The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Mancur Olson is one of the intellectual giants of our time. He was nominated for the Nobel Prize for ground breaking work which he presented in his prior major work, "The Logic of Collective Action." This work, as with any economic theorizing that must be taken seriously by the establishment, is formal and quantitative, as are his many published papers in the peer reviewed press.In the "Rise and Decline of Nations" Mancur Olson revealed the teacher in himself with a lucid readable account that left the mathematics in the footnotes. It was one of those books that Samuel Britten would give to his bright nephew who wants to know what it is all about without doing the difficult math.His thesis can be simply expressed as follows: societies that are governed by an encompassing interest will function better than societies that are governed by exclusive interests, whether these be tyrants, kings, oligarchs or representative democratic institutions corrupted by narrow interests. It is the inexorable development of the influence of powerful but minority groups that threatens to bring down the efficiency of governments in countries that have been stable for a long time. There is much to say for this interpretation of the evidence. But Olson says more than this. Why, he asks, does this occur?Why does a successful and vital democratic system become hollowed out from inside? Olson points to the tragedy of the commons. Reviewers on Amazon seem to have missed this central point. Olson shows with rigorous logic why this occurs, and why it is inevitable. An average voter generally feels that his voice is tiny in the sea of a wider electorate. He instinctively knows that a large personal investment in becoming aware of the details of the political and economic life of his country yields a poor individual return, and so he lets someone else do it, or trusts that the politicians will not mess it up too badly. This is a limitation on the ability of the mass to govern itself in addition to the inability of that segment of the electorate that do not have enough schooling to grasp the salient issues. Unless someone is a political pundit, paid for expressing informed political opinion, he will go with the flow or vote according to superficial impressions and imperfect heuristics.On the other hand, the logic is quite different when the individuals are lobbying for a minority interest that may return direct minority benefits. The commons is smaller. The Coaseian bargain easier to put together. There is a structural bias for those who wish to corrupt the system in the favour of narrow interests to want to invest more effort to do so. That bias easily outweighs any inclination for average citizens to prevent it from happening. And so, in the long term, the governments of stable nations become progressively more corrupt and less representative.Mancur Olson did not live to see how vividly his theory would be confirmed under the presidency of Bush, junior. It is we who can see this as one more piece of empirical evidence that Olson's theory is correct.Olson's theory predicts that this will get worse, not better. On the other hand, it is also Olson's prediction that when a very serious crisis takes place, many of the corrupting forces clustered about the centre of power can be flushed away. It is precisely this process in the form of Mao's Cultural Revolution that wiped out the middle cadre of the Communist Party in China, that paved the way for the Chinese miracle taking place today.We might ask, if we follow Olson's logic, whether the coming economic crash that the current Republican administration of the USA is engineering will be severe enough to bring about a thorough going clean out and an American revival? (And let's face it; Bush's economic policies are incompetent to the point of ruinous. His military and political ones too.) Or will the USA continue throughout the coming 50 years to sink inexorably into a quagmire of economic and political rigidities, to become a has-been nation as the UK did in the last century? Olson seems to predict the latter.

The economy no longer has to worry about "stagflation" like we did when this book was published but we do need to dissect the current economic stagnation. The U.S. economy has slowed, the income inequality gap has widened, and the U.S. is in economic decline. Mancur Olson had insight on the broader US economy and predicted that the increasing oligarchic tendency of our contemporary representative government.published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.the defining challenge of our time: rising income inequality and lack of economic mobility, can be met if we focus our government on the interests of the people rather than special interests.Refocussing government on the broad interests of our society and away from the interests of the “donor class”, or as John Dos Passos called it Big Money requires public financing of elections. Public financing can be accomplished by issuing an equal amount of non-transferable political payment certificates to all registered voters. No other kind of currency or payment in kind would be allowed. Recipients of the people’s political donations such as commercial firms, media, etc. could redeem their certificates at an Federal Reserve Bank.No one really can guess how this would affect policy or what effect it would have on office seekers but, for sure, they would be more dedicated to the common welfare and changes in public policy that would benefit our society broadly.My goal for nearly 20 years has been to level the playing field for the inventors of the 2nd generation superconducting Maglev transport technology, but have been unable to breakthrough the barriers established by the more influential transport interests. Drs. James Powell, Gordon Danby and I have tried writing about our experience in "The Fight for Maglev" and "Maglev America" both available on Amazon, in hopes of gaining public support for this system which is described on www.magneticglide.com. We know the technology is inevitable because of the shift in oil supplies and the realities of global warming so we want the United States to benefit from the new superconducting industry that would develop from deployment of Maglev guideways along the Interstate Highway System. This 300 mph National Maglev Network would allow every American to save, annually, $1,000 in reduced cost of goods and travel. We are trying to urge the Congress to authorize a Government Test Facility similar to those funded by the governments of Germany, Japan (using Powell and Danby's invention), Korea, China, and Brazil.Olson's analysis of the influence of existing, more affluent industries like the airlines has been used countless times in correspondence and in our books to try and persuade the public policy people that not only are the affluent taking a larger piece of the pie they are also shrink the whole pie. That is what has been happening to the U.S. economy.

