WEBVTT NOTE Judgment and Capital: Reconciling Interest Group Formation and Maintenance Theories through the Austrian Entrepreneur 1 00:00:00.000 --> 00:00:23.000 Alright, good afternoon. My goal in doing this is, I'm in the political science program at the University of Missouri, so being interested in Austrian economics, I wanted to apply Austrian theories and methods toward political science questions, and the formation and maintenance of interest groups seems like a very good start for this. 2 00:00:23.000 --> 00:00:30.160 Within political science, we have three dominating theories of group formation. 3 00:00:30.160 --> 00:00:35.560 One is disturbance, another is called exchange theory, and the other is patronage. 4 00:00:35.560 --> 00:00:43.000 These theories have dominated the ideas of interest group formation, why they're formed 5 00:00:43.000 --> 00:00:48.280 for quite some time. 6 00:00:48.280 --> 00:00:54.560 David Truman came up with the idea of a disturbance theory and this is based on the idea that 7 00:00:54.560 --> 00:00:58.160 there are two processes that lead to group formation. 8 00:00:58.160 --> 00:01:00.120 The first is social change. 9 00:01:00.120 --> 00:01:08.160 This is the kind of the concept that with advances in prosperity and so forth, people 10 00:01:08.160 --> 00:01:12.680 will gravitate towards different occupations and develop different interests. 11 00:01:12.680 --> 00:01:19.080 So old interests will fade away while new ones emerge. 12 00:01:19.080 --> 00:01:24.440 The second aspect of, or the second process are these disturbances. 13 00:01:24.440 --> 00:01:28.960 And what these are, these are disruptions of stable patterns of interaction between 14 00:01:28.960 --> 00:01:32.240 people such as technological change and so forth. 15 00:01:32.240 --> 00:01:38.320 And those, these two are supposed to emerge and imply a group creation. 16 00:01:38.320 --> 00:01:42.600 So a group formation results from the conditions that create a demand for collective action. 17 00:01:42.600 --> 00:01:52.600 Manker Olson, 1965, regarded as kind of demolishing this theory, said that it has a problem, it can't answer the collective action problem. 18 00:01:52.600 --> 00:02:02.600 And so Salisbury comes up with this exchange theory, and this is the first time we see the word entrepreneur as an explanation for group formation and maintenance. 19 00:02:02.600 --> 00:02:14.600 And this exchange relationship is the idea that an exchange is being made between the entrepreneurs or the organizers and the members of a group. 20 00:02:14.600 --> 00:02:28.600 So the entrepreneurs will invest capital to create a set of benefits, the members will pay a price for membership, and the entrepreneurial return on investment is the power to lobby on the member's behalf. 21 00:02:28.600 --> 00:02:33.600 So group success or failure is determined by the attractiveness of the set of selective benefits. 22 00:02:33.600 --> 00:02:42.600 Manker-Olson opined that you needed to offer some kind of selective benefits that others, the free riders, wouldn't be able to obtain. 23 00:02:42.600 --> 00:02:48.600 And so Salisbury comes up with materials, solidary and purposive benefits. 24 00:02:48.600 --> 00:02:54.600 And material is very self-explanatory. These are the tangible benefits one receives from group membership. 25 00:02:54.600 --> 00:03:00.560 Discounts on Insurance or maybe a discounted rate at the Shujing Club if you belong with 26 00:03:00.560 --> 00:03:02.840 the NRA, that type of thing. 27 00:03:02.840 --> 00:03:08.600 Solidary benefits of social rewards that you receive, so group like dances or balls 28 00:03:08.600 --> 00:03:14.260 or some kind of activity where you're able to associate with others and form just personal 29 00:03:14.260 --> 00:03:16.260 bonds and so forth. 30 00:03:16.260 --> 00:03:22.080 And then propulsive is like a psychic reward from the group's pursuit of collective goods. 31 00:03:22.080 --> 00:03:29.080 So, in this regard, the member is glad to give their money because they want to see some purpose furthered. 