The Rise and Decline of Mancur Olsons View of The Rise and Decline of Nations J. Barkley Rosser, Jr.

Department of Economics / MSC 0204 James Madison University, Harrisonburg, VA 22807 USA Tel: 540-568-3212 / Email: rosserjb@jmu.edu February, 2007 Keywords: collective action, encompassing organizations, rent seeking, transition economies Abstract: The evolution of Mancur Olsons views of his book, The Rise and Decline of Nations (1982), the middle of his three main books, is examined. It expands and extends to history and the world arguments presented in his The Logic of Collective Action (1965). While he never abandons the idea that the accumulation of interest groups in a democratic society may lead to its economic stagnation, how this comes about and can be overcome changes somewhat by the time of his final book, Power and Prosperity (2000), which focuses on the problems of the transition economies and proper political governance. A sign of the greater complexity of his later views emerges in his analysis of the U.S. South, presented in his presidential address to the Southern Economic Association (1983). Acknowledgements: The author wishes to thank Roger R. Betancourt and Thomas C. Schelling for providing either useful comments or materials, and Dennis Coates and Jac C. Heckelman for careful editing of earlier drafts of this paper. None is responsible for any remaining errors or misinterpretations. Introduction While Mancur Lloyd Olson, Jr.s first main book,1 The Logic of Collective Action (1965), has been cited more and can be viewed as more fundamentally innovative at the theoretical level, its successor, The Rise and Decline of Nations (1982) [henceforth, RADON] has been more widely translated and is arguably the magnum opus of his career, the grand application of his earlier ideas to the world and history at large.2 The earlier work laid out the problems that groups have in their collective goals as they become larger, with a greater disjuncture between the interests of the individual and of the collective group arising. In the final chapter of this work he suggested that his argument could lead to an overturning of the orthodox theory of pressure groups that saw them as a positive force for democracy and efficiency (Luce, 1924; Commons, 1950). Special interest groups representing small numbers of firms in oligopolistic industries could support monopolistic or protectionist legislation. Such legislation could damage the broader economy, especially groups unable to organize themselves that would then have to suffer in silence. While he rarely used the term, this argument can be seen as foreshadowing the later theory of rent
1

Prior to The Logic of Collective Action, Olson published the largely unknown The Economics of Wartime Shortage (1963a), which reflected his experience serving in the United States Air Force after returning from studying in the Philosophy, Politics, and Economics program at Oxford and before he completed his economics dissertation at Harvard. 2 In the Foreword to Power and Prosperity (2000, p. xvi), which appeared after Olson had died, Charles Cadwell reports that while Logic was more cited, it was only translated into 9 languages whereas RADON was translated into 12 languages. The Logic was originally Olsons Ph.D. thesis at Harvard, first overseen by Edward H. Chamberlin. After Chamberlins death in 1962, it was overseen by Thomas C. Schelling, who arranged for its publication in the Harvard Economic Studies series. McGuire (1998, p. 257) argues that it was RADON that vaulted Olson to academic celebrity. 1

seeking, and in his later works he more openly recognized the affinity of his ideas with the public choice school of thought.3 Although he added a number of arguments, two crucial innovations appear in RADON that underlie its central thesis. One is the distinction between distributional coalitions, which are seen as leading to outcomes inimical to economic growth, and encompassing coalitions, which are seen as potentially aiding economic growth in a society. Because of their greater size, the latter are seen as having trouble organizing themselves and achieving influence, although they may have a better chance of doing so in a smaller and more homogeneous society such as Sweden. His other innovation is the argument that over time a stable democracy will tend to accumulate more and more distributional coalitions whose political power will accumulate, thus gradually impeding the economic growth of the society. This becomes the key to his most famous argument in RADON. He especially focused on the post-World War II performance of Germany and Japan as compared with the United Kingdom, arguing that the defeat of Germany and Japan in the war had led to the overthrow of the power of narrow special interest groups that impeded growth whereas in the UK such groups reached a peak of power that was responsible for the relatively weak performance of the British economy. He emphasized that this was not a sudden development, but that after leading the world in economic growth during the Industrial Revolution during the long eighteenth century (1688-1834), Britain began to fall behind in the mid-19th century compared to such rising powers as Germany and the United States, this deceleration and relative decline only worsening in the aftermath of World War II. While he discussed a variety of other examples, this was the books central inspiring case. Of course, even as RADON was being published, the UK began to undergo a substantial political and economic transformation during the period of rule by Margaret Thatcher that triggered a global movement to privatization and marketization, even though Britain was not invaded and did not experience a violently revolutionary upheaval. Thus his central example undercut his argument about the inevitability of stagnation in a stable democracy. The power of special interest groups could be broken, and a stagnant economy could regain growth and dynamism through peaceful democratic means. While Olson largely avoided discussing the case of Thatchers Britain in his later work, it is quite likely that its example helped move him toward expressing strongly pro-democracy positions in the final pages of his last book, Power and Prosperity.4 If Britain was the primary inspiration, the example that provided the data for the econometric support of his argument in RADON came from comparing the states of the United States. Pulling the states of the Confederacy aside, he found a strong negative relationship
3