A genuine classic.Mancur Olson starts with a three chapter summary of his "Logic of Collective Action," where he explained how stability breeds special interest groups (e.g. cartels, guilds, unions, oligopolies etc.) and how those groups acquire influence in an economy. Some of the most basic observations are1. Bargaining power will never be perfectly symmetric, i.e. there will be winners and losers;2. The longer the period of stability, the more these special interests will flourish;3. Smaller groups can organize better than bigger ones;4. Cartels are bad for growth;5. Smaller ones are worse than big ones (for example a union that represents every worker must in the end take account of what's good for society at large, but a small one needn't);6. These "Distributional Coalitions" slow things down because they only have one or two levers to pull and must satisfy the needs of all their members,6b. the easiest lever to control is price, because it's observable, rather than quantity;7. Special interest groups fight progress that might make them redundant;8. In order to form, cartels must include everybody who can produce a good / provide a service, but then they concentrate on excluding everybody else;9. As these special interest groups accumulate they make the economy and society progressively unworkable.Armed with these basic findings from "The Logic," Olson takes you on a truly amazing voyage where he applies the lessons learnt. He runs all the regressions you'd ever need to convince yourself that US states that joined the union later are growing faster than those which joined earlier because the various "coalitions" like unions and lawyers have had less time to organize. He compares the growth of rich countries and demonstrates that the UK is suffering growth-wise because its polity has been uninterrupted for the longest time. (Thatcher had only been in office for 3 years when he wrote this!) Japan and Germany, on the other hand , grew the fastest post-war and that could well have had something to do with the fact that their militaristic pre-war governments first quashed anything resembling a "special interest," while the US occupations subsequently levelled the political playing field. He moves on to the success of the European Union in tearing down trade barriers, with all the economic benefits it reaped, and laments that this was more of a coincidence than anything else, since he is not aware of a single case where trade barriers were not torn down by a separate political reason. (the book pre-dates NAFTA) So, for example, the EEC (the precursor of the EU) was founded to prevent another Franco-German war and to provide a counterweight to the superpowers, trade was but the excuse. From there he moves on to explain the motives for primogeniture in European nobility, the formation of castes in India and apartheid in South Africa: a group enacts an exclusionary practice to preserve a privilege, and as time goes by the practice gets progressively stricter, as the gradient of privilege between insiders and outsiders increases.And so on.I now understand 1948-1981 Greece ten times better. I understand why we used to make washing machines in Greece, why we established distilleries and alumina smelting facilities in some of the most beautiful settings on earth (ancient Eleusis and Delphi) and why I was limited to USD 250 of hard currency per trip. Rather than do the right thing and develop from scratch industries that took advantage of my country's unique location, the lazy upper class imported already existing business models from abroad, protected itself with massive tariffs and made sure we normal people did not have the ability to buy foreign products. So when we got the double whammy of EEC entry and borrow-and-spend "Socialists" in 1980 and 1981 our goose was well cooked. I had always known that the socialists took us from 18% debt/GDP in 1980 to 85% by 1985, all wasted on building "Sweden on the Aegean," but now I also understand why all pre-existing business disappeared in less than half a decade, leaving us all dependent on the largesse of our government and its international sponsors. It is unlikely we will ever recover. Sigh!The book ends with the author's best shot at explaining the problem of his times, stagflation. In short, all the various cartels, guilds, unions etc. end up setting the prices for their products and their sweat above what would otherwise be the market-clearing price. If the economy is doing better, this mispricing becomes less unjustified, but if the economy is doing worse (for example subsequent to a shock to relative prices which leaves everybody in an economy poorer, like the one caused by OPEC) then the mispricing becomes even worse. So the misallocation of resources is less egregious when prices go higher than when they go lower. So the "natural" drift in prices, the one that hurts the least, is upwards. So when nominal income for the economy goes down, the more natural way to take the hit is via quantity, rather than price. A la limite, and as the powerful lobbies push their own agendas increasingly harder, you could even observe rising prices. And from that he concludes that "the best macroeconomic policy is good microeconomic policy." Stop protecting your local industry from foreign competition, force companies to compete with each other in the marketplace, force the workforce to get rid of restraints on new entrants and the macroeconomy will take care of itself. IS ANYONE LISTENING?So this was overall an amazing read. What I most enjoyed, however, was the continuous torrent of pithy one-liners that flow so effortlessly off of Olson's pen. My favourite: "evolution also happens in the zoo, not only in the jungle." Wow!

