The rise and decline of Mancur Olson's view of The Rise and Decline of Nations.

• Author: Rosser, J. Barkley, Jr.
• Position: Symposium

1. Introduction

   Although the first book by Mancur Lloyd Olson, Jr., (1) The Logic of Collective Action (1965), has been cited more often and can be viewed as more fundamentally innovative at the theoretical level, its successor, The Rise and Decline of Nations (1982) 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 grow larger, with a greater disjuncture arising between the interests of the individual and of the collective group. 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." Although Olson rarely used the term, this argument can be seen as foreshadowing the later theory of rent-seeking, and in his later works, he more openly recognized the affinity of his ideas with the public choice school of thought. (3)

   Although Olson added a number of arguments, two crucial innovations appear in Rise and Decline 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 might have a better chance of doing so in a smaller and more homogeneous society such as Sweden.

   Olson's other innovation was his argument that, over time, a stable democracy will tend to create 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 Rise and Decline. He especially focused on the post-World War II performance of Germany and Japan compared with the United Kingdom. He argued that the defeat of Germany and Japan in the war led to the overthrow of the power of narrow special interest groups that impeded growth, whereas in the United Kingdom, 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 with such rising powers as Germany and the United States, this deceleration and relative decline only worsening in the aftermath of World War II. Although he discussed a variety of other examples, this was the book's central inspiring case.

   Of course, even as Rise and Decline was being published, the United Kingdom 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, Olson's 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. Although Olson largely avoided discussing the case of Thatcher's 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)

   The example that provided the data for the econometric support of his argument in Rise and Decline came from comparing the states of the United States. Pulling the states of the Confederacy aside, he found a strong negative relationship 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 briefly discussed the special case of the Confederate states, a discussion expanded in his presidential address to the Southern Economic Association (Olson 1983). He attempted 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 although he presented his main argument forcefully in most of Rise and Decline, he recognized in certain places (pp. 15, 87) that "mono-causal" 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 political-historical. The theoretical theme 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 on a Coasean analysis of transactions costs as determining the quality of economic institutions and hence economic outcomes. The other theme 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. Although he continued to defend his main thesis from Rise and Decline, his focus shifted somewhat to the discussion of appropriate governing and institutional structures in the transition economies and developing economies more broadly, with recognition of the importance of North's emphasis on protecting property fights and the ability to enforce contracts.

   In the preface to his final book, Olson 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 institutions of high quality would be democratically founded individual liberties and the absence of predation by either the private or public sectors, a market-augmenting government. Thus, if in Rise and Decline he highlighted the potential for democracies to lead to economic stagnation, in his final work, he affirmed their fundamental importance in guaranteeing long-term economic growth.

2. From The Logic to Rise and Decline

   Martin C. McGuire (1998) argues that The Logic of Collective Action was not initially appreciated when it appeared. Indeed, it almost did not appear, as Thomas Schelling, Olson's eventual major professor and the editor of the Harvard series, initially rejected it as a thesis. The rejection was so severe that Olson was preparing a completely different possible thesis topic as an alternative until it was finally accepted after substantial revisions. (5) McGuire argues that what eventually made The Logic a classic were the extensive footnotes, with their discussions of the many variations and possible extensions and cases involved beyond the basic argument. These possible extensions and cases inspired, over the next several decades, a substantial cottage industry of researchers to work them out more formally, 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 is.

   Some of this development of ideas was carried out by Olson himself, at times with coauthors. Some of the more important extensions are his famous papers with Richard Zeckhauser, "An Economic Theory of Alliances" (Olson and Zeckhauser 1966) and "The Efficient Production of External Economies" (Olson and Zeckhauser 1970). 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. This result was 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 "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. Although this now seems an intuitively obvious result, it had not been previously articulated in precisely that form. (6)

   During this period, the focus on externalities got Olson involved in his foray into government when, as an assistant deputy secretary for the then Health, Education, and Welfare (HEW) Department, he wrote a report (Olson 1969c) 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...