While he tended to avoid citing much of their work later, in the Logic Olson heavily cited Buchanan and Tullocks The Calculus of Consent (1960) with evident approbation. While this work of Olsons is often viewed as a founding text of public choice theory, its core argument derived from more traditional public finance theory, the theory of voluntary exchange of Erik Lindahl as analyzed by Musgrave (1939), who brought it to Olsons attention. He would eventually serve as President of the Public Choice Society. 4 It is only in the Notes to the Foreword by Cadwell to Power and Prosperity that there is a reference to the Thatcherite experience in Britain. Cadwell cites Rauch (1994) as noting Thatchers Great Britain as the only clear example of reform without crisis, although Olson cited Rauchs work elsewhere in this book. 2

between how long a state had been in the Union and its rate of economic growth. He identified this also with the presence of older industries in the older states along with some evidence of more entrenched and numerous special interest groups. He also briefly discussed the special case of the Confederate states, a discussion expanded in his presidential address to the Southern Economic Association (1983). He would attempt to fit the South into his framework, but it involved other factors such as transportation and social peculiarities that complicated the main line of his argument. However, it must be recognized that while he presented his main argument forcefully in most of RADON, he recognized in certain places (pp. 15, 87) that monocausal theories of history and economics are inadequate, thus opening the door to this later adumbration. In his final book, two themes emerge as paramount, one theoretical, one politicalhistorical. The theoretical was the debate with a main rival to his grand historical theory, the new institutionalist perspective of Douglass C. North (1981, 1990) with its emphasis upon a Coasean analysis of transactions costs as determining the quality of economic institutions and hence economic outcomes. The other was the attempt to apply his ideas to the problems of the transition economies after the fall of the Soviet Union, a project that he had been specifically involved in since 1991. While he continued to defend his main thesis from RADON his focus shifted somewhat to the discussion of appropriate governing and institutional structures in the transition economies and developing economies more broadly, with a recognition of the importance of Norths emphasis on protecting property rights and the ability to enforce contracts. In the Preface to his final book he posed the question of why some countries are rich and some are poor and found the answer in the quality of institutions. In the final pages of the book he argued that the underpinning of quality institutions would be democratically founded individual liberties and also the absence of predation by either the private or public sectors, a marketaugmenting government. Thus, if in RADON he would highlight the potential for democracies to lead to economic stagnation, in his final work he would affirm their fundamental importance in guaranteeing long-term economic growth. 1. From The Logic to RADON Martin C. McGuire (1998) argues that The Logic of Collective Action was not initially appreciated when it appeared, indeed, that it almost did not appear as Olsons final major professor and the editor of the Harvard series, Thomas Schelling, initially rejected it as a thesis until after it was substantially revised, a rejection so severe that Olson was preparing a completely different possible thesis topic as an alternative until it was accepted.5 McGuire argues that what eventually made The Logic into a classic were the extensive footnotes with their discussion of the many variations and possible extensions and cases involved beyond the basic argument. These possible extensions and cases would inspire a substantial cottage industry of research in working them out more formally over the next several decades, with all of this effort ultimately referring back to the foundational work by Olson. Thus the book only emerged over time as the classic that it now clearly is.
5

Both in private communication and in his Foreword to Heckelman and Coates (2003), Schelling reports that his main input was to encourage Olson to reduce the level of technicality of his presentation in order to make it accessible to political scientists, sociologists, anthropologists, and legal scholars. 3

Some of this development of ideas was carried out by Olson himself, at times with coauthors. One of the more important such extensions involved his famous paper with Richard Zeckhauser (1966), An Economic Theory of Alliances, and their later (1970) The Efficient Production of External Economies. The earlier paper particularly took off from some brief remarks in The Logic (p. 36) regarding how in the NATO alliance it seemed that a disproportionate share of the cost burden was borne by the larger countries. This observation was part of the general argument that as groups expand in size it becomes harder for them to provide an optimal level of the collective good. In the 1966 paper Olson and Zeckhauser posed the famous formulation of the exploitation of the great by the small that can occur within a closed group that provides itself a pure public good by voluntary contribution, which made this paper Olsons first to attract widespread attention within the economics profession. This result would be refined by later economists (Warr, 1983; Bergstrom, Blume, and Varian, 1986; Andreoni, 1988) to show that if preferences are identical within the group, there will be a definite cutoff in income below which a member will contribute nothing. Recognition that externalities and the degree of collectivity varies in extent led Olson (1969a) to publish his The Principle of Fiscal Equivalence: The Division of Responsibilities among Different Levels of Government, in effect a theory of fiscal federalism. The argument is that the appropriate level of government to supply a particular kind of collective good is that which comes closest to encompassing the extent of its collectivity or the externalities associated with it. While this now seems an intuitively obvious result that would seem to be almost a truism, it had not been previously articulated in precisely that form.6 During this period his focus on externalities got Olson involved in his one major foray into government when, as an Assistant Deputy Secretary for the then Health, Education, and Welfare (HEW) Department, he wrote a report (1969b) about how various social indicators should be constructed to measure quality of life beyond merely measuring real per capita income. This idea has become entrenched in the Quality of Life indexes now regularly constructed for the United Nations and other bodies. As part of this project Olson also became concerned with the problem of negative externalities and how rapid economic growth could be socially destabilizing because of these problems. He would express these ideas in several publications (1969c, 1977).7 However, he apparently prepared a more or less book length exposition of these ideas as an extension of his HEW report that has never been published. He discussed it at some length in a footnote in RADON (pp. 249-250) in which he noted the possibility that economic growth may not always be a good thing, just the opposite of what he was assuming throughout the rest of that particular work. In this footnote he provided the title Beyond the Measuring Rod of Money for this never-to-bepublished work and said of it (1982, p. 249), this is a book I very nearly decided to publish in the