32 00:03:31.080 --> 00:03:39.080 Patronage theory has a different approach to the Friedrich problem that Olson talked about. 33 00:03:39.080 --> 00:03:47.080 As espoused by Jack Walker more clearly in 1983, he offered that group mobilization depends more on attracting patrons outside of membership. 34 00:03:47.080 --> 00:03:57.080 and he says this will increase the stability of wealthy sponsors to make sure that the going concern for the group is maintained. 35 00:03:57.080 --> 00:04:05.080 This, however, downplays the entrepreneur, that is that sponsors are not encouraged by the benefit package offered to members 36 00:04:05.080 --> 00:04:13.080 because they're giving well beyond what it costs to get discounts on insurance or lower rates at the shooting club. 37 00:04:13.080 --> 00:04:23.340 So the Austrian critique here will cover these four things, the change or the attitude toward 38 00:04:23.340 --> 00:04:28.160 functional entrepreneurship instead of the occupational entrepreneurship which is dominating 39 00:04:28.160 --> 00:04:34.200 in the political science literature and the unique role of members that is not considered 40 00:04:34.200 --> 00:04:41.220 by political scientists and combining these we form a new typology that varies from political 41 00:04:41.220 --> 00:04:44.620 of Science. 42 00:04:44.620 --> 00:04:51.820 So here's a study in 1996 by Nouns and Neely, and they wanted to test the exchange theory 43 00:04:51.820 --> 00:04:54.320 versus Walker's patronage theory. 44 00:04:54.320 --> 00:05:00.660 So they sent out a survey to 60 interest group entrepreneurs, which were founders. 45 00:05:00.660 --> 00:05:05.760 Six of these entrepreneurs were entirely funded by foundations, and four were recruited 46 00:05:05.760 --> 00:05:08.260 by patrons. 47 00:05:08.260 --> 00:05:13.660 Now here are some examples of what the survey data contained. 48 00:05:13.660 --> 00:05:18.300 So one respondent explained that she met a foundation representative of Congress in Aspen 49 00:05:18.300 --> 00:05:23.240 who discussed with her the need for a group to do what they do and subsequently the foundation 50 00:05:23.240 --> 00:05:27.480 offered her seed money and a job as head of the organization. 51 00:05:27.480 --> 00:05:32.820 Another entrepreneur stated that the foundation told me they would fund it so I said I'd do 52 00:05:32.820 --> 00:05:35.660 it. 53 00:05:35.660 --> 00:05:40.340 And then the founder of an anti-abortion group reported that her church basically demanded 54 00:05:40.340 --> 00:05:43.700 that she form a group and then gave her the necessary seed money. 55 00:05:43.700 --> 00:05:49.780 And then, so those of you who don't know, the seed money is that first batch of money 56 00:05:49.780 --> 00:05:54.020 that you're able to start the group with before you have members and so forth. 57 00:05:54.020 --> 00:05:59.860 All right, so as we've seen, the political science has this dominating occupational treatment. 58 00:05:59.860 --> 00:06:05.020 The entrepreneur is a manager of capital, not an owner, and so we're going to compare 59 00:06:05.020 --> 00:06:11.020 We compare this to the Austrian concept of judgment and we have, and this is a functional treatment, right? 60 00:06:11.020 --> 00:06:19.020 Describes an activity or process where one is risking his own capital under conditions of uncertainty. 61 00:06:19.020 --> 00:06:26.020 And this has to operate under mundane circumstances. 62 00:06:26.020 --> 00:06:33.020 Now what is very unique is that political science literature treats the members as consumers of a product. 63 00:06:33.020 --> 00:06:41.020 trying to create this analogy between market processes and interest group politics, or interest group formation, I should say, 64 00:06:41.020 --> 00:06:48.020 is that they want to kind of keep them together so they can show how the interest group forms. 65 00:06:48.020 --> 00:06:54.020 But Rothbard points out that members occupy a dual role. 66 00:06:54.020 --> 00:07:00.020 That is, they're both the consumers and the producers when they become members of an interest group. 