the group, a group that is small is more likely to form than one that is large. This explains why associations representing oligopolistic industries are the most common business pressure groups in a modern democracy.

How the AARP Overcame the Free Rider Problem

     When we confront this logical free rider reasoning with the facts, we are led to wonder why some very large pressure groups exist. How can we explain pressure groups like the American Association for Retired Persons (AARP), large labor unions like the AFL-CIO, and the American Medical Association of doctors? There are two answers. We use the first to explain the AARP and the second to explain the rise of a national union.

     The first answer is that an entrepreneur may be able to combine the supply of pressure group activity with the supply of other joint, yet excludable goods or services. Consider the AARP. It began as a local organization to provide information, collective buying power, and other local services for elderly citizens. These services were joint but elderly citizens who did not join AARP could be excluded from receiving them. Over time, many local organizations emerged. After a sufficient number had formed, the entrepreneurial-minded managers began to think more broadly.

     Pressuring national legislators is also a good with jointness characteristics. By offering to supply this service also, AARP managers were able to persuade non-members to join and members to pay higher dues. This enabled the managers to increase revenue substantially since over ten thousand people become candidates for membership every day.

     It is important to realize that because legislation benefits all of the elderly, each elderly citizen would enjoy the benefits of pressure group activity whether she joined the AARP or not. However, if she did not join (and pay the dues), she could not benefit from other interest group services like information and collective buying power. Thus it was crucial that the AARP provide its interest group services. Moreover, since interest group services can be supplied by other organizations, AARP had to offer services that were superior to those of its potential competitors. It apparently achieved this by establishing a reputation for giving high quality and trustworthy information and advice.

     Since AARP is a non-profit corporation, what motivated its managers to extend their interest group into a pressure group? Higher dues and higher membership could yield more revenue. But the managers could not pocket this additional money. Perhaps they reasoned that by increasing membership and dues, they could persuade the boards of directors to raise their salaries. Or perhaps they believed that achieving success in the AARP would increase their job opportunities elsewhere.

Unions

     A second explanation for large pressure groups is that the managers may be able to pressure legislators to pass laws that enable them to exclude otherwise free-riding individuals from gaining the benefits of its pressure group activities. Consider the case of a company union. A company union is an interest group comprised of workers who work for the same employer, or company. The main goal of the union is to raise the wages of company workers. It hopes to achieve this goal by threatening a mass strike by all workers. In order to succeed, it must (1) gain the support of most of the workers and (2) face only a minimal prospect that the company will hire replacement workers. The problem faced by the early union organizers was that, according to the law, a company could replace an employee who it believed was trying to organize a union or who was associated with a union. Facing the threat of being fired, most workers avoided the union organizers.

     At an opportune time, the early unions turned to the respective state governments for help. Their agents set out to persuade state legislators to pass labor laws. They wanted laws with two characteristics. First, they wanted the right to levy dues on all employees, whether the employees wanted to be members of the union or not. In other words, they wanted the police to compel even those who did not want to join a union to pay dues. Second, they wanted the exclusive right to supply labor services to a given company. That is, they wanted to bar the employer from hiring replacement workers who were not represented by the agents of the union. Some state governments gave the unions what they wanted but only if they used democratic processes to make decisions. A union could require all workers for a company to pay dues only if a majority of the workers approved. Similarly, a union could declare a strike only if a majority approved. Once a majority approved of the strike, the law barred a company from replacing the striking workers.

     After they succeeded in getting laws with these characteristics passed, the agents could effectively threaten a strike if the company did not agree to its terms, although the union still needed endorsement by the majority. Since the company was barred from hiring substitute workers, its only alternatives were to agree to the terms or to shut down. Under these conditions companies were more likely to agree to a union contract. After the agreement, all of the dues-paying employees, whether they were union members or not, would receive higher pay or other benefits. Anyone who did not pay dues was excluded since he could not, under the law, work for the company. The revenue from dues could be used to support workers during the period of the strike.

