Economists distinguish between different types of economic goods: public goods, common-pool resources, club goods and private goods. These goods vary along two dimensions: (1) rivalry in consumption and (2) excludability. A public good, for instance, is non-rivalrous in consumption and non-excludable. Air is often cited as a proto-typical public good. So is national defence. The nature of a good is not a given, but depends on the social, legal and economic conventions and circumstances. The commons in England were transformed from a common-pool resource into a private good through so-called enclosure (Polanyi 1944, Hardin 1968). It is rare to encounter goods in the real world in their ‘pure’ form. Rivalry in consumption and excludability typically come in degrees and so do the various types of economic goods. Few goods are unalterably non-excludable. Often the degree of a good’s publicness can be altered. Free trade policy can be transformed from a public good into a good more closely resembling a club or even a private good if selective protectionist measures are permissible (Gowa 1988). Nonetheless, the economic goods concept is heuristically useful.
Charles Kindleberger (1973) made use of the public goods concept to account for the stability of the liberal pre-1914 and post-1945 international economic regimes. In order to overcome collective action and cooperation problems, a hegemon needs to furnish public goods (e.g. market for distressed goods, lender-of-last resort, stable monetary relations). Kindleberger famously (but not uncontroversiallly) claimed that the breakdown of the interwar international economic regime was due to the United States’ unwillingness and Britain’s inability to exercise hegemonic leadership and provide the necessary international public goods and economic infrastructure. From this perspective, the United States became the provider-in-chief of global public goods after 1945. This is not the place to assess the empirical and conceptual validity of the Kindlebergerian variety of hegemonic stability theory (see Krasner 1976, Kindleberger 1981, Stein (1984), Snidal 1985, Keohane 1984, Eichengreen 1987; Krasner & Webb 1989; Gowa 1989; for a good summary Lake 1993) other than to note that different versions of hegemonic stability theory have different views as to whether the hegemon is exploited by or instead exploits the other states partaking in the ‘consumption’ of the international public goods.
Mancur Olson (1964) offered an explanation as to why public goods often fail to be provided even though their provision is everybody’s interest. The reason, Olson argued, is that public goods are characterised by non-excludability and this leads to free-riding. Free-riding tends to result in the public good not being provided. Moreover, individual actors will not to contribute to the provision of a public good if (1) the individual costs of doing so exceed the individual benefits and/ or (2) the individual contribution to the provision of the good is so small that it is not likely to have an impact on whether the good is provided or not (so-called “inconsequentiality problem”).
The collective action problem is particularly relevant in the case of large groups. The larger the group, (1) the lower share of individual benefits, (2) the less likely it is that individual benefits exceed individual costs and (3) the greater the organisational costs of organising the provision of . The collective action problem can be overcome (1) by offering selective incentives to individual members or (2) by forcing the potential beneficiaries to contribute (coercion). By contrast, in small groups (1) individual contributions are not independent of the contribution by others and (2) individual benefits are likely to exceed individual costs. All other things equal, this makes smaller groups more likely to provide public goods. At risk of oversimplification, the characteristics of a public good offer incentives to free-ride, thus making the provision anything but a foregone conclusion. Another important implication of the logic of collective action and public goods provision is that small stakeholders tend to exploit large stakeholders.
Collective action tends to be characterised by the ‘exploitation of the great by the small’. The reasoning goes something like this. If the larger actors have an incentive to provide the public good because they derive a net benefit from it, they will provide it regardless of what the smaller actors will do. The smaller actors understand this and will tend to free-ride given that the public good is by definition non-excludable and non-rivalrous in consumption. Provided the good is truly and purely public, the larger actors cannot resort to excluding the smaller actors. They can however resort to coercion and force the smaller members to contribute to the total costs of the provision of the public goods. This, however, may not be economical if the coercion and enforcement costs reduce the net benefits accruing to the larger members by more than the additional costs recovered from coercion. (The costs of coercion will naturally increase with the size of the group.) Threatening not to provide the public good in the first place is not a credible option, either. In short, as long as the marginal benefits exceed the marginal the costs, the larger actors will tend to provide the public good. This is what the ‘exploitation of the large by the small’ is about.
Olson & Zeckhauser (1966) argue that the same logic applies to groups like NATO. The logic of collective action can shed light on the degree of cost-sharing in the case of a security alliance. Members will be added until the marginal benefits equal the marginal costs of its members and members’ contributions then ought to equal their marginal utility. Moreover, to the extent that the US in the 1960s was by far the largest contributor to NATO, this would suggest that the US also derived the greatest utility from it. The logic of collective action however suggests that the smaller members tend to contribute disproportionately less than the larger members. This is what the ‘exploitation of the large by the small’ means. Admittedly, the tricky part, economically, is to calculate the costs and benefits. But it certainly it offers an interesting way to look national defence expenditure and collective security. That said, this issue appears in a slightly different light if one posits that NATO does not in fact provide a public good, but rather a club good. After all, collective security may be non-rivalrous in consumption, but non-members are by definition excluded from 'consuming' it (more on this below).
The post-WWII international economic order was based on the provision of club goods rather than public goods. After all, Communist states were largely excluded from (Western) international economic institutions. Club goods are non-rivalrous in consumption (up to a point) but excludable (Buchanan 1965). Following this logic, the post-1947 GATT regime was certainly a club rather than a public good. After all, non-GATT members did not automatically benefit from the automatic trade privileges accorded to GATT members. Similarly, non-IMF members did not have access to an international lender-of-last resort function. It was admittedly more difficult to exclude non-IMF members from using the dollar, as the emergence of eurodollar markets in the seventies demonstrated. Excluding non-IMF members from using the dollar was in principle possible, if costly. Moreover, the IMF quota subscription were equivalent to the fixed membership fee and interests paid on IMF loans were the equivalent of a user fee in the parlance of club goods theory. Non-members certainly did not regard the IMF and GATT as providing public goods. To members the IMF provided a club good and if the principle of reciprocity is seen as a sort of membership fee or cost, so did GATT.