It can be argued that this was a precise and logical implication of the long-argued principle of subsidiarity, that a higher level organization should not do what a lower level one can do, a point noted privately by Roger R. Betancourt. 7 He foreshadowed these arguments in one of his few publications prior to The Logic (Olson, 1963b). 4

1970s, but I decided this subject was so vast that it needed years of additional thought I hope to finish revising it soon after this book is published. But this did not come to pass. 3. The Main Argument McGuire (1998, p. 256) claims that one day over lunch in the mid-1970s while at the University of Maryland (Olsons home base from the late 1960s to his death), Olson argued that the extremes of laissez-faire and a command socialist economy would avoid rent-seeking, while a mixed economy would be subject to it. He was sharply challenged on this claim, which led him to formulate an idea that essentially goes against his earlier argument about larger groups being unable to obtain collective goods: the encompassing organization. The distinction between this kind of group, whose interests coincide with the broader social collective interest, and the narrower distributional coalition, the special interest, rent-seeking groups that slow down economic growth, became the key to his argument in his 1982 Rise and Decline of Nations [RADON]. In the first chapter of this book he posed the basic data on the post-World War II performance of the major nations, highlighting particularly the relatively poor performance of the UK as compared with (West) Germany, Japan, and even France. In the second chapter he largely reiterated his basic arguments from The Logic of Collective Action. In the crucial third chapter, The Implications, he introduced his distinction between encompassing and distributional organizations and worked through how they affected his earlier arguments. Drawing on a variety of historical examples, he summarized his argument with a set of general implications that he then listed at the end of the chapter after discussing them individually. They constitute the central core of RADON, and they are as follows (1982, p. 74). 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 societys capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth.
5

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. The final piece of his thesis was to add that stable democracies without defeat, revolution, or some other substantial internal upheaval tend to accumulate more and more of these distributional coalitions over time. This then explains the stagnation of long-stable democracies such as postWorld War II Britain as compared to the just-defeated Germany and Japan. 4. Further Applications of the Argument In the remaining four chapters of RADON Olson applies this basic argument to a variety of cases in different parts of the world and at different periods of time. The fourth chapter, Developed Democracies since World War II, presents his main cases, the contrast of booming (West) Germany and Japan with stagnant Great Britain. This is the revenge of the defeated nations, liberated from their rent-seeking distributional coalitions. France is also included as part of the booming group, and it certainly exceeded both the UK and the United States in GDP growth rate in the decades immediately following the war, although it is somewhat more problematic in terms of the story that Olson tells.8 Olson also explains the apparently anomalous good performance of Sweden as due to its special interest groups being of the encompassing nature, with its labor and management groups negotiating at the national level to achieve a stable macroeconomy.9 The chapter concludes with an econometric analysis of the United States, showing that older states are growing more slowly than newer states, correcting for other variables, with a brief discussion of the special circumstances of the American South. The fifth chapter, Jurisdictional Integration and Foreign Trade, focuses on how Britain became the center of the industrial revolution, arguing that it was the first nation in Europe to achieve jurisdictional integration and a unified national market after the Glorious Revolution of 1688 stabilized the nation, following the upheavals of the Civil War of the mid-17th century. This jurisdictional integration undercut the power of the local distributional coalitions that held back the nation and continued to operate in such rivals as France. Much as in his discussion of the U.S., Olson argues that the industrial revolution arose in previously smaller cities, such as Manchester and Liverpool, which displaced some earlier large cities such as Norwich and York (p. 123).
8

It is true that Germany defeated France and occupied it to some extent during the war. But it is also true that much of it was ruled by a local puppet, the Vichy regime, that did not upend or disrupt most groups in society, although the more overtly left-wing ones were suppressed, only to emerge after the war stronger than before it (Levy, 1999). Olson argues rather unconvincingly that this defeat combined with long internal conflicts led to the outcome in France, which is certainly a substantial variation on his main argument, given that France was marked by substantial continuity of institutions through the war. Arguably the groups were kept under control during the immediate postwar period by a combination of indicative central planning and the influence of the emerging European Economic Community (now European Union), with such strongly centralizing leaders as Charles de Gaulle (Estrin and Holmes, 1983; Chanter and Jenkins, 1996). 9 Olson (1990, 1995a) would later express frustration and disillusionment with Sweden and the Teutonic nations more generally, arguing that their previously encompassing organizations devolved into mere distributional coalitions that impeded innovation and growth, with the ending of the national level wage bargaining in Sweden in 1986 the crucial sign of this problem. 6

