Judgment and Capital: Reconciling Interest Group Formation and Maintenance Theories through the Austrian Entrepreneur

0:00Alright, 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. Within political science, we have three dominating theories of group formation. One is disturbance, another is called exchange theory, and the other is patronage. These theories have dominated the ideas of interest group formation, why they're formed for quite some time.

0:48David Truman came up with the idea of a disturbance theory and this is based on the idea that there are two processes that lead to group formation. The first is social change. This is the kind of the concept that with advances in prosperity and so forth, people will gravitate towards different occupations and develop different interests. So old interests will fade away while new ones emerge. The second aspect of, or the second process are these disturbances. And what these are, these are disruptions of stable patterns of interaction between people such as technological change and so forth. And those, these two are supposed to emerge and imply a group creation.

1:38So a group formation results from the conditions that create a demand for collective action. Manker Olson, 1965, regarded as kind of demolishing this theory, said that it has a problem, it can't answer the collective action problem. 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. 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. 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.

2:28So group success or failure is determined by the attractiveness of the set of selective benefits. Manker-Olson opined that you needed to offer some kind of selective benefits that others, the free riders, wouldn't be able to obtain. And so Salisbury comes up with materials, solidary and purposive benefits. And material is very self-explanatory. These are the tangible benefits one receives from group membership. Discounts on Insurance or maybe a discounted rate at the Shujing Club if you belong with the NRA, that type of thing. Solidary benefits of social rewards that you receive, so group like dances or balls or some kind of activity where you're able to associate with others and form just personal bonds and so forth.

3:16And then propulsive is like a psychic reward from the group's pursuit of collective goods. So, in this regard, the member is glad to give their money because they want to see some purpose furthered. Patronage theory has a different approach to the Friedrich problem that Olson talked about. As espoused by Jack Walker more clearly in 1983, he offered that group mobilization depends more on attracting patrons outside of membership. and he says this will increase the stability of wealthy sponsors to make sure that the going concern for the group is maintained. This, however, downplays the entrepreneur, that is that sponsors are not encouraged by the benefit package offered to members because they're giving well beyond what it costs to get discounts on insurance or lower rates at the shooting club.

4:13So the Austrian critique here will cover these four things, the change or the attitude toward functional entrepreneurship instead of the occupational entrepreneurship which is dominating in the political science literature and the unique role of members that is not considered by political scientists and combining these we form a new typology that varies from political of Science. So here's a study in 1996 by Nouns and Neely, and they wanted to test the exchange theory versus Walker's patronage theory. So they sent out a survey to 60 interest group entrepreneurs, which were founders.

5:00Six of these entrepreneurs were entirely funded by foundations, and four were recruited by patrons. Now here are some examples of what the survey data contained. So one respondent explained that she met a foundation representative of Congress in Aspen who discussed with her the need for a group to do what they do and subsequently the foundation offered her seed money and a job as head of the organization. Another entrepreneur stated that the foundation told me they would fund it so I said I'd do it. And then the founder of an anti-abortion group reported that her church basically demanded that she form a group and then gave her the necessary seed money. And then, so those of you who don't know, the seed money is that first batch of money that you're able to start the group with before you have members and so forth.

5:54All right, so as we've seen, the political science has this dominating occupational treatment. The entrepreneur is a manager of capital, not an owner, and so we're going to compare We compare this to the Austrian concept of judgment and we have, and this is a functional treatment, right? Describes an activity or process where one is risking his own capital under conditions of uncertainty. And this has to operate under mundane circumstances. Now what is very unique is that political science literature treats the members as consumers of a product. trying to create this analogy between market processes and interest group politics, or interest group formation, I should say, is that they want to kind of keep them together so they can show how the interest group forms.

6:48But Rothbard points out that members occupy a dual role. That is, they're both the consumers and the producers when they become members of an interest group. So he explains this difference here that within a business, consumers are separate from the producers, right? Separate sources of funds where the consumer or the customer expenditures and the entrepreneurial investments provide the funds. With an interest group, the consumers are the donor investors and they provide that dual purpose source of funds. 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. Whereas the investors are investing money in the company because they want to return their investment.

7:34They 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. 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, he's satisfied with the material benefits they receive, 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. So the organizational purpose here is to serve the goals of the donor investors. This creates a different typology. Under the Salisburyan typology or the exchange theory typology, as you see, there are four basic kinds of ways that groups form.

8:27So the first is with individuals with their own money. 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. The second is individual approaches a patron for funding and an individual retains founding rights. What I mean by retaining founding rights is that let's say that the wealthy patron decides that doesn't like the way that the membership is going, they can always withdraw funds, but they can't fire the organizational leader. So in this case, the individual entrepreneur would still retain that entrepreneurial function.

9:14Now when we get to the third and the fourth, we have something different here, which varies from political science. The individual approaches the patron for funding and the patron retains founding rights. This is the case where an individual has an idea, comes to a wealthy sponsor, and he says, sure, I'd do that, but I'm going to go ahead and control the ultimate decision-making process. I'll fire you if I don't think you're doing a very good job. And the same thing happens with the fourth, which where a patron, it describes the three examples I gave, where the patron approaches an individual to manage the patron's funding. So you can see that the Austrian, you know, focus here is on the entrepreneurial function and not just on a title.

10:02So 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. 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? wanted to curb the amount of individuals that would die because of them. Over time, she succeeded and, you know, new laws were passed to lower blood alcohol level requirements for driving and she, you know, the group saw drunk driving deaths reduced.

10:54But the problem was, is after they succeeded, well, what's the need for the group, right? The members are, well, okay, they're drunk driving, deaths are down, why do I need to keep, you know, funding the group? 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. They're becoming more neo-prohibitionist, you know, one of the BAC levels reduced even further. In fact, she testified on behalf of the American Beverage Institute when the 0.08 laws were being proposed. You also have the idea of spinoff or competing groups. You know, we think of the NRA as the leader in gun rights interest group, but it started in 1871.

11:44Over time, it's up to 4.5 million members. whereas the G.O.A., or the Gun Owners of America and Jews for the Preservation of Firearm Ownership have much smaller memberships. And part of this reason is that individuals in the G.O.A. and the, I have that backwards, J.P.F.O., they have more, I guess you'd determine, extremist views on gun ownership rights. 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.

12:31And 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. So what are the role of disturbances here? We've kind of ignored Truman during this whole process. But with the disturbances in the Austrian idea is that members have an increased or decreased desire to sacrifice that lesser benefit, which is the use of money elsewhere for a greater benefit in donations. So we think of things that happen like the Sandy Hook shooting, where you may see a spike in membership because people have a greater incentive.

13:20They see a greater threat coming from gun control advocates. So they do play some role in there. So the conclusion is that current political science fails to provide a strong and cohesive theory of group formation by treating the entrepreneur from an occupational perspective and not looking at that functional perspective. 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.