     The lobbying activities of union agents achieved the greatest success in the states of the northeastern U.S. Because legislators in the southern states resisted the lobbying, the states were labeled "right-to-work" states. Workers in the latter states were free to join or not to join a company union and pay union dues. And a company had the right to replace any and all workers who went on strike.

     Helped by the new state laws, union organizers throughout the northeast and in some other states were very successful in forming unions. Union membership grew rapidly. As more and more local company unions were established, union organizers began to perceive the potential benefits of pressure group activity at the national level. A good example is of a way that the unions could gain from such activity is the case of the national minimum wage law. Because unions had succeeded in raising wages for the members who worked in unionized companies, those companies had to pay higher wages, other things equal, than non-unionized competitors. This reduced the unionized companies' competitiveness and sometimes threatened a company's survival. If legislators were to pass a national minimum wage law, it would raise the labor costs to competitors, thereby enabling the unionized companies to be more competitive.

     Recognizing the benefits of a national minimum wage law, leaders of local unions who had successfully negotiated high wages in the labor law states joined together in a nationwide union. Their aim was to put pressure on legislators to raise the minimum wage for the entire country. The result was higher costs and lower profits to companies in right-to-work states and higher profits for the companies in the labor-law states. The higher profits in the latter made it possible for the unions to negotiate higher wages for their workers than otherwise.

     In addition to pressuring legislators to raise the minimum wage, union agents also pressured them to limit competition from foreigners. They supported candidates who voted for high tariffs, import quotas, voluntary export restraints by foreign companies, and so-called anti-dumping laws.

     What incentive did union agents have to influence laws? Perhaps they reasoned that if they could show that their law-influencing activities raised the wealth of union members, the members would vote to pay them higher salaries and other benefits. Or perhaps they were afraid that unless the company increased its relative competitiveness, they would be unable to negotiate higher wages and be ousted from their jobs by unhappy union members.

Professional Associations

     Doctors’ associations were also able to solve the free rider problem. Before 1873, there were no regulations on the supply of health services in the U.S. either at the national level or in the individual states. One might say that there were no doctors, in today's legal sense. There were only a variety of different kinds of healers. Beginning in 1873 currently practicing healers began to join together in various state medical associations in an effort to influence state legislatures to protect them from competition by newcomers to the state. Their principal aim appears to have been to limit the entry of new healers by setting licensing standards and, in the process, to raise the price of health services higher than otherwise. They persuaded legislators to establish licensing standards. The medical association then stocked the state licensing boards with its own members. One of the first acts of a licensing board was to require newcomers to join the state association and follow association rules as a condition for obtaining a license. If a newcomer proceeded to practice healing without a license, he would be subject to police action. Thus, a person who wanted his healing practice to proceed smoothly was practically forced to join the association. As the state medical associations grew, the members hired agents to administer them. The agents helped to fortify the licensing laws and were able to maintain or to raise dues (and their own salaries) in the process.

     The action of healers who had succeeded in using state laws to limit competition in one state was quickly copied by healers in other states. Before long, every state in the country had a dues-collecting doctors association and a doctor certification board. Eventually, the state associations joined together in a national organization, the American Medical Association (AMA). The AMA was financed by contributions from the local associations which, in turn, were financed by members' dues. A main goal of the AMA became that of influencing national government health laws and policies. A secondary goal was to supply its associations and individual doctors with various services, such as information on new drugs and therapies.

     The AMA is an example of local pressure groups that later grew into a national pressure group and also into local and national interest groups. Today, licensed doctors pay fees to the AMA for three reasons. First they want various interest group services. Second, they want to assure that state medical associations continue to exclude low-priced alternative therapies. Third, they want pressure group services.

Lobbying

     The term "lobbying" is derived from the early days of the U.S. Congress. During recess or before legislators' meetings began, people who expected to gain or lose from a particular bill used to visit the lobbies of the buildings in which the two houses of Congress met. Their goal was to influence legislators. As time passed, such people turned more and more to hiring professionals to perform this service for them. These professionals were given the name "lobbyist" and their activity was called "lobbying." Today, Washington D.C. has thousands of lobbyists. About three-fourths of them are lawyers and many are former legislators.