Australia and New Zealand are posed as negative cases like the later Britain, stable democracies that became constrained by excessive tariffs, clearly exhibiting the power of strong distributional coalitions. The chapter ends by warning that if the coalitions are strong enough they can overcome even the advantages of free trade, with the UK as the example. The cartelizations and excessive union power of the British coalitions show up in the sectors not competing in international trade. The sixth chapter, Inequality, Discrimination and Development, moves to history and the less developed world, blaming stagnation in pre-Communist China on the entrenched power of strong guilds (Morse, 1909) and the stagnation of India on its caste system, despite the highly laissez-faire system that the British maintained there during the Raj (Ansley, 1952). He also argues that guilds were problems in ancient Mesopotamia. Following the provocative analysis of Hutt (1964), Olson blamed the problems of South Africa on the distributional coalitions set up by fearful white workers. The final chapter, Stagflation, Unemployment, and Business Cycles, moves to macroeconomic problems in the United States during the troubled period of the 1970s when most of the book was written. He focuses on sources of price and wage rigidities, which he sees as poorly explained by both Keynesians and monetarists, as well as by the rational expectations school, and which he sees as leading to a bad natural rate of unemployment. Unsurprisingly he emphasizes the power of both unions and cartelized industries. This leads him to advocate essentially Post Keynesian incomes policies in which tax incentives are provided for cost-side restraints on wages and prices (Olson, 1979), although it must be noted that these have not been seriously attempted anywhere. In any case, as already noted, the success of RADON would lead to numerous honors and appointments for Mancur Olson. Besides the presidencies of the Southern Economic Association and the Public Choice Society, he would be named president of the Eastern Economic Association and Vice President of the American Economic Association, as well as membership in the American Academy of Arts and Sciences and an Honorary Fellowship of University College at Oxford University. While The Logic of Collective Action may have been Olsons ultimately most innovative and influential work, The Rise and Decline of Nations was the work that made him most widely famous, and it was awarded the Gladys M. Kammerer Award for the best book of 1983 by the American Political Science Association. 5. Mancur Olson on the American South If France was a somewhat problematic case for Olson in RADON, the American South was also. In his presidential address to the Southern Economic Association (Olson, 1983) he expanded upon his brief remarks in the book regarding the South. Given Olsons general argument was that defeat led to economic growth as entrenched groups were overthrown or undercut, the question arises as to why the South did not grow after its stunning defeat in the American Civil War. Furthermore, the question arises as to why it then later took off into dramatic growth after World War II. The answers do not fundamentally undercut his main thesis in RADON, but they do

suggest that things can be more complicated and nuanced than his usual story, with the South demonstrating that indeed economic growth is often a multi-causal matter. For one thing, the events after the Civil War do not clearly contradict his main line, as he notes an initial emergence of industrial development after the war that would then get cut off, notably a 64% increase in manufacturing establishments between 1860 and 1870 (Wright, 1982). In explaining the industrial stagnation after this period, Olson followed an earlier president of the Southern Economic Association, William H. Nicholls, whose 1960 work Southern Tradition and Regional Progress emphasized the roles of agrarian values, a rigid social structure, an undemocratic political structure, conformity of thought and behavior, and an irresponsible neglect of public education (Olson, 1983, p. 925). This pattern emerged after the end of the Reconstruction in 1876, although it did so only gradually as the Jim Crow system spread from town to town throughout the South, not becoming fully entrenched until after the beginning of the 20th century (Woodward, 1974). In effect, the previously dominant distributional coalitions reasserted themselves and restrained industrial development, which was seen as a threat to the traditional southern social order of white supremacy and racial segregation. This social order would spectacularly break down with the civil rights movement of the 1960s, which got going initially in the 1950s and would coincide with the emergence of regionally rapid economic growth relative to the rest of the U.S., especially the previously predominant Northeast. While Olson does see this collapse of the previous ruling distributional coalitions as important, he ends up arguing that this was probably less important than two other factors: lack of unions and improved transportation.10 Ironically, the former probably reflected the influence of the previously existing political and social order, which tended to suppress the development of unions. Olson would argue that in the end World War II was more important for the South than the Civil War (ibid. p. 929). The reason was that this was the period of most rapid unionization in the rest of the nation, especially the established industrial zones of the Northeast and Midwest, the older sections of the country that would come to stagnate after the war compared with the newer states in the West and the newly revived ones in the South. Thus, after the war the South stood as the location of low wages and northern industries, especially textile ones, would migrate southwards, and the southern industrial boom would be on.11 Finally, Olson also emphasizes a factor that has nothing to do with distributional coalitions or their power, transportation costs. Olson draws on Barger (1951) to argue that before the 20th century railroad costs were too high to justify northern manufacturers taking advantage of the low wages in the South (although the wage differential was not as great as it would be after unionization took hold later in the North). However, costs of railroads steadily declined over the first half of the 20th century, undoing this disadvantage. The emergence of alternative modes of
10

