POWER AND PROSPERITY: Outgrowing Communist and Capitalist Dictatorships.

• Author: Arrow, Kenneth
• Position: Review

POWER AND PROSPERITY: Outgrowing Communist and Capitalist Dictatorships by Mancur Olson Basic Books, $28.00

THE QUALITY OF THIS POSTHumous volume only makes those of us who respect and are indebted to the late Mancur Olson regret his untimely death even mote.

Power and Prosperity is the last in Olson's series of works analyzing the effects of government and social interactions on economic growth. His-method has been the construction of relatively simple models of rational choice based on selfish motives to explain the course of economic growth. Even relatively elementary reasoning can give raise to surprising results. Olson does not consider that free markets are the entire solution to the problems of growth, though of course their vitality is a necessary condition. Collective action is also needed, though in his earliest work, Olson argued that collective action is unlikely to occur if there are many participants in the economy; each individual will have an incentive not to participate but to benefit from the collective actions of others (what economists call the "free-rider" problem). For example, if fires are handled by a volunteer fire department, it will pay any specific individual not to volunteer. Only if there are relatively few participants (or few organized groups of participants) will it be easy to recognize the gains from collective action.

This issue leads to a broader view. Suppose a nation is controlled by some autocrat acting entirely in his or her own interest. The autocrat may still have an interest in increasing the growth of the country, instead of simply stealing everyone's wealth, because over a period of time the autocrat will have more income to tax. Olson very neatly works out the implications of this remark. In particular, he shows that there will be an optimal tax by the autocrat which balances his or her desire for immediate consumption against future better prospects. The assumption is that the lower the tax the higher the rate of growth, since growth is fueled by private incentives. Of course, as Olson emphasizes, a good deal depends on the time horizon of the autocrat and thus the prospects of growth are greatest when the autocrat has a long horizon, as in the case of a royal dynasty.

In a democracy, the majority will generally have a stronger focus on overall growth than in particular interests, though this can be offset if some particular interests can express themselves more easily. In his classic The Rise...