The purpose of business is to maximise profit. Businesses exert economic power in pursuit of achieving this purpose through the allocation of scarce resources, and their success is clearly measured in pecuniary terms. The presumed purpose of the state is to ensure equity, efficiency, security, liberty, and community. Democratic, decentralised states exert political power in the pursuit of these goals through election, legislation, and regulation. The success of a state is far more difficult to measure, but any metric should attempt to reflect the quality of life of every citizen in that state. Because the powers of economics and politics act along different axes, the purposes of businesses and states are not necessarily antithetical. In fact, they are often self-propagating: businesses cannot exist without the state, because the state provides a regulatory framework that facilitates commerce; likewise, the state cannot exist without businesses, because businesses produce the goods and service we consume, and provide the incomes we need to pay for them. However, when one of these forces grows too strong, it can distort the direction of the other. For instance, government intervention can create economic inefficiencies in the pursuit of equity. Conversely, businesses can seek political rents through lobbying in the pursuit of profit.
Defined as excess profits above the market payoff, rents can occur through two mechanisms: “they arise naturally in the price system by, for example, shifts in demand and supply curves. The pursuit of rents under these circumstances is the sense in which rent seeking is equivalent to profit seeking”; they “can also be contrived artificially through, for example, government action” (Tollison, 1982, p. 575). Government actions can artificially produce excess returns in a number of ways. For instance, the government could introduce a tariff on alcoholic beverage imports, which would create an artificial scarcity of alcoholic beverages, and produce rents to be captured by domestic alcoholic beverage producers. These rents represent a pure transfer of wealth from the consumer to the producer. Rent seeking refers to “the expenditure of scarce resources to capture an artificially created transfer” (p. 578). In other words, businesses can attempt to influence the state to pass legislation and regulations that allow them to capture the excess profits, or rent, produced by government action. Based on theoretical analysis and empirical research, Tollison claims in Rent Seeking: A Survey, that “resources spent in the pursuit of a transfer are wasted from society’s point of view. These expenditures add nothing to social product (they are zero-sum at best), and their opportunity cost constitutes lost production to society” (p. 576). However, they also acknowledge that “’rent seeking’ or ‘profit seeking’ in a competitive market order is a normal feature of economic life” (p. 577). As such, rent seeking cannot be avoided. Nonetheless, in order to evaluate the policies of a government, it is important to identify the extent to which the legislation is influenced by rent seeking.1
Businesses can seek political rents by adopting various strategies. For example, corporations can make contributions to the campaigns of politicians who promise to protect their interests. Alternatively, businesses can use litigation as a rent seeking strategy, by taking advantage of beneficial laws, or challenging harmful ones. The most salient form of rent seeking, however, is lobbying, which takes many forms. Depending on the frequency of the issue, as well as the scope of its impact, businesses have four options: in a one-off situation that only affects one business, they can hire contract lobbyists, who boast vast political expertise and networks; in a one-off situation that affects more than one business, they could form an “ad hoc issue coalition to deal with the problem”; business could hire their own public affairs offices to address a unique recurring problem; finally, “if an issue recurs frequently and affects all firms in an industry in a uniform way, a company will probably turn to a business association, such as the American Bankers Association or the Beer Institute” (Lehne, 2012, p. 165). Businesses pay dues to these organisations, which then attempt to influence the government to enact policies that produce excess profits on their behalf. As such, businesses can lobby through business associations for legislation and regulations that allow them to capture an artificially created rent.2
One specific strategy that businesses can employ in order to capture excess profits is to influence states to introduce legislation that restricts the power of unions. The labour market is distinct from other markets because “workers who sell their labour power enter into an authority relationship with the employer …. Workers have responded to the special features of the labour market by organising unions that use their control over the supply of labour to win improved wages and working conditions from employers” (Bowman, 2013, p. 174). In this way, a union allows workers to “increase their market power and at the same time reduce the coercive power of employers over individual workers”, effectively giving them a monopoly over the labour market through collective bargaining. Intuitively, therefore, the more power that unions have, as determined by participation rates and available resources, the greater the wages and working conditions of the workers they represent. Wages and working conditions determine the costs of production for corporations, especially in labour-intensive industries, and so high wages lead to increased costs, which ultimately reduce profits. As such, it is logical that businesses would prefer government policies that limit unions’ power.3