Olson vigorously rejected another widely claimed factor, the invention and spread of air conditioning, noting that hot weather did not restrain the rise of ancient civilizations. 11 Olson also notes that this period coincided with efforts by local communities in the South to subsidize industrial development as well (Cobb, 1982), arguing that they realized the Jim Crow system was coming to an end, so that they needed to industrialize, although the earliest of these efforts dating to the Great Depression in the 1930s would seem to predate such clear perceptions. 8

transport, the automobile and the airplane, and ultimately the construction of the interstate highway system, would eventually alter this situation such that the South would no longer suffer a transportation cost disadvantage and thus could take advantage of its lower wage rates to attract industrial development. So, Olson sees other factors at work besides his distributional coalitions, although of course it is the emergence of these coalitions in the form of unions in the North that is partly responsible. Olson concludes his discussion by forecasting that the South will fall again, (ibid., p. 932) as it becomes like the rest of the U.S. and begins to accumulate its own set of distributional coalitions, the same level of cartelization as the Northeast and the older Middle West. He goes so far as to say that it will even fall out of sight, as it loses its distinctiveness along with its old evils and the old romance. It will become one with the nation as a whole, although this is less certain from todays perspective. Thus, Olson is largely able to fit the American South into the framework of RADON, even if he has to introduce some additional elements in order to do so. 6. The Collapse of Communism and the Road to Power and Prosperity Mancur Olson would never openly abandon the framework he established in RADON, but his later career involved moving further and further away from its arguments, with more emphasis on political factors. The central triggering event would be the collapse of Soviet-bloc communism between 1989 and 1991, with Olson becoming involved in the study of this event and the transition processes in its aftermath, initially with his colleague at the University of Maryland, Peter Murrell (Murrell and Olson, 1991) and on his own, especially after he established the project on Institutional Reform and the Informal Sector (IRIS), which would become involved in a variety of projects around the world.12 While some of his later work focused specifically on the problems of transition (Olson, 1995b) most of it attempted to develop a broader political economic approach to problems of economic growth and development, even if much of the analysis was driven by the problems of the economies in transition (Olson, 1991, 1993, 1996; McGuire and Olson, 1996), with all of this culminating in his final (and posthumously published) book in 2000, Power and Prosperity. It can also be argued that in these later works he endeavored to deal with and incorporate to some extent rival ideas coming from the new institutionalists, especially North (1981, 1990), with much of his argumentation focusing on cases involving encompassing organizations dominating political systems rather than the rent-seeking, distributional coalitions of RADON. It was contemplating Stalins Soviet Union in the aftermath of its final collapse that led Olson to develop his idea of the autocratic ruler as a stationary bandit. Olson considered a primitive pre-state world dominated by roving bandits who would engage in widespread predation. However, if a bandit became stationary somewhere, he would begin to act like one of Olsons virtuous encompassing organizations from RADON, recognizing that he needed to have those around prosper to some extent if there would be anything for him to steal from them (Olson,

12

Whereas many identify the informal economy as a problem for governments (Schneider and Enste, 2002), Olson was more inspired by the work of de Soto (1989) to see it as a potential source of economic growth if it can be legalized and brought within an established system of enforceable contracts and property rights. 9

1993). His interests would increasingly coincide with theirs, at least to some extent, and out of such a process, states would emerge. Stalin was thus the ultimate stationary bandit. Now the great problem for Olson and his existing framework of analysis was to explain how it was that after the defeat of fascism there had been this outburst of economic growth in West Germany and Japan, whereas in the aftermath of the defeat of communism (which was an internal collapse rather than an externally imposed military defeat, of course) there was this massive collapse of economic output in most countries, even if it was not as great as officially measured due to the rise of underground economies in much of the former Soviet bloc.13 Attempting to maintain continuity with his arguments from RADON he argued that during the communist years powerful distributional coalitions had arisen in the state-owned industries in particular, with an important sign of this phenomenon being the emergence of the soft budget constraint in the more market-oriented of these economies (Kornai, 1992, Chap. 24). These groups were not necessarily overthrown after the fall of communism, but rather asserted themselves in corrupt privatizations and the rise of the underground economy. They began to participate in private predation, whereas previously they had participated in public sector predation. Ironically this suggested that slower privatizations might be preferred to more rapid ones, as the latter were more likely to simply hand over the previously state-owned assets to their existing managers and interest groups, with resulting corruption, as in Russia. Gradual privatizations, as in Poland, Hungary, and China, were more likely to result in restructurings and new management with less corruption and greater efficiency (Havrylyshyn and McGettigan, 2000). In addition Olson would argue that for China in particular, the Maoist Cultural Revolution destroyed the old elites and coalitions, thereby laying the foundation for more rapid growth later (Olson, 2000, pp. 166-167), even though communism remains in political control there.14 Olsons meditations upon failed governments led to his effort to debate the new institutionalists (Dixit and Olson, 1998; Olson, 2000, Chaps. 3 and 4), labeling them Panglossians and utopians. He noted that the foundation for their approach was the transactions cost approach of Coase (1937) and his related Coase Theorem (1960), which argued that in the absence of transactions costs and with well-defined property rights people would engage in efficient voluntary exchanges. This argument would be extended to politics as well as economics, resulting in arguments that democratic outcomes must reflect such efficient exchanges as inefficient political outcomes would be driven out of the system (Becker, 1983; Wittman, 1989).15

