The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, Mancur Olson, Yale University Press (1982)

A Timeless Analysis

Confused or annoyed by the seemingly endless arguments about the economic theories of Keynes vs. Hayek et al.?  Here is a theory that falls between the two schools of thought and offers some genuinely fresh thinking.

Olson’s nine “implications” are discussed individually, and then restated as a one-page list at the end of Chapter 3.  The gist is that special interest groups (privileged classes, producer cartels, labor unions, etc.) rig prices and/or output so as to advance their own interests, typically with the approval or support of the government. This leads to misallocation of resources and lower economic output than would otherwise be realized, but people in the favored class or group will still be better off.

What about the possibility that consumers and the general public will react by organizing to protect their interests?  Olson persuasively argues that this does not happen because the perceived payoff for each person in a large aggregation of people is outweighed by the effort involved.  In other words, the usual rule of thumb is “let George do it.” 

As for seeking redress through the political process, voters typically will not invest the time and effort to understand the issues and where the candidates stand.  After all, how likely is it that one’s vote will decide the election?  Voters do pay attention to gaffes, talking points, sex scandals, etc., but that is primarily for the entertainment value.

In a society dominated by special interests, less effort is devoted to boosting economic output and more to dividing the economic pie (aka “rent seeking”).  Any society has special interests, of course, but the specifics vary widely – helping to account for (a) changes in economic performance over time, and (b) the widely differing performance of different societies. 

When changes in economic conditions occur, e.g., unexpected deflation or inflation, the painstakingly negotiated arrangements of the special interests take time to adjust.  In the meantime, needed economic changes are not made, which Olson posits as one of the reasons for the length of the Great Depression in the 1930s and the emergence of stagflation (a previously unknown occurrence) in the years after World War II.

Like any economic theory, this one is far from perfect.  Indeed, some of the commentary about the economic track record of various countries seems contradicted by developments since this book was published.  Nevertheless, I believe “The Rise and Decline of Nations” offers some useful insights for economic policy makers in 2011 who are grappling with the issue of how to “create jobs.”