     Lobbyists no longer confine their activities to the buildings where legislators meet. They visit legislators' offices, invite them to dinner and vacation retreats, and offer to pay them for lectures. There are now large lobbying corporations in Washington who offer their services to a variety of different clients.

Pressure Groups and Political Parties

The Rise of Pressure Groups in the U.S.

     Pressure groups are a relatively recent phenomenon in the U.S. Prior to the early 20th century, the only pressure group of significance was comprised of civil war veterans. Around the turn of the century, however, a variety of national pressure groups began to emerge. This seems to have resulted from the convergence of several factors. First, the rapidly expanding population of voters (see Chapter Thirteen) during the later 19th century led to a sharp increase in the demand for local public goods. Local governments, which had typically hired their employees through the spoils system (see above), were inadequate to supply these demands. So small pressure groups emerged to promote the replacement of local and state spoils systems with a more professional means of supplying local public goods. Having succeeded at the local and state levels, the reformers of different states linked together to form national organizations whose goal was to influence national legislation and policy. Second, during roughly the same period, the trade and professional associations that had been established as pressure groups at the local level also expanded into national pressure groups. These included the labor unions and doctor associations described above, as well as lawyer associations.

     Third, Congress appears to have created a number of bureaus that gave individuals incentives to form pressure groups or to use existing pressure groups to try to influence national legislation relating to the bureaus. For example, a farm bureau was established to help farmers, partly by providing education and information. This not only made it easier for farmers to join together in interest groups, it gave the groups an additional means of presenting their demands for new laws to benefit them. Over time, the interest groups grew into pressure groups; and the government bureaus became supporters of the pressure groups' goals. This also happened in commerce and labor between 1890 and 1920. Later in time, pressure groups were helped by the 1930s New Deal policies. Massive federal government spending to help particular classes of individuals created incentives for those individuals to form pressure groups in order to increase their benefits or avoid having them discontinued at the end of the period. Government bureaucrats often helped the pressure groups since they shared the goal of expanding their bureaus. Similar incentives were created by President Roosevelt's policy of inviting leaders from industry and business to consult in the making of new laws and regulations. For example, in deciding on farm policies, Roosevelt invited representatives of farmers; in deciding policy toward manufacturers, he invited presidents of large manufacturing corporations; in deciding banking policy, he sought the advice of leading bankers; and so on. To individuals who already had pressure groups, such actions were interpreted as invitations to increase their pressure. To individuals who did not have pressure groups, they were invitations to quickly form them.

     Fourth, the formation of pressure groups was aided greatly by the various improvements in communication that occurred during the last century and a half. The telegraph, telephone, radio, TV, and now the electronic media have reduced the costs of identifying a common interest and of making collective decisions.

Interrelations Between Pressure Groups and Parties

     The rise of the pressure group reduced the power of political parties and made it more possible for some candidates to win elections without the help of a party. It also reduced party loyalty and the reliance of new legislators on the old. These changes gave legislators who were less powerful in the party an incentive to more frequently oppose party leaders in making appointments to government jobs.

     The pressure group and the political party may be both substitutes and complements. A candidate for the legislature may think that the best way to get elected is to align herself with a political party. As a substitute, she may find it more profitable to align herself with a particular pressure group or set of groups. Or she may regard the two as complements and align both. A person who wants to influence legislation is similar. He may form or join a political party, form or join a pressure group, or both.

Pressure Groups and Collective Decision-Making Efficiency

     Our references to pressure groups have been mainly about how such groups enable individuals to impose external costs of collective decision-making on others (see Chapters Four and Five). Suppose that people join such groups to persuade legislators to allow them to pay lower taxes at the expense of others, to enjoy impure public goods paid for by others, or for other reasons discussed in this part. In other words, suppose that they join pressure groups in order to influence the passage of exploitative laws. Then such groups would be wasteful. If we aimed for efficiency in collective decision-making, we might consider trying to ban them.