13

Rosser, Rosser, and Ahmed (2000, 2003) establish a strong correlation between increasing inequality in some transition countries, such as Russia, and the rise of the underground economy. Such an argument is consistent with the arguments of McGuire and Olson (1996) about redistribution, social capital, and stable democracies that respect contracts and private property. Clague, Keefer, Knack, and Olson (1999) would label such underground markets as irrepressible. Other markets would require state support to function and would generate contract-intensive money. 14 It can be argued that China is another case that does not fit very well in Olsons theories, especially in its ability to continue to grow rapidly despite its lack of democracy, reported widespread corruption with lack of enforcement of contracts and property rights in recent years (Wong and Ding, 2002). But, Olson focused more on the nations of the former Soviet bloc, and he is hardly alone in not being able to fully explain what is happening in China. 15 Ironically these arguments amounted to a revival of the older arguments of Luce (1924) and Commons (1950) that Olson had argued against in his first book. 10

Olson saw two key problems with this approach. One was a return to his argument from The Logic of Collective Action that in large groups there will be a disjuncture between the individuals interest and the groups interest, leading to prisoners dilemma problems and the breakdown of successful collective action, even in the absence of transactions costs. The other was his more pessimistic observation regarding governments, that they can undermine the well-defined property rights necessary for the operation of the Coasean utopias. Bad things often happen, even to rational people (Olson, 2000, p. 58), and There is no way of explaining the extreme poverty of many nations without taking account of the extent to which they are misgoverned (ibid., p. 59). In his famous essay, Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others are Poor, (1996) he would call for economic advisers of developing nations to wise up, to get the structure of incentives and the institutions right, so that the bills sitting on the sidewalk will get picked up. In Power and Prosperity, a government that had the incentives and the institutions right would be a market-augmenting government.16 Such a government would be founded upon democracy, which prevents an autocratic state from engaging in predation, thereby maintaining a balance of power, just as the leaders of the Glorious Revolution sought such balance in the British parliament from each other (even as such balances might lead to RADON-style stagnation in the longer run).17 But such a government would have enough authority that it can enforce property rights and contracts. There is no private property without government, Olson would declare on one of the final pages of his final book (Olson, 2000, p. 196). However, along with an absence of public predation, there must be an absence of private predation, the cartelizations that he denounced so vigorously in RADON.18 It is perhaps the final irony of Mancur Olsons intellectual career that at its endpoint he would embrace a position that described an optimal state as being one of middle-of-the-road balance between laissez-faire and autocracy. The irony is that this is exactly the opposite of the argument that he made in the mid-1970s that set him off on the road to write RADON, the argument that there would be no rent-seeking in either pure laissez-faire or pure command socialism. 7. Conclusions Throughout his intellectual career, Mancur Olson was concerned with the problem of how groups decide to do things and when those decisions will be socially optimal or not. In his early masterpiece, The Logic of Collective Action he laid out the general problem and how it is harder
16

This phrase would serve as the title for one of the volumes published in Olsons honor after his death (Azfar and Cadwell, 2003). 17 For discussion of the relationship between Northian and Olsonian views regarding the Glorious Revolution, see Mokyr and Nye (2007). The crucial role of civil liberties in the institutions underlying growth has been further studied by Acemoglu and Johnson (2005), with BenYishay and Betancourt (2006) further unbundling this argument to focus on the role of personal autonomy and individual rights. 18 Djankov, Glaeser, La Porta, Lopez-de-Silanes, and Shleifer (2003) would pursue such an argued tradeoff between the costs of private predation and public predation to pose the institutional possibilities frontier that suggested total social transactions costs would be minimized with some intermediate form of government. Rosser and Rosser (2007) provide a critique of details of this argument. 11

for larger groups to achieve optimality or align their interests with those of the members of the group. He argued that small groups could exercise power in a democratic society in the form of rent-seeking special interests that could undermine social efficiency, in contrast with earlier ideas about politics. On the way to writing his most widely famous book, The Rise and Decline of Nations, Olson developed the idea of encompassing organizations whose interests may correspond broadly with those of society at large. However, he argued that over time, stable democracies would tend to accumulate the other kinds of groups, the rent-seeking distributional coalitions that would engage in cartelization and protectionism that would distort incentives and impede technological and organizational progress, and thus hinder economic growth. He would use this powerful argument to explain a wide variety of historical outcomes, even as the argument would have problems with certain cases. In his later years, culminating in his final book, Power and Prosperity, he would move more directly to a consideration of how governments come to power and rule, motivated by his concern for the problems of the post-socialist transition economies and the failure of the prediction that they would boom just as the defeated fascist economies had after World War II. While many of his arguments from his earlier works carried over, he developed newer ideas and emphasized his debate with the new institutionalists. In short, he emphasized that the new institutionalists could not explain the bad outcomes that one observes in the world, with its poor and poorly governed nations, how it is that bad things happen, even to rational people. While in the Rise and Decline of Nations he had emphasized the problems that can arise in stable, long-lasting democracies, at the end of his career he emphasized the virtues of democracies that can defend property rights and protect people from the predations of both an overly powerful private sector and an autocratic state. References Acemoglu, Daron and Simon Johnson. 2005. Unbundling institutions. Journal of Political Economy 113:949-95. Andreoni, James. 1988. Privately provided goods in a large economy: The limits of altruism. Journal of Public Economics 35:57-73. Ansley, Vera. 1952. The economic development of India, 4th edition. London: Longmans, Green. Azfar, Omar and Charles Cadwell, editors. 2003. Market augmenting government. Ann Arbor: University of Michigan Press. Barger, Harold. 1951. The transportation industries, 1889-1946. New York: National Bureau of Economic Research. Becker, Gary. 1983. A theory of competition among pressure groups for political influence. Quarterly Journal of Economics 98:371-400.

