Taking Stock / Can the Little Man Win?

There is a theory that in democracy, he can’t. But in this age of social media...? Well, let's just say special interest groups can use Facebook, too, and they have the money.

Could it be that a thousand employees of the Israel Standards Institute, abetted by a handful of major importers and industrialists, have torpedoed a huge reform of Israel’s import rules? A reform born of the social-justice protest that could have significantly lowered the cost of living?

Could it be that the Knesset’s Economic Affairs Committee surrendered to the interests of a tiny clique, abandoning the interests of millions of people?

Could it be that the 1,500 employees and a handful of passing politicians managed to stymie reform of the Israel Broadcasting Authority for decades? A reform that would have benefited millions of viewers and democracy itself?

Could it be that 12,000 workers at the Israel Electric Corp. and their friends in government also spent decades stifling any nascent reform that might have opened up Israel’s energy market and reorganized the company better, foiling a move that would have benefited all other Israelis and businesses?

Could it be that the 1,500 tenured workers of the Airports Authority have more influence over Israel’s main international airport than the 2 million Israelis passing through it each year?

Could it be that Israel’s banking system is structured as a duopoly that serves mainly 25,000 bank workers and executives rather than their millions of customers?

Could it be that the defense system has long since stopped focusing on keeping Israel safe? That it has thousands of people engaged mainly in preserving budgets and cushy salaries by lobbying the government, the Knesset and the public? That they legitimize the existence of the gargantuan mechanism by manufacturing security threats? Could it be that, in this way, the system manages to impose its inefficiency, costing tens of billions of shekels a year, on the taxpayer?

Could it be that large swathes of the public sector exist mainly to serve certain groups in the public sector, not the sick or the schoolchildren, not the students or the job-seekers, not the consumer or the small businessman or the rest of Israel?

Could it be that over the decades, dozens and hundreds of small special interest groups coalesced in both the private and public sectors, which have more influence over the structure of the economy than the millions of taxpayers and consumers (and politicians) do?

Could it be that democracy in Israel is some sort of fantasy?

Over the last few years, the Israeli public has been waking up. It has started to realize that these things could be.

Almost everybody who accepts this theory, that the economy is in practice shaped by and for special interest groups, then argues it reflects the weakness of the leadership, or political corruption.

Others would claim the existence of the special interest group is only natural and that isn’t the question anyway – what is the question is left or right, nationalization or privatization, big government or small, and so on.

Meet Mancur Olson

Please meet Mancur Olson. He isn’t as well-known as Adam Smith, Friedrich Hayek, Milton Friedman or Paul Krugman. If he hadn’t died relatively young (66), he’d probably have won a Nobel for explaining, from the 1960s to the 1980s, why the power in modern democracy and the free market gradually concentrates in the hands of narrow interest groups.

Olson published two important books. The first is the “Logic of Collective Action” (1965). The second is “The Rise and Decline of Nations” (1982).

In the first, Olson explains why it’s easier for small groups to organize. The second explains the accruing influence of special interest groups on the prosperity and success of economies and nations.

Using simple models based on game theory, Olson proves that all democratic societies and economies gradually develop narrow interest groups that wield great influence over the structure of the economy and the allocation of resources.

These interest groups stifle economic development, hamstring prosperity, and bar the adoption of new technologies. They blunt reaction to economic changes. The more interest groups an economy has, the smaller they are and the less inclusive – the more they depress economic growth over time.

Until the publication of his books, the wonders of the Japanese and German economies – their phenomenal growth from the 1950s to the 1970s – was attributed to culture, history and industriousness.

Olson had another explanation: These economies thrived because both nations lost World War II. The powerful interest groups in these countries were savaged by the new government that arose after the war.

In other words, breaking or at least weakening the power hubs in Germany and Japan (from families to unions) is what laid the foundations for building dynamic, competitive, innovative and prosperous economies.

An interesting aspect of Olson’s thinking is why there is little chance that large groups of citizens, taxpayers, consumers will be truly represented in democracies and free societies. He postulates that there is an inverse relationship between the size of the group and its ability to take collective action for the good of its members.

The smaller the group, the more focused it is on more homogeneous interests; thus it is more able to organize. The smaller the group, the easier it is to roll its inefficiency over to the public.

My readers know my argument that the media, in some cases, tends to serve special interest groups. In the case of tycoons, bankers and politicians, the incentive of the media is clear. But there’s another reason, more structural in nature, which Olson explains well: The information, the analysis and the calculations regarding products and public services that are affected by pressure groups are themselves a public product. Since a large public cannot organize, it cannot attain that public product – namely, it cannot attain information that would teach it the real cost of the special interest groups.

Or, the fact that democratic societies gradually organize into structures that serve narrow interest groups does not necessarily attest only to corruption, stupidity, bad governance or cupidity by politicians and regulators, or journalists. It is the result of the ability of small groups to organize, versus the inability of large groups to organize and represent themselves and analyze the economic reality in which they live.

One could attack Olson’s theory from several angles. This year, Gunnar Trumbull of Harvard published a book called “Strength in Numbers: The Political Power of Weak Interests,” which claims that groups of consumers, taxpayers, the sick and the like are more able to organize today by virtue of being weak and, therefore, winning public sympathy. He presents many examples, but do they prevail over special interest groups over time?

Ostensibly, the era of social networks should gradually be empowering large groups of non-homogeneous people to organize for a common end, thereby eroding Olson’s main claim. But the Israeli experience has proven that groups still can’t really organize on Facebook because they lack know-how, understanding and the ability to manage an effective lobby. These are things special interest groups do well, and they have money, too; they can also use Facebook and influence the public through the press as well.

In Israel, each special interest group may be small, but together they are large and great, and together control a huge swathe of the economy.

We feel the biggest special interest group is the military. It’s so big, with more than 150,000 people feeding off the system, that it barely meets Olson’s criteria. Possibly the reason an interest group that huge can exist is that it’s a hermetically sealed entity, unmeasurable and tied to the ethos of the establishment of the Jewish state.

If you think I agree with Olson, and that I think the role of the press is to create the public product that analyzes the real cost of the narrow interest groups – you are right.

I think special interest groups have a dramatic effect on the structure of the Israeli economy, its ability to grow and on inequality.

One can argue who belongs to which interest group, if it’s half a million people or a million. But what’s sure is that they are the only groups really represented in Israeli politics over time.

Will it take war or some horrible crisis to weaken the special interest groups, dismantle the structures that suffocate growth and clean the rust that has the economy in its grip?

We shouldn’t wait. Solutions need to be found -- ones that don’t serve the special interest groups. Got any? Email me at guy.rolnik@themarker.com.

AP