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

Mancur Olson is one of the intellectual giants of our time. His Nobel Prize was awarded 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.

Mancur Olson along with Milton Friedman and Michael Porter may well be one of the key figures of late 20th century economics. In some respects he is more universal in his outlook than the other two as his life's work represented in this book synthesises economics and politics in a sort of evolutionary life cycle view of societies.

He probably wouldn't have liked to hear it but his ideas have a nice Taoist flavour. As a society becomes more successful, advanced and stable it's institutions become more complex and invariably start to turn the favourable stability into undesirable rigidity. Legislation starts to mushroom along with the people who create and administer it and somehow the society finds that the achievements of it's youth are no longer possible.

He identifies various strands in this process of sclerosis, the main one here being the activity of special interest groups. As he puts it; "the larger the number of individuals or firms that would benefit from a collective good, the smaller the share of the gains from action in the group interest that will accrue to the individual or firm that undertakes the action. Thus, in the absence of selective incentives, the incentive for group action diminishes as group size increases, so that large groups are less able to act in their common interest than small ones."

In normal language, this means that somebody lobbying government for the general good is not going to get as much as somebody lobbying for a small group. A fine example of this would be the farmers in the European Common Agricultural Policy. They gain a great deal in subsidies and controlled prices, managing to spread the cost over a large number of taxpayers and consumers. No individual shopper knows how much extra they are paying for their butter etc., it's not going to be very much anyway and they're not going to hire a lawyer to fight about it.

However, keep this process going on long enough and apply it to enough goods and services and you find a magical growth in prices / regulation / administration / number of lawyers and government share of G.D.P.

In a sense this is the old pre-civilisation tribalism in modern guise. "If you have the power use it. " The common-good on this reading has a very local definition and is blind to the good of the society as a whole.

This seems to be a cultural problem and Olson sheds light on the uncomfortable dual nature of economic liberalism. On the one hand competition is good because it promotes efficiency/ choice and lowers prices but on the other it is an anti-society instinct that easily slides out of control.

The book is heavy going since it has to try to be acceptable to the economic "science" theologians. Unfortunately for Olson it is still heretical to suggest that sociological observation or any of the useful established work in psychology has any relevance to economics.

In fact the economics profession itself seems to have undergone the very process that Olson describes as the open flexible texts of Adam Smith have turned into a rigid mass of irrelevant mathematics.

Easy to read - easy to digest - easy to understand - a brilliant book - relating how through group behaviour our system becomes ever increasingly difficult to navigate with initial wins for some turning into wholesale losses for the rest of us.

Well worth taking on vacation