However, the terminology of "free rider" is only found once in that book, referring to the labor market context. In a conceptual sense, the free rider arguments entered mainstream economics as a result of the work of Mancur Olson's classic 1965 book The Logic of Collective Action. When did the free rider terminology jump from being specific to a financial or a labor union context, and become a general term widely used by economists? The answer here turns out to be trickier than one might expect. 196), Republican of Ohio, who wrote the Taft–Hartley Act of 1947 as a result of his conviction that the Wagner Act was too favorable to the labor unions, conceded that a “limited type of compulsory membership contract is a complete answer to the ‘freerider’ argument so often advanced to support the need for a closed shop.” In an issue of the Annals of the American Academy of Political and Social Science devoted to discussing labor in the American economy, even Senator Robert A. 2), wrote that the “‘free-rider’ is a well-known problem of the American union.” That problem referred to the “reluctance of workers to pay union dues after their immediate demands have been met.” Among the characteristics of the American trade unions, the institutionalist economist saw “reliance upon the closed shop or the union shop,” which he defined as “devices partly to deal with the problem of the ‘free-rider’” (p. "Discussing the Taft–Hartley Act, the former president of the American Economic Association and authority on labor issues, Sumner H. For its proponents, regulation of the securities market was justified by the need to defend the interests of the public against unfair practices and free riding in particular, while, for its adversaries, this regulation appeared as an obstacle to access a supposedly open market.ĭiscussions of labor unions in the 1940s and 1950s often referred to the "free riders" who wanted to receive union wages and benefits without paying union dues. From the mid-1960s, free riding was used to describe “the practice of purchasing during distribution and selling after a subsequent rise in price in the aftermarket.” Though not illegal, this practice was forbidden by the NASD because the broker-dealer was not supposed to enjoy “an unfair advantage from his position as a distributor of securities.”. The NASD likewise prohibited the practice of free riding “hot issues.” Here, professionals who had withheld shares from the public at the initial public offering were castigated for selling them with a significant profit in the trading market afterwards. Fontaine offers examples going back to the 1930s, but here's one example from the 1960s which involves about a case where in an initial public offering, certain securities dealers who had been allocated shares would hold back shares from the public, and then plan to sell them later at a higher price. The use of "free rider" in the context of securities practices seemed to involve situations where there was an expectation that established institutional participants in financial markets had a responsibility to act in certain ways, and that holding back in an attempt to increase profits was acting like a "free rider. The journal isn't freely available on-line, but many readers will have access through library subscriptions.įontaine discusses two main uses of "free rider" in economics leading up to the 1960s: one in the context of securities practices and the other in the context of labor unions. Philippe Fontaine explores earlier and current uses of "Free Riding" in the September 2014 issue of the Journal of the History of Economic Thought (v. The meaning of "free rider" has evolved over time, until terminologysort of popped up in the economics literature. Of course, if many people behave in this way, collective action can become difficult to sustain. In an introductory economics class, the idea of a free rider often arises the discussion of public goods, referring to the idea that self-interest can lead people to a wish to benefit from collective-often government-goods and services, without contributing an appropriate share. A homely example might be the family that shows up each year empty-handed at the big reunion, planning just to eat what all the other families provides. In social science parlance, a "free rider" is someone who benefits from a collectively provided good but does not make an appropriate contribution to the provision of that good.
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