The second of three major works by the late University of Maryland economist Mancur Olson, The Rise and Decline of Nations builds on the theories of his first work,  The Logic of Collective Action: Public Goods and the Theory of Groups , and applies them to macroeconomic issues, in particular: stagflation, unemployment, and business cycles. Olson writes for a general audience, with both the economic theory and the examples presented in plain English and well explained. The final chapter delves a bit deeper into economic theory, but will still be within the grasp of non-economists.For centuries, if not millennia, people have been fascinated by the rise and fall of nations. Many have written about the issue in various ways: Edward Gibbon opted for an historical case study in  The Decline and Fall of the Roman Empire, vol. 1-6 ; Jared Diamond took a broad, resource-based geographic approach in his bestselling  Guns, Germs, and Steel ; while Thomas Piketty in  Capital in the Twenty-First Century  used an economic approach to note that extreme divergences in wealth have historically led to civil unrest, revolution, and the collapse of regimes.Olson acknowledges in his first chapter John Maynard Keynes’ enormous contribution to economic theory, but notes too the gap between his macro-economic focus and the micro-economic context within which individuals operate. Olson aims to link macro and micro, and endeavors to show over the course of his book “how involuntary unemployment, and also deep depressions, can occur even when each decision maker in the economy acts in accordance with his or her best interests.”Like Piketty, Olson looks to more recent history. He cites European countries’ varied rates of economic growth or decline and the many, varied theories advanced in their explanation, and then wonders if there might not be some more unified explanation, something that has been missed. Olson uses a bottom-up approach, drawing on his earlier work in Logic to propose that the incentive and ability of groups to self-organize within a society has a growing impact over time on economic efficiency and growth. From this, he draws nine implications:1. “There will be no countries that attain symmetrical organization of all groups with a common interest and thereby attain optimal outcomes through comprehensive bargaining.2. Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time.3. Members of "small" groups have disproportionate organizational power for collective action, and this disproportion diminishes but does not disappear over time in stable societies.4. On balance, special-interest organizations and collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.5. Encompassing organizations have some incentive to make the society in which they operate more prosperous, and an incentive to redistribute income to their members with as little excess burden as possible, and to cease such redistribution unless the amount redistributed is substantial in relation to the social cost of the redistribution.6. Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining tables, and more often fix prices than quantities.7. Distributional coalitions slow down a society's capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth.8. Distributional coalitions, once big enough to succeed, are exclusive, and seek to limit the diversity of incomes and values of their membership.9. The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution."Bolstering the data-set, Olson expands the historical European figures to include the growth rates of different states within the US, and then of various countries around the world. He then matches the economic growth rates with the growth and intensity of each jurisdiction’s special interest groups, paying close attention his theory’s nine implications.“The logic of the argument implies that countries that have had democratic freedom of organization without upheaval or invasion the longest will suffer the most from growth-repressing organizations and combinations”, but Olson warns that forward looking citizens shouldn’t hope for upheaval to spur growth any more than Piketty’s poorer citizens should look for the wealthy to go bankrupt as a way of reducing inequality. Rather, they should look to improve economic outcomes for all through cross-border free trade and the mobility of the factors of production, because Olson’s nine implications break down across borders (i.e. without a stable nation-state to nurture them).In his concluding chapter, Olson brings his theoretical framework to address his (and other economists’) concerns about Keynsian and monetarist (and two related) models, and in particular their failure to address high unemployment or the combination of high unemployment and high inflation (stagflation). The explanatory variable, contends Olson, is the societal and labour rigidities, in part caused by special interest groups and imperfect information.The book was written in 1982, when stagflation was presumed economically impossible. (The Philips Curve predicted a trade-off between unemployment and inflation, not both together). Reading today, though, Olson’s theories are still fresh, and can be used to frame many inefficient (and often annoying) structures we see around us: sclerotic labour unions; powerful industry lobbies; antiquated organisations; and – following Olson’s second implication that organisational difficulty increases with group size – also groups that would be welcome but haven’t been able to organise. With the internet age and new communication tools, Olsen’s theories will provoke further thought still. The Logic of Collective Action: Public Goods and the Theory of GroupsThe Decline and Fall of the Roman Empire, vol. 1-6Guns, Germs, and SteelCapital in the Twenty-First Century

Generally a good book from the historical stand point. Not adequate for today's world of financial empires that are networks spannend across the globe. Probably those in Wallstreet read this book and reformed the way they manage their business and their empire.

Clearly and for good reason one of the classic books in this field. A very important and relevant model which offers excellent explanations.