67 00:07:00.020 --> 00:07:05.800 So he explains this difference here that within a business, consumers are separate from the producers, right? 68 00:07:05.800 --> 00:07:15.200 Separate sources of funds where the consumer or the customer expenditures and the entrepreneurial investments provide the funds. 69 00:07:15.200 --> 00:07:21.300 With an interest group, the consumers are the donor investors and they provide that dual purpose source of funds. 70 00:07:21.300 --> 00:07:30.000 So if we take the example of maybe a pen or pencil making company, your consumers will be buying the pens because they want to use a pen. 71 00:07:30.000 --> 00:07:34.000 Whereas the investors are investing money in the company because they want to return their investment. 72 00:07:34.000 --> 00:07:40.000 They don't care if it's a BIC or whatever, they just want to know that it's profitable and it can earn them a return. 73 00:07:40.000 --> 00:07:52.000 On the interest group side, however, the member is consuming the services of the interest group because he's satisfied with the purpose it holds, 74 00:07:52.000 --> 00:07:54.000 he's satisfied with the material benefits they receive, 75 00:07:54.000 --> 00:08:08.000 But he's also the producer because those who manage the capital can only use so much, can only, you know, further the goals with as much money as they receive from the members. 76 00:08:08.000 --> 00:08:15.000 So the organizational purpose here is to serve the goals of the donor investors. 77 00:08:15.000 --> 00:08:18.000 This creates a different typology. 78 00:08:18.000 --> 00:08:27.720 Under the Salisburyan typology or the exchange theory typology, as you see, there are four basic kinds of ways that groups form. 79 00:08:27.720 --> 00:08:30.840 So the first is with individuals with their own money. 80 00:08:30.840 --> 00:08:44.160 This seems kind of basic and intuitive that both Salisburyan and the Austrian understanding would consider this, the individual as the entrepreneur, the person moving the market, right, moving resources. 81 00:08:44.160 --> 00:08:48.320 The second is individual approaches a patron for funding and an individual retains founding 82 00:08:48.320 --> 00:08:49.320 rights. 83 00:08:49.320 --> 00:08:56.800 What I mean by retaining founding rights is that let's say that the wealthy patron decides 84 00:08:56.800 --> 00:09:01.780 that doesn't like the way that the membership is going, they can always withdraw funds, 85 00:09:01.780 --> 00:09:07.600 but they can't fire the organizational leader. 86 00:09:07.600 --> 00:09:14.840 So in this case, the individual entrepreneur would still retain that entrepreneurial function. 87 00:09:14.840 --> 00:09:19.560 Now when we get to the third and the fourth, we have something different here, which varies 88 00:09:19.560 --> 00:09:21.280 from political science. 89 00:09:21.280 --> 00:09:25.520 The individual approaches the patron for funding and the patron retains founding rights. 90 00:09:25.520 --> 00:09:30.400 This is the case where an individual has an idea, comes to a wealthy sponsor, and he says, 91 00:09:30.400 --> 00:09:35.480 sure, I'd do that, but I'm going to go ahead and control the ultimate decision-making process. 92 00:09:35.480 --> 00:09:39.160 I'll fire you if I don't think you're doing a very good job. 93 00:09:39.160 --> 00:09:42.720 And the same thing happens with the fourth, which where a patron, 94 00:09:42.720 --> 00:09:46.000 it describes the three examples I gave, 95 00:09:46.000 --> 00:09:49.360 where the patron approaches an individual to manage the patron's 96 00:09:49.360 --> 00:09:52.440 funding. So you can see that 97 00:09:52.440 --> 00:09:55.280 the Austrian, you know, 98 00:09:55.280 --> 00:09:59.540 focus here is on the entrepreneurial function and not 99 00:09:59.540 --> 00:10:02.840 just on a title. 100 00:10:02.840 --> 00:10:19.440 So when we see this, when we use this in the application of what's going to happen within groups, is that we can see some of the changes in entrepreneurial decisions being made is that, one, you might have a change in mission. 