Knowledge And Decisions

We tend to conceive of various interest groups — the steel industry, agriculture, construction workers, doctors, ethnic minorities, etc. — as integrally persisting through time, and of various special interest legislation or policies as being for the benefit of such groups as enduring entities. In reality, however, the constant turnover of individuals and/or organizations in particular sectors makes possible sharp divergences between the interests of the incumbents as of a given time and the enduring interest group of which they are a transient part. For example, laws making it difficult for employers to fire anyone are an obvious benefit to existing employees. But such laws create incentives for such employers to raise hiring standards and to substitute capital for labor incrementally — both actions raising the unemployment rates among workers subsequently entering the labor force. The net result can be a reduction in employment opportunities for “labor” over time, though an immediate gain in employment opportunities for incumbent employees. It may be a perfectly rational goal for incumbent employees to seek such laws protecting jobs and for incumbent politicians to pass such legislation. Many of those whose future job prospects are being traded off for present advantages are too young to vote or have not yet been born. Similarly, state laws often protect incumbent corporate managers from “takeover” efforts by other corporations which might fire them after buying the business. From a social point of view, it may make little sense to protect less efficient executives from more efficient executives. However, it is incumbent management which decides where to locate corporate headquarters and installations, and those states which shield incumbent management by obstructing “takeover” efforts have an advantage in attracting taxpaying and job creating businesses. It is a perfectly rational decision for states to do so, even when it is against the national interest. In short, it is perfectly rational for incumbent labor and incumbent business to seek goals which are antithetical to the economic interests of labor and business as long run interest groups. And it is equally rational for incumbent politicians to accommodate them with laws that are in no one’s long run interest.

It might seem as though, when the transient representatives of an enduring group are replaced by a new generation, existing legislation adapted to the previous generation would be repealed. But such adjustment to later feedback is inhibited by differences in the cost of knowledge to incumbents and nonincumbents. First of all, incumbents know who they are individually, what they have in common, and what they have at stake. People who might have become doctors if the A.M.A. did not restrict entrance to medical schools, or who might have created an entirely different kind of railroad if the Interstate Commerce Commission did not control that industry, will never know that with anywhere near the same certainty — that is, with anywhere near as low a cost of knowledge. An incumbent need only be sane to know what his occupation is, and only moderately intelligent to realize what he and his cohorts could lose under alternative institutional arrangements. But someone who finds that dishwashing is the best job he can get cannot know that he could have become a construction foreman if the construction union did not restrict entry. Even if he could know, he could not locate all the other individuals who might have been his co-workers or employers in the hypothetical construction industry as it would have existed without union restrictions, so that they might form a counteracting special interest group. Similarly, all the potential executives, investors, employees, and subcontractors of the kind of railroad companies that could have come into existence without I.C.C. regulations face incredible costs of knowledge in trying to locate one another, even if each somehow knew that he was personally one of the losers from I.C.C. policies.