One such policy is the 1947 Taft-Hartley amendment to the 1935 National Labour Relations Act – commonly referred to as the Right to Work act – which “sanctioned a state’s right to pass laws that prohibit unions from requiring a worker to pay dues, even when the worker is covered by a union-negotiated collective bargaining agreement” (Mishel, 2001). In other words, it allows workers to receive the benefits of union participation, whether they contributed towards its achievement or not. As of 2019, 27 states have enacted Right to Work laws. Proponents of the Right to Work act frame this amendment as an attempt to maximize the freedom of individual workers. However, this amendment actually creates the conditions necessary for the free rider problem to apply. The free rider problem is an economic theory predicting that market failure will occur when those who consume a public good do not pay for it, because they assume that their contributions are unnecessary, leading to the under provision of the public good. In this scenario, the public good is the improved wages and working conditions that unions negotiate through collective bargaining, and it is paid for by union membership dues. By making union membership fees optional, the Right to Work act creates a market failure in union formation, as not enough workers contribute, causing a reduction in union participation rates and resources. As a result, unions have less collective bargaining power, resulting in the under provision of the public good, which is characterised in this instance as a deterioration in workers’ wages and working conditions.4
There is empirical evidence to support the free rider theory’s prediction that Right to Work laws depress wages and working conditions. In a 2015 study on the relationship between Right to Work laws and wages, published by the Economic Policy Institute, Gould and Kimball estimated the wages of 304,157 workers, aged 18-64 years, using data from Bureau of Labour Statistics Current Population Survey Outgoing Rotation Group (CPS-ORG) for 2010-2012. They then constructed a regression model, “starting with the most general and building up to a model that controls for the full range of explanatory variables”. These variables included various individual demographic and socioeconomic characteristics, such as age race, level of education, as well as workers’ industry and occupation. The characteristics are largely the same for Right to Work and non-Right to Work states. After controlling for demographic and socioeconomic factors, as well as state-level labour market control and cost-of-living measures, they found that “wages in Right to Work states are 3.1 percent lower than those in non-RTW states …. This translates into Right to Work being associated with $1,558 lower annual wages for a typical full-time, full-year worker”. Unsurprisingly, they also find that union participation is 2.4 times higher in Right to Work states that in non-Right to Work states. This research demonstrates that, ceteris paribus, the cost of production in Right to Work states is lower than in non-Right to Work states, because the Right to Work legislation restricts the power of unions to bargain to collectively due to the free rider problem. This policy is bad for workers, whose wages and working conditions become worse, but good for businesses, who make more profit, representing a clear policy trade-off between equity and efficiency. It is therefore in the best interest of businesses to pursue profit by lobbying state governments to enact Right to Work laws.5
One of the most prominent and influential business associations that seek to influence government policy is the American Legislative Exchange Council, commonly referred to as ALEC. ALEC is a national policy organisation that “provides a constructive forum for state legislators and private sector leaders to discuss and exchange practical, state-level public policy issues” (Jackman, 2015). According to ALEC’s website, state legislators can pay $100 for a two-year membership, while business representatives have a choice of membership levels, ranging from $12,000 for the ‘Washington Circle’ package, to $30,000 for the ‘Jefferson Circle’ package. Private sector members then have the option of paying a further $5,000 for ‘Task Force membership’, which unlocks “the opportunity to debate, discuss and vote on model policy”. ALEC is also registered as a c501(c)(3) charitable organisation, which exempts them from federal income tax, and allows them to receive tax deductible donations. According to publicly available tax documents, ALEC had a total revenue of $10,352,239 in 2017; about 85% of this came from contributions and grants, and only about 10% from program services. When they have paid their membership fees, “ALEC members, including state legislators and corporate representatives, meet in task forces on specific issue areas (i.e. environment and energy, worker’s rights, etc.) and collaborate to write model legislation. Once the task force completes a model bill it is approved by the ALEC membership and governing board. Once bills clear those hurdles, they become official ALEC ‘model policies,’ which are disseminated to state legislators” (Jackman). Given the direct role that businesses play in this process, ALEC’s model policies are particularly amenable to rent seeking. In other words, businesses are quite explicitly able to buy influence over lawmakers, through participation in an ALEC task force. Consequently, these policies may prioritise the interests of its corporate members over the interests of the public that they are supposed to serve.6, 7
One journalist attempted to quantify the influence that ALEC has over state legislatures. First, Molly Jackman “collected information on the 169 model bills that they tag as most significant, covering each of the nine ALEC task force areas”. Next, they “used Boolean string searches in LEXIS to find bills with the same language that were introduced in the 2011-2012 legislative session”, yielding 132 bills in 34 states. “Most common were bills pertaining to immigration and the environment, followed by those relating to guns and crime” – distinctly controversial issues. Finally, Jackman found that “of the 132 ALEC model bills introduced, 12 were enacted”. Although “a success rate of 9% may not seem high upon first glance”, it is important to “consider the fact that, in the 112th session of the U.S. Congress, less than 2% of introduced bills passed. This means that bills based on ALEC policies have a survival rate nearly 5 times that of the average bill in Congress”. This study demonstrates that ALEC – and by extension their corporate members – have significant influence on state legislatures.