     There are several reasons why banning pressure groups might not be wise. First, the pressure group is a peaceful organization and represents one manifestation of freedom of speech. It might be difficult to ban this manifestation without also reducing free speech in other areas. We pointed out the importance of freedom of speech in Chapter Five. In addition, pressure groups can increase the efficiency of collective decision-making by helping to more effectively communicate voter preferences to politicians and by helping to inform voters about candidates.

     Given these real and potential benefits, perhaps the best course of action for those who support democracy is to hope that the various constitutional freedoms of speech, press, assembly, election, and related ones will check the most serious cases of pressure group exploitation. If too much of this exploitation occurs, members of the collective would presumably be sensible enough to demand constitutional change. They might demand a supra-majority to pass new legislation. They might limit the taxing and other fund-raising powers of the government. Or they might ban some kinds of legislation.

     Another point to keep in mind is that if pressure groups were outlawed, individuals who wanted to influence legislators could simply shift to political parties. They could become factions within the parties or they could create their own parties.

Questions for Chapter 12

1.  Tell the functional definition of a political party.

2.  Tell why, in a single nationwide constituency election containing say 100 elected legislator positions, candidates would have an incentive to join together in political parties.

3.  Tell why, in a single-representative district system of electing legislators, candidates would have an incentive to join together in political parties.

4.  In the early U.S., what sources were used to pay the party workers who helped in a candidate’s election campaign?

5.  Why did the framers of the U.S. democracy (the founding fathers) oppose universal suffrage?

6.  Explain how screening political candidates enabled political parties in the early U.S. to raise their earning potential.

7.  In early U.S. elections, how could legislative candidates afford to pay political parties to help them get elected?

8.  Describe the "spoils system" in U.S. political history. How did the spoils system strengthen political parties?

9.  Why is the roundup strategy less important in the U.S. today as a means of rallying voters than it was in the past? (In answering this question, you should tell (1) why the strategy itself is less desirable from the party's point of view and (2) why some other strategy or strategies have become relatively more attractive.)

10.   According to the text, other things equal, being a member of a political party would give you an advantage over a legislator who was not a member of a political party in serving your voting district. By putting yourself in the shoes of a recently elected legislator, explain how being a member of a party would give you this advantage.

11.   Tell the difference between a party platform and a party ideology.

12.   Explain how political parties are “centers for logrolling.” (In your answer, you must explain what a center for logrolling is.)

13.   Put yourself in the shoes of a campaign contributor who wants to influence legislation. Under what conditions would it be advantageous for you to contribute to the party instead of to particular candidates? What is the disadvantage of contributing to the party?

14.   Define and give an example of a pressure group.

15.   Interest groups typically supply services to members that could theoretically be supplied by private firms for a profit. Tell why interest groups often have an advantage in supplying these services.

16.   Suppose that you want to earn money by supplying some service. You have two choices: form your own for-profit corporation or form a non-profit corporation. Describe the advantage and disadvantage of forming the non-profit corporation.

17.   Many interest groups are also pressure groups. An interest group may form first and then become a pressure group. Given an example of this transformation that is different from the one in your text. Your example may be hypothetical.

18.   Many interest groups and also pressure groups. A pressure group may form first and then become an interest group. Given an example that is different from the one in your text. Your example may be hypothetical.

19.   How does your text define an exploitative law?

20.   Consider a pressure group that does not now offer non-pressure group services to its members. Explain how a decision by managers of the group to begin to offer such services can improve the effectiveness of their pressure group activities.

21.   Large pressure groups face a serious free rider problem. How did Mancur Olson explain the emergence of such groups? (Give two explanations.)

22.   Give an example of opposing interest groups trying to influence the legislature's choice of characteristics of a good.

23.   Define lobbying.

24.   Should pressure groups be banned? Explain?

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J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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