Explaining the rain: The Rise and Decline of Nations after 25 years.

• Author: Heckelman, Jac C.
• Position: Symposium

1. Introduction

   Mancur Olson's (1982) The Rise and Decline of Nations was hailed as an instant classic in several circles but was met with its fair share of critics. To date, there are over 1800 citations of Rise and Decline listed in the Social Science Citation Index. The citation count continues to be strong, ranging from 50 to 100 in any given year since its publication (Figure 1). As detailed by Whaples (2003), while Rise and Decline ranks second in citations only to Alfred Chandler's The Visible Hand among all books in economic history, at the same time it has received a decidedly mixed reaction from economic historians, both in initial reviews and in current retrospection. McLean (2000) asserts the common wisdom among public choice scholars that, despite being an economist, Olson was probably more revered within political science. Yet despite this (or perhaps because of it), Olson has also been attacked as just another economist wrongly applying economic theory to political science (Green and Shapiro 1994).

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   Although a wide variety of related concepts can be found throughout the book, most attention has been paid to Olson's concept of "institutional sclerosis," in which it is hypothesized that special interest groups will accumulate over time in stable societies and eventually reduce the economic efficiency of the economy in which they operate. An outline of the basic development of this theory is presented in the next section.

   The main purpose of the paper, however, is to consider the body of evidence testing for institutional sclerosis. This is done in two parts: first by examining previous cross-sectional regressions explaining variation in growth rates and then by discussing the large-scale descriptive accounts others have made regarding the experience of various nations. As with any theory that has undergone a multitude of tests, support for institutional sclerosis is not universal. On the whole, however, it has been well received and appears to be equally supported by both cross-sectional econometric tests and descriptive case studies of individual nations. The interdisciplinary nature of Olson's work is made clear by the almost equal appearance of these tests in both economics and political science journals and by scholars on both sides of the Atlantic. No systematic bias in favor or opposition to Olson's theory is found to have arisen in any of these camps.

2. From The Logic to Rise and Decline

   Mancur Olson's research covered a variety of topics, but he will always be most closely connected to interest group formation and their macroeconomic consequences. Olson's focus on interest groups can be traced back to his dissertation at Harvard, later published as The Logic of Collective Action (1965). (1) In Logic, Olson's primary concern was the provision of goods or services that provide benefits to multiple individuals, even those who do not participate in their provision. Olson argued that collective provision of such goods or services confronts the same difficulties as do cartels. Individuals will take advantage of inexcludable benefits by declining to participate in the provision of these goods and services, thereby acquiring the benefit without incurring the cost. According to Olson, individual incentives will tend to work against the formation of groups whose purpose is to provide these public goods. Olson notes that in this context, the free market would underprovide public-type goods. He emphasized, however, that the extent of this free-riding behavior would be a function of group size. Small groups would be more likely to form than would large groups because free riding is easier to monitor in smaller groups.

   Larger groups are expected to have trouble attracting membership and would need to rely on a system of selective incentives. Such groups would need to also simultaneously offer special excludable private goods, such as low-cost insurance, to act as an enticing carrot, while social pressures, such as ostracism or physical harm, would represent a threatening stick. However, if a single member could obtain a benefit that would exceed the total cost, he or she may provide the good while others free ride on its nonexcludability. Olson referred to this phenomenon as "exploitation of the great by the small." In game-theoretic terms, complete free riding is the Nash equilibrium to a prisoners' dilemma game, but exploitation of the great by the small is akin to the equilibrium in a game of chicken, where even the exploited is better off, although in a personal second-best situation (Mueller 2003, chap. 2).

   The analysis stemming from Logic suggests that narrow special interests will be more prevalent than larger groups, which suffer from free-riding problems. In The Rise and Decline of Nations (Rise and Decline hereafter), Olson set out to develop the macroeconomic consequences of the interests facing such groups. In particular, he argued that past research on the sources of growth were lacking since they did not answer the fundamental question as to the primary establishment of growth prospects; rather, "they trace the water in the river to the streams and lakes from which it comes, but they do not explain the rain" (Olson 1982, p. 4). Olson set out to explain the rain that created the environment for growth and the avenues in which growth was blocked by these same forces.

   As developed in Rise and Decline, because the benefits of economic growth are widely dispersed across members of society, the likely gain to any group that advocates faster growth will be only a small share of these benefits unless the group is sufficiently encompassing of society overall. At the same time, a progrowth advocacy group will incur all the costs of its efforts. As such, economic growth can be viewed as another sort of public good. Following through from Logic, Olson argued that incentives work against the formation of progrowth groups. On the other hand, groups that form to advocate excludable redistribution will obtain large benefits for themselves while imposing costs on the broader society. Redistribution of this sort is akin to a negative externality that the interest group does not consider (in full). Consequently, groups that encourage redistribution are more likely to successfully form than groups that advocate growth. Moreover, since it takes time for even small groups to overcome their collective action problems, over time more special interest groups are expected to form and engage in redistributive activities. As these groups form, their impact will serve to divert scarce economic resources away from technological advances and other growth-enhancing activities that are nonexcludable toward redistributive activities. Thus, Olson predicts that economic growth will naturally decline over time in stable societies as groups continue to flourish.

   These sclerotic effects are due to the formation of special interest organizations. If the interest groups or their means of influencing policy are destroyed, growth prospects would be enhanced. Instability, such as coups and revolutions, is expected to destroy the influence of these groups and their avenues for controlling social resources. Constant instability, however, will also open up new avenues for rent seeking. Thus, Rise and Decline predicts that the best growth prospects should be present where there is recent social upheaval but that long-term stability is expected to follow.

3. Tests of the Theory of Institutional Sclerosis

   In chapter 3 of Rise and Decline, Olson lays out nine distinct implications from his analysis. (2) Although he discusses all the hypotheses to some extent in the remaining four chapters, Olson pays particular attention to three of the implications:

   Implication 2: Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time.

   Implication 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.

   Implication 7: Distributional coalitions slow down a society's capacity to adopt new technologies and to reallocate resources in response to changing conditions and thereby reduce the rate of economic growth.

   Only a handful of studies have directly tested Implication 2. The vast majority of the literature has instead either tested some variant of Implications 4 and 7 or combined the three implications to relate stability to economic growth, leaving the role of special interest organizations and distributional coalitions implicitly in the background.

   Empirical Tests Involving Regression Analysis on Economic Growth

   Olson's econometric evidence in Rise and Decline focuses on the various state economies of the United States, where it is shown that measures of state age are directly correlated with union membership (Implication 2), union membership is inversely correlated with the growth rate of income (Implications 4 and 7), and state age is inversely correlated with income growth (combination of Implications 2, 4, and 7). The length of a state's life is based either on the date of statehood or the end of the Civil War for the states of the Confederacy because these latter states were thought to have had their institutional structures rebuilt in the aftermath of Reconstruction. Many subsequent independent studies largely followed Olson's empirical framework.

   The evidence regarding Olson's theory of institutional sclerosis is summarized in Table 1. The theory of institutional sclerosis has been most frequently tested by comparing cross-national or American state growth rates. The top portion of Table 1 includes only empirical tests that have relied on regression analysis of growth rates. Because the sclerosis literature is so vast, studies that use other dependent variables are not included in the table. Some examples of alternative...