Forced participation in collective organisations has been common in the past - and even now used to collect levies from farmers. Lauren Brazier scrutinises the process and rationale for student associations. Your view?

By Lauren Brazier

The Education (Freedom of Association) Amendment Act 2001 made membership of a tertiary-institution student association voluntary. Before this, students at every New Zealand tertiary institution other than the University of Auckland were compelled to join their association.¹

This situation was known as compulsory student membership (CSM).

The alternative, the voluntary student membership introduced under the amending Act of 2001, is known as VSM.

Institutions and incentives

The CSM and VSM arrangements are institutions. Institutions are ‘systems of established … rules that structure social interactions’.² They are the ‘rules of the game’ that incentivise or constrain individual actions. The law itself is an institution that provides incentives and constraints for social interaction. Incentives matter because people evaluate costs and benefits in order to make decisions.

CSM provided a set of incentives that led to an inefficient allocation of resources. Because associations were able to compel students to pay annual levies, there was little incentive for them to discover or provide services that students actually wanted. The associations knew they would get the students’ money regardless of the nature or quality of services they provided. Further, the cost of obtaining information about services the students desired provided a disincentive to engaging widely with them.

Misaligned incentives and weak monitoring led to various instances of waste, fraud and mismanagement. Notable instances include a former president’s draining $750,000 from the Whitireia Polytechnic student association and $20,000 being spent on fitting out the Victoria University of Wellington association’s van with tinted windows and speakers. The resources that students were compelled to contribute to their associations were not being allocated to their highest-value uses because there were no incentives to find out what those uses were, let alone implement them. Rather, resources were applied in ways that best suited a small number of individual members.

Solidarity is not what it seems

Supporters of CSM argued that student associations provide valuable services to students. However, value is a relative concept determined by supply and demand. A good or service does not, and cannot, have an intrinsic value: its value is determined relative to other options available. Under CSM students did not have the opportunity to ‘value’ the association’s services relative to alternatives because they were not able to ‘vote with their feet’ and apply their membership fees to other uses.

CSM supporters also argued that if association membership was made voluntary then some students would free-ride on the provision of services paid for by others. If it stands, this argument provides strong support for CSM. It is used to justify similar arrangements in the agricultural sector.

However, for this argument to stand the services provided by associations must satisfy the requirements for public goods. That is, they must be non-excludable and non-rival.

Non-excludability means that it is impossible to stop someone who is not a member from using or benefiting from the good or service. Few of the services provided by student associations fall within this category. For example student media, entertainment and clubs are excludable – as are most student advocacy services. By providing membership cards, student associations could easily restrict the benefits to those who have paid for them. The exception to this is political advocacy, which is non-excludable in that all members ‘enjoy’ the outcomes it achieves.

What about non-rival? This means that one person’s consumption of a good does not affect another person’s consumption of that good – but, for the most part, goods and services provided by associations are rival. For example if an association’s employees are doing advocacy work for one student, they cannot at that very same moment be undertaking advocacy work for another student. So political advocacy is rival, because the use of resources to support one political viewpoint is done at the expense of other political viewpoints.

Thus the free-rider argument is by itself insufficient for justifying CSM.

Voluntary benefits

VSM, unlike CSM, aligns an association’s incentives more closely with its members’ interests. The association does not get guaranteed access to students’ resources; instead, there is an incentive to gain information on what students require and to provide what is desired. The resources that students contribute to their association will then move to their highest-valued use, which will encourage students to join (or remain in) the association.

The literature on public choice theory discusses benefits to be gained from voluntary association.³ Its concept of clubs focuses on voluntary organisations that provide ‘excludable’ public goods – goods where ‘exclusion is possible, but the addition of a new member lowers the average cost of the good to all other members: that is, there are economies of scale’.⁴ Its concept of ‘voting with the feet’ deals with a situation where ‘individuals express their preferences via entry and exit decisions’.⁵ Freedom of association is a related feature, describing VSM more accurately than CSM and reinforcing VSM’s efficiency benefits. These benefits apply whether or not there is competition among providers.

In addition, VSM allows for the competition that is required for these efficiency benefits to be realised. For example, a university campus with several different associations competing for students would lead to clearer delineations of students’ preferences, and thus greater efficiency.

Shouting loudest …

The debate that accompanied the law change highlights how the preferences of selfinterested individuals can affect the efficiency of politically determined outcomes. The New Zealand Union of Student Associations (NZUSA) stated that over 4800 submissions were received by the Select Committee on the Education (Freedom of Association) Amendment Bill, and that 98% of these were in favour of CSM.⁶ According to NZUSA there are approximately 270,000 students in New Zealand. So fewer than 2% of students made a submission on the Bill (since doubtless there were some submissions that were not made by students).

Public choice theory can explain why so few students submitted, and why most of those who did were in favour of CSM. A traditional inefficiency of decisionmaking is that individuals who receive the concentrated benefits of a policy whose costs are dispersed over many people will be the ones who lobby for that policy. This is exactly what happened in debate about the amendment: student leaders and the small number of students who received the bulk of CSM’s benefits strongly advocated for it to continue.

Evidence from a number of associations suggests that the benefits of CSM went to small groups of students. At the Tai Poutini Polytechnic student association, for example, large amounts of student funds were given to selected groups of students in order to hold parties – and in other student associations leaders received salaries and (often large) bonuses. So the marginal benefit of opposing the Bill outweighed the marginal cost for the special interests involved.

By contrast, the costs to individual students of sourcing information in support of the Bill were concentrated and outweighed the individual benefits they would receive were it to pass. This was a disincentive to actively supporting VSM.

Of course, public choice theory does not explain why anyone would actively support VSM. It fails to take ideology into account; and no doubt ideology motivated some students. However, public choice theory does help explain why support for CSM was more evident.

Further, lobbying by student politicians against the Bill can be seen as a form of rentseeking. The policy of CSM had created an economic rent: by compelling students to join just one association at each tertiary institution, it had given that particular association a monopoly (rent) over student funds. The student politicians were pursuing that rent. This offers another explanation for why there were more submissions against the Bill than for it – and the fact that there was a rent being sought is, of course, another indicator of inefficiency.

… but not longest

Despite those who received the concentrated benefits of CSM actively opposing the Bill, it was passed and the law is more efficient for the better incentive structure that VSM provides. None of the economic arguments were able to establish CSM as more efficient. The law relating to associations has evolved to become more efficient, despite the best efforts of special interest groups.

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1 There were two exceptions: a referendum could be initiated by 10% of students to decide as a collective whether the association at their institution should be voluntary; and individual students could opt out of their association in limited circumstances. But the first was never successfully implemented and the second affected only a very few students.

2 GM Hodgson (2006) ‘What are Institutions?’ Journal of Economic Issues 40(1) pp2-4.

3 See: DC Mueller (2003) Public Choice III Cambridge University Press (Chapter 9); and D Seymour (2009) ‘A Public Choice Analysis of Compulsory vs Voluntary Student Membership’ (at www.actoncampus.org.nz/blog).

4 DC Mueller op.cit. p183.

5 ibid. pp182, 187.

6 These figures have been questioned because of NZUSA’s use of postcard submissions.

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Lauren Brazier is a law and economics student at Victoria University of Wellington. This article is based on an essay she wrote in 2012 for the VUW law and economics course Econ 330.