Lake (1993) argued that free trade is both rivalrous in consumption and excludable. Certainly free trade as a good is excludable, but it is less obvious that it is rivalrous in consumption. After all, a country’s ‘consumption’ of free trade does not diminish the ‘consumption’ of a country that has identical levels of commercial access. It is true that a country may ‘consume’ more market share. So distinction needs to be drawn between free trade and market share. This perhaps mirrors the distinction between free-traders and mercantilists as well as between neo-liberal institutionalists and neo-realists (Krasner 1976, Keohane 1984). Free trade is non-rivalrous in consumption. Market share is not. Free trade is in principle and in practice excludable.
The EU common market and the euro area are club goods. The goods are excludable. Only members benefit from the free movement of goods, services, capital and labour. Non-members do not. The goods are also non-rivalrous in consumption. Again, a member may attract more capital or labour. But adding, for instance, another member would not diminish the degree of access to the common market. So consumption is non-rivalrous. The economic theory of the club suggests that, first, more members reduce the cost of running the club and, second, that increased membership will lead to reduced utility. But the latter only occurs if the goods are non-rivalrous in consumption only up to a certain point (e.g. swimming pool gets too crowded), which is an additional assumption club goods theory frequently makes. However, the common market does not suffer from the equivalent of 'congestion' as membership increases. In this sense, the EU common market is in fact a relatively ‘pure’ form of a club good. Consumption is non-rivalrous (one can’t consume more free trade than others) but the good is excludable (non-members do not benefit from the same access to the common market). What increased membership will do, however, is increase the incentives and opportunities for free-riding especially of the ‘small’ at the expense of the ‘great’ in terms of membership fees. Absent user fees, it is difficult to bring the marginal cost in line with the marginal utility of individual members.
The EU’s largest member-state, Germany, is also the EU’s large single net contributor. In spite of being the largest net contributor to the EU budget, Germany has benefitted more from economic integration than any other EU member (in absolute terms) due to trade specialisation, economies of scale and agglomeration effects (Krugman 1991). The economic gains from free trade in goods and services and the free movement of capital and labour, though difficult to calculate, almost certainly exceed cumulative net financial transfers. (I promise I will try to do this calculation in a future comment. For now, just grant me this assumption.) And this is not taking into account the less quantifiable benefits of trade vulnerability mitigation and insulation from international diplomatic-economic pressure and demands (Jaeger 2020). Some economists argue that monetary union led to an excessive export of capital and this is in part responsible for Germany's low productivity growth. This is a separate argument I cannot address here, except to point out that economies comparable to Germany that are not in a monetary union have not done visibly better, productivity- and growth-wise, in the past two decades (e.g. Japan). The point is: Germany’s ‘disproportionate’ financial contribution to the EU budget looks like a case of the ‘great being exploited by the small’. It also suggests that the marginal economic-political benefits Germany derives from EU and euro area membership continue to exceed the marginal costs. In other words, economic efficiency gains outweigh financial contributions. This sounds about right, intuitively. But I admit that I owe the reader a detailed calculation.
The logic of collective action suggests that the smaller EU member-states are well-positioned to 'exploit' or free-ride in a way similar to how Germany free-rides on NATO (or the US). However, such free-riding will only work to the extent that the free-riding does not lead to marginal costs exceeding marginal benefits for the larger EU members. After all, the great are unlikely to help provide the good if they do not derive a net benefit from it. But as long as the marginal benefit of membership exceeds the marginal cost, the great are bound to shoulder a disproportionate burden. So Thucydides’ “the strong do as they please, the weak suffer as they must” does not seem to hold in a cooperative as opposed to a conflictual context. Smallness can give a state bargaining power disproportionate to its size – but only up to a point. This is of course an insight well-recognised in IR alliance theory. In fairness, Thucydides was well aware of it, too, as his explanation of the origin of the Peloponnesian War in the context of the broader alliance structure and specific dispute involving Corcyra, Epidamus, Corinth demonstrates.
The need for post-pandemic EU stability and the increased resources this will require is bound to lead the larger members to increase their economic-financial contributions relatively more than the smaller members - at least, this is what the logic of collective action would suggest. The recent Franco-German agreement on a EUR 500 bn rescue fund (effectively grants, as it stands) and the opposition to it by many of the smaller 'frugal' (northern and eastern) member-states suggest as much. While this might be interpreted as the traditional opposition of 'creditor' countries to transfers to 'debtor' countries, it does in fact demonstrate that the larger 'creditors' (France, Germany) are more prepared to transfer additional resources to the EU member-states most adversely affected by the pandemic, compared to the smaller ('frugal') 'creditor' countries. And the fact that Berlin's decision came hot on the heels of a ruling by the German constitutional court that is thought to cast doubt on the Bundesbank's participation in the ECB's pandemic-related quantitative easing programme suggests that the German government is keen to maintain the stability and integrity of the common market given the continued net benefits Germany derives from it. This makes sense in light of the Olsonian logic of collective action. Hitherto the 'exploitation of the great by the small' hypothesis is consistent with the 'data'.