12

BenYishay, Ariel and Roger R. Betancourt. 2006. Civil liberties, the unbundling of institutions and economic growth. Mimeo, University of Maryland. Bergstrom, Theodore C., Lawrence Blume, and Hal R. Varian. 1986. On the private provision of public goods. Journal of Public Economics 29:25-49. Buchanan, James and Gordon Tullock. 1960. The calculus of consent: Logical foundations of constitutional democracy. Ann Arbor: University of Michigan Press. Cadwell, Charles. 2000. Foreword. In Power and prosperity: Outgrowing communist and capitalist dictatorships, Mancur Olson. New York: Basic Books. Chanter, Juny and Brian Jenkins. 1996. France: From the cold war to the new world order. New York: St. Martins Press. Clague, Christopher, Philip Keefer, Stephen Knack, and Mancur Olson. 1999. Contract intensive money: Contract enforcement, property rights, and economic performance. Journal of Economic Growth 4:185-209. Coase, Ronald. 1937. The nature of the firm. Economica 4:386-405. Coase, Ronald. 1960. The problem of social cost. Journal of Law and Economics 3:1-44. Cobb, James C. 1982. The selling of the South: The southern crusade for economic development, 1936-1980. Baton Rouge: Louisiana State University Press. Commons, John R. 1950. The economics of collective action. New York: Macmillan. De Soto, Hernando. 1989. The other path: The invisible revolution in the third world. New York: Harper & Row. Dixit, Avinash and Mancur Olson. 1998. Does voluntary participation undermine the Coase theorem? Economics Letters 61:3-11. Djankov, Simeon, Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. 2003. The new comparative economics. Journal of Comparative Economics 31:595-619. Estrin, Saul and Peter Holmes. 1983. French planning in theory and practice. London: George Allen & Unwin. Havrylyshyn, Oleh and Donal McGettigan. 2000. Privatization in transition countries. Post-Soviet Affairs 16:257-86. Hutt, William Harold. 1964. The economics of the colour bar. London: Merritt and Hatcher Ltd. Kornai, Jnos. 1992. The socialist system: The political economy of communism. Princeton: Princeton University Press. Levy, Jonah D. 1999. Tocquevilles revenge: State, society, and economy in contemporary France. Cambridge: Harvard University Press.

13

Luce, Robert. 1924. Legislative assemblies. Boston: Houghton Mifflin. McGuire, Martin C. 1998. Mancur Lloyd Olson, Jr. 1932-1998, personal recollections. Eastern Economic Journal 24:253-63. McGuire, Martin C. and Mancur Olson, Jr. 1996. The economics of autocracy and majority rule. Journal of Economic Literature 34:72-96. Mokyr, Joel and John Nye. 2007. Distributional coalitions, the industrial revolution, and the origins of economic growth in Great Britain. Southern Economic Journal, this issue. Morse, Hosea Ballou. 1909. The guilds of China. London: Longmans, Green. Murrell, Peter and Mancur Olson. 1991. The devolution of centrally planned economies. Journal of Comparative Economics 15:239-65. Musgrave, Richard A. 1939. The voluntary theory of public economy. Quarterly Journal of Economics 53:213-37. Nicholls, William H. 1960. Southern tradition and regional progress. Chapel Hill: University of North Carolina Press. North, Douglass C. 1981. Structure and change in economic history. Cambridge: Norton. North, Douglass C. 1990. A transactions cost theory of government. Journal of Theoretical Politics 2:355-67. Olson, Mancur. 1963a. The economics of wartime shortage. Durham: Duke University Press. Olson, Mancur. 1963b. Rapid growth as a destabilizing force. Journal of Economic History 23:529-52. Olson, Mancur. 1965. The logic of collective action: Public goods and the theory of groups. Cambridge: Harvard Economic Studies 124, Harvard University Press. Olson, Mancur. 1969a. The principle of fiscal equivalence: The division of responsibilities among different levels of government. American Economic Review, Papers and Proceedings 59:479-87. Olson, Mancur, 1969b. Toward a social report, U.S. Department of Health, Education, and Welfare. Washington: U.S. Government Printing Office. Olson, Mancur. 1969c. The relationship of economics to the other social sciences. In Politics and the social sciences, edited by Seymour Martin Lipset. New York: Oxford University Press, pp. 137-62. Olson, Mancur. 1977. The treatment of externalities in national income statistics. In Public economics and the quality of life, edited by Lowdon Wingo and Alan Evans. Baltimore: Johns Hopkins Press for Resources for the Future and Centre for Environmental Studies, pp. 219-49.

