PREFACE: I'm cleaning out drafts of various posts that I have sitting in gmail because, let's be honest, these are never going to get finished now that I'm writing FPiPE. Accordingly, your mileage may vary.
The Logic of Collective Action: Public Goods and the Theory of Groups
People usually assume that a group of people with a common interest will naturally organize themselves to collectively pursue that interest. However, if the action of the group needs to be explained by the rational action of the individuals who compose it, it turns out that even a group with a clear common goal and a clear consensus about how to achieve it will NOT, in fact, always spontaneously organize for their collective benefit. Often, in fact, they won't manage to get organized at all, and even if they do, they will tend to achieve an outcome for the group as a whole that is much worse than could be achieved if they were able to act as one unit.
Olson demonstrates this failure to spontaneously organize simply by examining the cost benefit calculation faced by an individual actor in a large group that has a collective interest in some common good. By hypothesis we have a group of people with unanimous agreement on the value of a public, collective good. In addition, the benefit of providing this group good exceeds the cost -- that is the benefit to the group taken as a whole exceeds the cost taken as a whole. The group has a clear common incentive to provide this good for themselves. However, if the good is truly public and non-excludable, that is, if it must be provided either for everyone at the same time or for no one at all, then each individual has an incentive to free-ride and let his neighbor front the cost of providing the good while he sits back and enjoys the inevitable benefits. In a large group, a single individual's share of the benefits of a collective good will be very small, and their contribution to the cost will not in itself be enough to pay for the good. If each individual operates in this rational cost-benefit maximizing way, nobody will pay for their share of the cost of the good, and the good will not be provided.
You might think that Olson would link this analysis to the tragedy of the commons idea, or to the irrationality of voting, but in fact he begins the book by making a strict analogy between this situation and that of firms in a competitive industry trying to collude to collectively lower output and hence raise prices. Theoretically, all the widget makers might have an interest in reducing volumes and forcing up the price of widgets. However, if there are many widget makers, the incentive for each individual widget maker is to maintain their volumes but still reap almost the full benefit of the higher price created by the others' reductions. After all, the volume of an individual widget maker is not large enough by itself to change the market price significantly, but the cost of a given maker's volume reduction is borne entirely by that individual. It's rational for individual widget makers to run full tilt even if they would all be better off if they could collectively agree to reduce output, which is of course why price moves toward marginal cost in these types of markets.
I think it pays to spend a little time letting that idea soak in. Economists think that incentives matter. But incentives for whom? If we take individual incentives as the unquestioned atoms, as it were, of our economic system, then the behavior of any group will need to be explained by some mechanism that harnesses those incentives. The group has to be created and held together, and for that you need some sort of mechanism. Olson shows us that our often implicit assumption that groups will act just like big individuals is based on "anthropomorphising" the incentives we think drive individuals.
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