on 23 December 2003
I was fortunate enough to be guided to this book during my Masters course in Land Economy at Cambridge. Since then, I haven't stopped praising it to anyone that will listen and many that wouldn't.
It managed to completely change my outlook on the world, politics, the nature of the state and the way in which the world needs to progress. Amongst other things, you will find the explanation for the emergence of the state, the nature of monarchies, the reasons for the failure of communism and the ingredients for a successful economy.
A seminal piece of work that should be the first port of call for anyone interested in the world around them.
This is a must-read book.
on 29 December 2005
Mancur Olson is one of the intellectual giants of our time. His nobel prize was awarded for his ground breaking 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 (with the exception of some graphs in a later chapter, not difficult to interpret, but which the reader can skim over if they are so inclined, for the argument is clearly stated in the text). The "Rise and Decline of Nations", Mancur Olson's prior book for the greater public, is a hard act to follow, but that he does with this sequel, "Power and Prosperity." And how.
"Power and Prosperity" brings the compelling reasoning of Olson's theories of collective action forward with a lucidity and ease unmatched by any other book I have encountered. And yet he still breaks new ground; the prompting was Olson's observations of the former Soviet Russian Federation's failure to rise above anarchy and to harness the power for free markets for the good of her people. In this book Olson answers the question: Why has Russia failed where the West has succeeded?
Olson's use of language is quite outstanding. He uses no big words where simple words will do. He defines the terms of his essay as he goes. He refers the reader to academic publications for those interested in formal proofs. He does not repeat himself except to remind the reader of the main line of argument, which keeps the whole tight and disciplined, yet easy to read.
This book is very strongly recommended for anyone seeking the synthesis of the big picture and a disciplined logical analysis.
on 12 February 2012
If there is a leading economic text to act as a guide to the new milenium it is probably this one.
Olson firmly rejects the idea that economics can be understood without the political context of power relationships that surround commercial activity.
He makes the interesting observation that lively markets exist throughout the Third World and he refers to these as "self-regulating" markets with a notable characteristic being their short time horizon. Essentially there is the simultaneous payment for and delivery of goods.
He contrasts this with advanced democracies that have "NON self-regulating" markets i.e. what he calls "socially contrived markets" that allow much greater predictability and longer time horizons based on contract law and state protected property rights, allowing such things as long-term capital investment, stock markets, complex manufacturing and banking.
An established democracy with widely spread power and solid property rights is clearly desirable but he makes the point that democracy is a historically recent invention that has only partly displaced traditional autocracies. Autocracies (dictatorships) concentrate power in one person or a small group at the expense of the majority and are maintained by the threat of force and often use an "ideology", for example Communism of Fascism, to justify their exclusive and permanent right to power.
The book shows that democratic free markets with an impartial rule of law will in the long rule out distance unstable dictatorships, but he proceeds to suggest that long-established democracies are prone to a few problems of their own, that in some cases can prove fatal. Most notably special interest groups can gain (undemocratic) special access to political power for their own gain at the expense of the national majority. A fine example would be the enormously costly bailout of the speculative bad debts of Wall Street banks passed onto American taxpayers, or alternatively (again in the U.S.), the medical/ insurance lobby that manages to deliver a less health population at twice the cost of similar European systems.
An interesting observation is that the remarkable success of German and Japan after WW2 was in large part the result of the complete destruction intricate systems of special relationships allowing a fresh start along clean free market lines, but of course, at the great social cost of war.
A bit like Thinking Fast and Slow, but with a lot less rambling and almost zero cross referencing in the main text, this is a book that's meant to summarise a career's findings. It's written by somebody who both knows a whole lot and wants to tell you everything he knows. And it's written so beautifully, you keep asking yourself "why did I not think of that?" To which the answer, of course, is "because it's only so clear once somebody has told you."
Mancur Olson, the man who explained in his youth one of the main problems of our otherwise quite solid market economy, the tendency of concentrated interests (such as lobbies, oligopolies and unions) to prevail over the interest of the silent majority, spent the last couple years of his life writing this primer that sheds light on some of the big questions in politics. Here's a list of my favorite examples:
1. How come most countries on earth used to be run by a dictator / tyrant / king? Answer: because it beats the hell out of what was the alternative at the time, namely being raided by itinerant hordes. Not unlike a mafia don, a "Stationary Bandit" had every interest in seeing his people prosper and every interest in providing them protection from roving bandits. So that's the system that prevailed everywhere for a long, long time.
