Concentrated benefits and dispersed costs

Michael Giberson

Recently I went looking for a source for the idea that special interest lobbying succeeds due to the logic of concentrated benefits and dispersed costs.

Frequently in economics and especially among public choice analysts the concept is attributed to Mancur Olson and sometimes specifically to The Logic of Collective Action. For example, in a post by J.C. Bradbury, A Lesson in Concentrated Benefits and Dispersed Costs, “ he states “Mancur Olson was right” in reference to a news story that compares the $4 million lobbying campaign a football team put together seeking taxpayer spending for a football stadium to a mere $20,000 that opponents of the spending were able to raise. At TechLiberation Jerry Brito writes, “The few who will benefit from the transfer have an easy time organizing to lobby for it, while a group as diverse and dispersed as taxpayers face what Mancur Olson called a collective action problem.” (Links in sources).

The main concern of Olson’s LCA is how special interest groups manage to organize in the first place.  In a sense, this is the flip side of the “concentrated benefits and dispersed costs” problem; Olson in LCA is more about how groups manage to get prospective members to engage in private costs (i.e. pay dues) to pursue group benefits (i.e. lobbying for a policy change). If the prospective member will benefit from the policy change whether or not it joins the lobbying group, then economic logic says the prospective member should not join the group. (Olson’s answer is that most lobbying groups are maintained by the provision of private goods to members and the lobbying capability is, in a sense, a byproduct capacity of the group.)

In an essay “An ‘Austrian’ Perspective on Public Choice,” [ungated version] Pete Boettke and Peter Leeson observe that Ludwig Mises, F.A. Hayek, and Joseph Schumpeter each indicated they grasped the basic policy logic of concentrated benefits and dispersed costs.  For example:

Like public choice theorists, Hayek understood the danger of interest groups in the context of the logic of concentrated benefits and dispersed costs. While these “innumerable interests . . . could show that particular measures would confer immediate and obvious benefits on some, the harm they caused [on others] was much more indirect and difficult to see” (Hayek [Road to Serfdom] 1945, 17-18).

The examples pre-date LCA by 20 years. Boettke and Leeson don’t assert that any of the three invented the idea, only that they exhibited familiarity with the concept. For a clearer source we will need to look elsewhere.

In political science, and particularly in the literature on the politics of trade, the idea is tracked to E. E. Schattschneider’s 1935 book on the Smoot-Hawley Tariff: Politics, Pressures and the Tariff: A Study of Free Private Enterprise in Pressure Politics, as Shown in the 1929-1930 Revision of the Tariff.  (Republished in 1974 under the awful title: Politics and People: The Ordeal of Self-Government. Page numbers below to this edition.) Schattschneider wrote:

Contrary to facile assumptions, economic interests, insofar as their behavior is illustrated in the tariff revision of 1929-1930, are not universally active in promoting their interests in politics. … Apparently, equal stakes do not produce equal pressures. The protective tariff is well established because large areas of adverse interests are too inert and sluggish to find political expression while an overwhelming proportion of the active interests have been given a stake in maintaining the system. (pp. 162-163)

and:

“Although . . . theoretically the interests supporting and opposed to [tariff] legislation . . . are approximately equal, the pressures upon Congress are extremely unbalanced. That is to say, the pressures supporting the tariff are made overwhelming by the fact that the opposition is negligible.” (p. 285-286)

As it turns out, Olson does cite Schattschneider in Logic of Collective Action, but to a later book on lobbying (The Semi-Sovereign People) rather than Politics, Pressures and the Tariff.  Still, Olson does articulate the political logic of concentrated benefits and dispersed costs, if not quite in those words, and his book is probably the earliest work by which most present economists and political scientists have been introduced to the idea.

Perhaps Schattschneider’s 1935 book was not the first to describe this logic of mobilized political interests either, and in any case as the work of Boettke and Leeson suggests, the idea was likely independently arrived at by others as well. Still, if we’re awarding blue ribbons for first place, I’ll tentatively give the award to Schattschneider unless you convince me of an earlier source.

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3 thoughts on “Concentrated benefits and dispersed costs

  1. I suggest that it is quite hard to motivate groups to contribute money to win government favors. They do want to be free-riders, but politicians make the returns so high that many potential free-riders contribute because they are afraid of losing out.

    If memory serves, I see stories like “Industry A received government projects of $200 million, and gave $400,000 to congressional campaigns.” Put another way, the revenue return for contributing to politicians is about 500 to 1 if you can form a significant group. Assuming a profit of 10%, the real return is about 50 to 1.

    That is quite a high price that politicians pay for campaign contributions. It must be a tough market.

    The wags say that we should bring back direct bribery. It would be cheaper for the nation for politicians to hand out $800,000 directly and get back $400,000 in campaign contributions. Much cheaper than spending on $200 million projects. Of course, those projects employ many family members and cronies who also give campaign support, so maybe the return is somewhat better than 2% (50 to 1).

  2. Bastiat’s “the seen and the unseen” seems to be a different phenomena which explains why a single constituency might believe a law or other intervention to be valuable because they only see the initial, intended effect, and do not observe the full ranges of consequences from the intervention.

    Did William Graham Sumner also explore this concept of seen and unseen wrt political activity? I’m not very familiar with Sumner’s work.

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