14

Olson, Mancur. 1979. On getting really full employment without inflation. In Solutions to inflation, edited by David C. Colander. New York: Harcourt Brace Jovanovich, pp. 183-87. Olson, Mancur. 1982. The rise and decline of nations: Economic growth, stagflation, and social rigidities. New Haven: Yale University Press. Olson, Mancur. 1983. The South will fall again: The South as leader and laggard in economic growth. Southern Economic Journal 49:917-32. Olson, Mancur, Jr. 1990. How bright are the northern lights? Some questions about Sweden. Lund: Lund University Press. Olson, Mancur, Jr. 1991. Autocracy, democracy, and prosperity. In Strategy and choice, edited by Richard J. Zeckhauser. Cambridge: MIT Press, pp. 131-57. Olson, Mancur, Jr. 1993. Dictatorship, democracy, and development. American Political Science Review 87:567-76. Olson, Mancur, Jr. 1995a. The devolution of the Nordic and Teutonic economies. American Economic Review, Papers and Proceedings 85:22-27. Olson, Mancur, Jr. 1995b. Why the transition from communism is so difficult. Eastern Economic Journal 21:437-61. Olson, Mancur, Jr. 1996. Big bills left on the sidewalk: Why some nations are rich, and others poor. Journal of Economic Perspectives 10(2):3-24. Olson, Mancur. 2000. Power and prosperity: Outgrowing communist and capitalist dictatorships. New York: Basic Books. Olson, Mancur and Richard Zeckhauser. 1966. An economic theory of alliances. Review of Economics and Statistics 48:266-79. Olson, Mancur and Richard Zeckhauser, 1970. The efficient production of external economies. American Economic Review 60:512-17. Rauch, Jonathan. 1994. Demosclerosis. New York: Time Books. Rosser, J. Barkley, Jr. and Marina V. Rosser. 2007. A critique of the new comparative economics. Review of Austrian Economics, in press. Rosser, J. Barkley, Jr., Marina V. Rosser, and Ehsan Ahmed. 2000. Income inequality and the informal economy in transition economies. Journal of Comparative Economics 28:156-71. Rosser, J. Barkley, Jr., Marina V. Rosser, and Ehsan Ahmed. 2003. Multiple unofficial economy equilibria and income distribution dynamics in systemic transition. Journal of Post Keynesian Economics 25:423-47. Schelling, Thomas C. 2003. Foreword. In Collective choice: Essays in honor of Mancur Olson, edited by Jac C. Heckelman and Dennis Coates. Heidelberg: Springer-Verlag.

15

Schneider, Friedrich and Dominik H. Enste. 2002. The shadow economy: An international survey. Cambridge: Cambridge University Press. Warr, Peter G. 1983. The private provision of a public good is independent of the distribution of income. Economics Letters 13:207-11. Wittman, Donald. 1989. Why democracies produce efficient results. Journal of Political Economy 97:1395-424. Wong, John and Lu Ding. 2002. Chinas economy into the new century: Structural issues and problems. Singapore: World Scientific. Woodward C. Vann. 1974. The strange career of Jim Crow, 3rd edition. New York: Oxford University Press. Wright, Gavin. 1982. The strange career of the new southern economic history. Reviews in Economic History 10:164-80. From Wikipedia, the free encyclopedia MANCUR OLSON Mancur Lloyd Olson, Jr. (pronounced /mnsr/[1] or /mkr/; January 22, 1932 February 19, 1998) was a leading American economist and social scientist who, at the time of his death, worked at the University of Maryland, College Park. Among other areas, he made contributions to institutional economics on the role of private property, taxation, public goods, collective action and contract rights in economic development. Olson focused on the logical basis of interest group membership and participation. The reigning political theories of his day granted groups an almost primordial status. Some appealed to a natural human instinct for herding, others ascribed the formation of groups that are rooted in kinship to the process of modernization. Olson offered a radically different account of the logical basis of organized collective action. In his first book, The Logic of Collective Action: Public Goods and the Theory of Groups, he theorized that only a separate and selective incentive will stimulate a rational individual in a latent group to act in a group-oriented way; that is, members of a large group will not act in the group's common interest unless motivated by personal gains (economic, social, etc.). He specifically distinguishes between large and small groups, the latter of which can act simply on a shared objective. Large groups, however, will not form or work towards a shared objective unless individual members are sufficiently motivated. In 1982, he expanded the scope of his earlier work in an attempt to explain The Rise and Decline of Nations. The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions will have the incentives to form lobby groups and influence policies in their favor. These policies will tend to be protectionist and anti-technology, and will therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the "Logic" dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. Olson's idea is cited as an influence behind the Calmfors-Driffill hypothesis of collective bargaining.

16

In his final book, Power and Prosperity, Olson distinguished between the economic effects of different types of government, in particular, tyranny, anarchy and democracy. Olson argued that a "roving bandit" (under anarchy) has an incentive only to steal and destroy, whilst a "stationary bandit" (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it. The stationary bandit thereby takes on the primordial function of government - protection of his citizens and property against roving bandits. Olson saw in the move from roving bandits to stationary bandits the seeds of civilization, paving the way for democracy, which improves incentives for good government by more closely aligning it with the wishes of the population. [2] To honor Olson's many contributions to the fields of Economics and Political Science, the American Political Science Association introduced the Olson Award to the best PhD dissertation in Political Economy. [3] 1. The Economic Journal, Vol. 109, No. 456, Features (Jun., 1999), pp. F445 2. http://www.humboldt.edu/~ee3/econ306/olson.html 3. http://www.apsanet.org/~polecon/awards.html#Past%20Winners

17