The Rise and Decline of Nations 1982

1
Mancur Olson

• The Rise and Decline of Nations 1982
• Logic of Collective Action 1965
• Decline and rise of empires civilizations
• Decay or external threat
• Little understood and inadequate data
• More recently WW2 - Japan, W. Germany, G.
  Britain
• U.S. - N.E. old mid-W. great cities, here
  decline
• - W. S. rise

2

• Growth accounting ultimate causes of growth.
• 1. Advance of knowledge
• 2. Physical capital accumulation - vintage
• 3. Political military stability inducement to
• K-accumulation (or expectations)
• K - destruction due to war.

France grew faster than Great Britain despite
greater political instability. Six common market
founders France, Germany, Italy, Belgium,
Holland, Luxemburg grew faster than US, UK,
Australia, New Zealand. Former also grew faster
in the 1960s than 1950s after common market was
formed.
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U.S. grew rapidly until WWI United Germany grew
rapidly in 19th Century Japan after Meiji
Restoration in 1867-68 Rise of the West
Involuntary unemployment in Great Depression.
May occur with rational individual behavior.
Ungovernability of a nation single issue
politics and lack of party discipline.
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Top heavy societies dominated by top firms
families in largest cities. Unequal distribution
political instability, underdeveloped economy.
Social mobility and class rigidity. Why differ
in different times and across societies. Ad hoc
arguments are insufficient because they can never
be tested on a wide array of data.
Non-verifiable. Unique features e.g. cultural
arguments (sophisticated versions are persuasive)
but a theory must be able to explain a diverse
set of phenomena. Construct irrefutable
arguments after outcome is known. Infinitely
many ways of doing this.
5
History is often rewritten again and again
because an infinite number of stories can be
built. No accumulation of knowledge of cause and
effect. Confidence is an explanation depends on
power and parsimony. Simplicity of argument and
diversity of facts explained is essence of
establishing correct theory. Not selective
choice of facts. But this does not mean that
mono-causal explanations can account for
everything, or even the most important ones.
Guard against excessive simplicity. Should not
rule out, however, remote the possibility, that
many facts are in fact due to a diversity or
numerous causes. Sometimes the multiplicity of
causal forces can make a true theory appear
false, and a false theory true.
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The Logic

• 1. Paradox of behavior of groups individuals
  with common interest would come together to seek
  to further than interests.
• 2. Politics as the process of competing groups.
  Each individual belonging to many groups.
  Outcome as balance of countervailing power of
  organized groups. Marx. Galbraith. Dahl.
• 3. Free rider problem imply that large groups in
  the absence of special arrangements
  circumstances will not act in group interest.

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4. Collective goods provided to associations
spill over to non-members, hence, rationally
governments, lobbies, cartels would not exist
unless they provide something else. 5.
Governments exist by compulsory taxation
provide public goods constitutional contract.
6. Other organizations use selective incentives.
Positive or negative. Applied selectively to
individuals contingent on their performance in
contributing to the provision of collective
goods.
E.g. Early phase of unionization involve
violence. Private goods provided to members may
be contingent on performance.
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Small groups or federal groups have an additional
form of selective incentive based on
interpersonal interaction - social selective
incentive is powerful and inexpensive but
available only in special situations.
Homogeneous groups, small ones (interaction
among large members costly) Political
entrepreneurs managers use indoctrination
selective recruitment to increase the homogeneity
of their client groups. Information
calculation about a collective good is also a
collective good. Rationally ignorant. Unless
information about public affairs is interesting
and entertaining.
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Private rewards in these areas accrue to
politicians, lobbyists, journalists, social
scientists. Even stock market investors.
Limited knowledge explains effectiveness of
lobbying. Benefits to individual enlightenment
spread out among population rather than accrue to
the person who seeks enlightenment. Explains
man bites dogs criterion of newsworthiness.
Rather than typical events. Not complexities of
economic policy or quantitative analyses of
public problems.
10
Explains in democracies income tax brackets all
progressive, but loopholes favor the wealthy.
Former is understood by all but latter is complex
and reflects interests of small numbers of
organized, prosperous tax payers. Health
insurance provide gains to those with low or
middle income but implemented administered to
the benefit of physicians. Voluntary
contributions in large groups must be small,
unless there are selective incentives, for them
to be forthcoming. Sign petitions, vote, express
opinions.
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For small number of beneficiaries, voluntary
contributions work, bargaining policing easier
in cartel arrangements or cost-benefit
calculations favorable enough to ignore free
rider problems. Similarly logic extends to
groups with a few large members but many small
members. Lobby in small jurisdictions more
intensive than in large ones. Given same size
firms more would have to cooperate in larger
jurisdiction more severe free rider problems.
On per capita basis more lobbying intensity.
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Differences in intensity of preferences. For
same aggregate level of willingness to pay, small
group of zealots more willing to lobby.
Historical significance of fanatics. Groups who
have access to selective incentives more likely
to act collectively. Latent groups consumers,
taxpayers, and the poor in contrast to
professional groups and business firms. There
are variations across nations and historical
periods. This is crucial to the rise and decline
of nations.
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The Implications