101 00:10:19.440 --> 00:10:31.740 For those familiar with MAD, started in the early 80s by Candy Leitner, she wanted to put an end to or stop drunk driving deaths, right? 102 00:10:31.740 --> 00:10:38.140 wanted to curb the amount of individuals that would die because of them. 103 00:10:40.140 --> 00:10:49.140 Over time, she succeeded and, you know, new laws were passed to lower blood alcohol level requirements for driving 104 00:10:49.140 --> 00:10:54.140 and she, you know, the group saw drunk driving deaths reduced. 105 00:10:54.140 --> 00:11:00.140 But the problem was, is after they succeeded, well, what's the need for the group, right? 106 00:11:00.140 --> 00:11:06.340 The members are, well, okay, they're drunk driving, deaths are down, why do I need to keep, you know, funding the group? 107 00:11:06.340 --> 00:11:14.880 So what they do is they change the mission, and this Candy Leitner famously stepped down from MAD because she didn't like the way that the group was going. 108 00:11:14.880 --> 00:11:21.380 They're becoming more neo-prohibitionist, you know, one of the BAC levels reduced even further. 109 00:11:21.380 --> 00:11:34.180 In fact, she testified on behalf of the American Beverage Institute when the 0.08 laws were being proposed. 110 00:11:34.180 --> 00:11:37.300 You also have the idea of spinoff or competing groups. 111 00:11:37.300 --> 00:11:44.100 You know, we think of the NRA as the leader in gun rights interest group, but it started in 1871. 112 00:11:44.100 --> 00:11:49.580 Over time, it's up to 4.5 million members. 113 00:11:49.580 --> 00:11:51.980 whereas the G.O.A., or the Gun Owners of America 114 00:11:51.980 --> 00:11:55.820 and Jews for the Preservation of Firearm Ownership 115 00:11:57.220 --> 00:11:59.820 have much smaller memberships. 116 00:11:59.820 --> 00:12:03.780 And part of this reason is that individuals in the G.O.A. 117 00:12:03.780 --> 00:12:08.620 and the, I have that backwards, J.P.F.O., 118 00:12:10.620 --> 00:12:13.660 they have more, I guess you'd determine, 119 00:12:13.660 --> 00:12:16.500 extremist views on gun ownership rights. 120 00:12:16.500 --> 00:12:31.500 And so you'd be able to have the entrepreneurial function going on there is where the founder of the GOA, H.L. Richardson, you know, was not as satisfied with the way the NRA was going, you know, with the way they were going. 121 00:12:31.500 --> 00:12:44.500 And so you see the GOA opposing the NRA and a lot of legislation that the NRA actually supported. So you have the gun control acts of 1968 and so forth. 122 00:12:44.500 --> 00:12:46.900 So what are the role of disturbances here? 123 00:12:46.900 --> 00:12:51.580 We've kind of ignored Truman during this whole process. 124 00:12:51.580 --> 00:12:57.740 But with the disturbances in the Austrian idea 125 00:12:57.740 --> 00:13:01.540 is that members have an increased or decreased 126 00:13:01.540 --> 00:13:04.940 desire to sacrifice that lesser benefit, which 127 00:13:04.940 --> 00:13:08.020 is the use of money elsewhere for a greater 128 00:13:08.020 --> 00:13:10.100 benefit in donations. 129 00:13:10.100 --> 00:13:13.340 So we think of things that happen like the Sandy Hook 130 00:13:13.340 --> 00:13:20.500 shooting, where you may see a spike in membership because people have a greater incentive. 131 00:13:20.500 --> 00:13:24.820 They see a greater threat coming from gun control advocates. 132 00:13:24.820 --> 00:13:28.420 So they do play some role in there. 133 00:13:28.420 --> 00:13:32.620 So the conclusion is that current political science fails to provide a strong and cohesive 134 00:13:32.620 --> 00:13:37.140 theory of group formation by treating the entrepreneur from an occupational perspective 135 00:13:37.140 --> 00:13:41.220 and not looking at that functional perspective. 136 00:13:41.220 --> 00:13:52.220 So using the functional approach developed by Austrian economists, we can gain a better understanding of how the force moves interest group direction of its resources.