2. What does it take to get rid of the dictator / tyrant / king once you're fed up with him? Answer: first, a big event that upsets the applecart, such as a famine or a plague or a discovery; second, a multitude of interests on the ground so no single successor scheme take over where the previous tyrant left off and third, no external threats. Daron Acemoglu goes a lot deeper in trying to explain this in his book from 12 years later, but still, what a beautiful summary!
3. How come oligopolies and concentrated interests can form and thrive when we know that even two people can sometimes not agree to collude? Ah, that would be because the prisoner's dilemma never occurs in nature. Most economic agents who matter can talk and compare notes. And they are not prisoners. Hell, even prisoners can get it done if the game is repeated.
4. If one day we achieve perfect information and zero transaction costs, will the diffuse interests of the consumers, the poor or the unemployed finally prevail over concentrated interests? Erm, probably not. And that's because the basic problem will not disappear. The marginal member of these groups will still do best if somebody else does the hard work for him. The incentive to free-ride will remain.
Then he moves to the meat of his book, namely the dissection of why the fall of the Soviet Union did not lead to prosperity. It's still a step by step series of answers to questions. Stuff like
5. How come Sergei Bubka broke the world record for pole vaulting 17 times, nine of those by just one centimetre? Ah, because under Stalinism the able and the unable got paid the same up to the fortieth hour of work, but after that they got something a lot closer to market rate. So the able, those who could do superior work, would not only (a) get underpaid for their first forty hours of work, thereby giving the state their labor for super cheap, but also (b) they would work as much as possible past that fortieth hour, since that's the bit of their labor that got compensated well. Also, they could be guaranteed to gravitate toward the jobs that required skills. My choice of example, of course, was meant to prove that you could go around the system. Bubka could probably have set the bar fifteen centimeters higher twice, rather than a couple centimeters seventeen times, but that would have landed him two bonus apartments, rather than seventeen.
6. What are the main ways to collude against the hyper-extractive Stalinist regime? Two mainly: first you can work together with the guy right above you and the guy right below you in the chain of production to sell privately excess resources that have been allocated to your endeavor; second, you can work together with state-run near-competitors to trade with one another excess resources, rather than ask for them from above.
7. What's the one biggest difference between Germany post WWII and Russia post Communism? In Russia the main source of corruption, the informal markets that dealt in the re-allocation of misallocated resources, not only survived the transformation intact, but by definition reached into everywhere. By dint of having set prices and quantities, indeed by having set them wrong, the system had not only given birth to a parallel, informal market system for the reallocation of resources, but had actually forced every single citizen to deal with this system (or alternatively perish). The people in charge of these informal networks continued to thrive after the transition, except they no longer had anybody to fear whatsoever. They could carry on their previous trade legitimately. Only they knew how the system worked.
8. What's the difference between Russia and China post Stalin/Mao? Mao had purged all Communist party insiders during the infamous Cultural Revolution. When Deng took over, there was no entrenched bureaucracy of party cadres who could resist him. The market reforms imposed by Deng were only resisted by elements in the very top echelons, but the rank and file knew not to stand in the way.
Finally, Mancur Olson presents us with the big idea of his book. Again, it's a question: How come market system fails in some places? How come the logic of the market does not prevail everywhere? When we visit third world countries it is quasi impossible not to bump in to a suk or an open market. If indeed nothing can go wrong in a society that encourages mutually beneficial trading, how come only some countries allow millions of mutually beneficial trades to turn into one big vibrant market-clearing machine?
The answer is that there are two types of markets: spontaneous markets and socially contrived markets.
Spontaneous markets are the ones that will appear regardless. The author goes as far as to say that spontaneous markets are irrepressible. Essentials will find their way to people regardless of how bad the government is, regardless of how extractive a despot is, regardless of how poorly the price has been set. When no capital investment is necessary for the production of a good, for example, it will be traded as many times as necessary, formally or informally, until it reaches whoever needs it most. Only two conditions need to be met: first, both parties must stand to gain from the trade and second, both parties must be able to somehow enforce contracts, a la limite by threatening to refrain from repeated trades. So that's how come markets are ubiquitous.
Socially contrived markets, on the other hand, are the markets that need the support of the state to exist. If it is essential to invest in capital (such as plant and equipment) or human capital or intellectual property to provide a particular good or service, then it is equally essential that a government exist to guarantee those property rights. And it is in the provision of the property rights which support socially contrived markets that Mancur Olson identifies the difference between rich countries and poor countries.
Pretty simple once somebody has pointed it out, no?
I really really enjoyed this book.