The Interest-Group Theory of Government
If "majority rule" were in fact a meaningful way of characterizing political outcomes in a representative democracy, there would be no minimum wage law, no agricultural price supports, no import tariffs and quotas, in short, none of the many and varied government programs and policies that benefit the few at the expense of the many. Yet, such special interest measures exist--deed flourish--in the United States and elsewhere. This simple observation about political life raises two important questions. If a large number of governmental activities generate no discernible benefits for the majority, why are such policies adopted? Given the very real costs, both direct and indirect, borne by taxpayers in supporting the machinery of wealth redistribution, why do such policies persist?
One approach to answering these questions, which might be termed the "market failure" approach, derives from the work of Arthur Pigou. 1 This way of analyzing government emphasizes the reasons why in many cases the private market economy cannot be wholly relied upon to allocate and distribute resources in a socially optimal way. For example, the existence of positive or negative "externalities"--benefits or costs associated with economic activities not received or borne directly by market participants--causes some goods to be oversupplied and some to be undersupplied. Left alone, private markets would produce too much environmental pollution and not enough education. Similarly, the informational disadvantages of buyers respecting the quality or performance characteristics of certain products and services leaves them vulnerable to exploitation by sellers. The suggestion is that government intervene in policy-specific ways, using taxes, subsidies, price regulation, and the like to correct these market failures: "In the Pigovian approach the state is a productive entity that produces public goods, internalizes social costs and benefits, regulates decreasing cost industries effectively, redistributes income Pareto optimally, and so forth." 2
The market failure theory of government, assuming as it does that government benignly pursues the objective of maximizing social wel-