In order to asses ALEC’s influence over Right to Work legislation specifically, I applied a similar methodology. According to their website, ALEC’s model Right to Work policy was finalised in 1995, almost 50 years after the original Taft-Hartley amendment. As such, any Right to Work legislation that was passed before this date was presumably not influenced by ALEC (although this does not preclude the possibility of historical corporate lobbying through some other channel). Out of the 27 states that have passed Right to Work laws, only 6 did so after 1995: Alabama, Indiana, Kentucky, Michigan, Oklahoma, and West Virginia. I then compared the Right to Work section of the legislature of each of these states to ALEC’s model policy. Perhaps unsurprisingly, I found striking linguistic similarities. In particular, all 6 statutes featured some close variation of ALEC’s stipulation: “No person shall be required, as a condition of employment or continuation of employment … to pay any dues, fees, assessments, or other charges of any kind or amount to a labour organization”. These similarities suggest that the legislature of all of these states was strongly influenced by ALEC’s corporate members and benefactors.8, 9
Businesses are not the only organisations that can influence government policy, however, as labour unions can also engage in lobbying. AFL-CIO, for instance, is an economy-wide federation of unions. The goal of the AFL-CIO – to maximise wages and working conditions – is contrary to that of businesses – to maximise profits. Based on the logic explained earlier in this paper, it is in the best interests of the AFL-CIO to lobby against Right to Work laws. They were able to do so successfully in Missouri, where public campaigning lead to the reversal of the legislation in a referendum. However, Olson’s theory of collective action predicts that the AFL-CIO will have much less success in organising than their corporate counterparts. This theory develops the free rider problem, and argues that large groups of people with common interests have higher costs of organisation and enforcement than small groups. For instance, large groups are anonymous so contributions are unrecognised, and the benefits of the goal are smaller per person. As such, large groups are less able to act in their common interest than small groups. Small groups are therefore referred to as privileged groups. In the case of Right to Work laws, corporate representatives are a privileged group, because they are much a smaller group than the workers they employ: ALEC has only 2,000 members, whereas the AFL-CIO has over 12,500,000 members. Therefore, businesses are more likely to be able to cooperate to achieve their common goal of lobbying for Right to Work laws than union members are to achieve the opposite.
Finally, corporations also benefit from greater social capital. A 2007 study by Yackee draws a distinction between visible lobbying, which can be observed by the public, and invisible lobbying, which occurs "off the public record". By investigating “lobbying contacts with state agency officials during the development of 38 health-related regulatory policies in the state of Wisconsin”, they conclude that "rule-level changes are more likely to occur when those parties using invisible lobbying also advocate for policy change in a publicly observable way". Furthermore, “throughout the year ALEC conducts issue-specific seminars in 20 to 30 state capitols. ALEC Academies are special two-day intensive programs on specific issues, featuring national experts as faculty”. Through these conferences, business representatives are able to spend time with state legislators, during which they presumably engage in ‘invisible lobbying’. Union representatives, by contrast, cannot afford this luxury. As such, the disparity in influence between corporations and unions grows even wider.10
In this article, I have discussed the intersection of rent seeking, unions, and collective action. In doing so, I have analysed the specific case of ALEC, the AFL-CIO, and Right to Work laws. Taking these various economic theories into account, I have concluded that corporations are able to exchange dollars for political influence through business associations such as ALEC. Due to institutional differences between business and labour associations, the former has greater influence than the latter. Businesses use this influence to maximise profits by lobbying for Right to Work laws, at the expense of the worker. While rent seeking is inevitable, it is important to hold politicians accountable, and ensure the state fulfils its duty of protecting equity, efficiency, security, liberty, and community. As for businesses, perhaps they might redirect their expenditure on lobbying efforts to paying their workers a fair wage.