• 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.
• - logically impossible for a society to achieve
  equity and efficiency through comprehensive
  bargaining.
• - interest groups who are organized to further
  their own interests would choose policies
  inefficient for society, benefits fall on
  themselves and costs on the unorganized.
• - fairness is not necessarily on the agenda.

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• 2. Stable societies with unchanged boundaries
  tend to accumulate more collusions and
  organizations for collective action over time.
• - organization success requires time and effort,
  strong leadership and favorable circumstances.
• - social pressures and rewards as selective
  incentives requires creating new patterns of
  social interaction.
• - complementarities between activities that
  promote the collective good and income generation
  necessary to finance efforts to secure collective
  good must be found and exploited.

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• - societies that have secured selective
  incentives to maintain themselves survive even if
  the collective good they once provided is no
  longer needed. Because selective incentives make
  indefinite survival feasible - unless major
  social upheaval, violence, instability.
• 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
  coalitions reduce efficiency and aggregate income
  in the societies in which they operate and make
  political life divisive.

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• - in general interest groups all prefer a more
  prosperous society may therefore work for this
  goal.
• - alternatively they wish to carve out a bigger
  share through redistribution.
• - promoting efficiency lobbies are rare because
  most benefits accrue to others - a public good -
  because such lobbies tend to be small.
• - redistributive lobbies benefit from being
  small, despite loss of efficiency - public bad -
  to society such lobbies make no commensurate
  sacrifice to compensate for costs imposed.
• - distributional coalitions or rent seeking
  groups. Cartels or lobbies seek legislation that
  reduce efficiency or output in order increase
  income for themselves.

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• E.g. taxes or subsides - transitional gains to
  interest group but lower efficiency for all,
  because private return equalize over time. Rent
  accrues to specialized factors.
• E.g. reduction of entry usually imposes even
  more social costs rent dissipation.
• E.g. cartelization with barriers to entry
  triangle loses versus rent dissipation.
• sometimes lobbies may support efficiency
  enhancing
• measures, largely because they are major
• beneficiaries of such policies.

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• - others suffer from inefficiencies obtained by
  other distributional coalitions and therefore
  lobby to oppose them.
• - distributional conflicts tend to be zero sum
  pervasive in political life makes it divisive
  and encourage intransitive, irrational, or
  cyclical choices making relatively lasting or
  stable political choices less likely, and
  societies ungovernable.

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• 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.
• - Federations of labor unions.
• - Chambers of commerce industry
• Willing to promote efficiency gain measures, and
  to bargain with others for such a purpose.
• Some special interest organization will be
  encompassing in relation to a particular firm or
  industry, and have an incentive to help it
  prosper.

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• - However industry wide unions may encourage
  firms to organize to form a cartel, that maximize
  joint monopoly gains to firms workers.
• - Scandinavian example demonstrate less
  parochial views.
• USA - parochial congressional interests, party
  discipline and national policies as a whole.
• E.g. president try to limit pork-barrel
  legislation and congressmen who promote them.
• - all encompassing organizations may not always
  serve public interest if information is costly
  and agents behavior difficult to monitor. Less
  diversity of advocacy, opinion, and policy and
  fewer checks on erroneous ideas.

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• 6. Distributional coalitions make decisions more
  slowly than the individuals and firms of which
  they are comprised, tend to have crowded agendas
  and bargaining table, and more often fix prices
  than quantities.
• such coalitions use consensual bargaining and
  constitutional procedures.
• consensus voluntary provision is not optimal but
  requires unanimity through bargaining. And is
  difficult to achieve since members have conflicts
  of interest over cost sharing.

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• - constitutional procedures necessary when it is
  too costly to bargain due to large numbers or as
  a cost saving device to engage in continuing
  collective action. But it takes time. Typical
  procedural rules in democratic bodies tend to
  favor the status quo.
• - many decisions to make with various delays.
• - resort to impartial outsiders, simple
  formulas, seniority rules that apportion the
  costs of collective action among participants.
• - price fixing leaves allocation decision to the
  impartial forces of the market. Although this
  may work against interest of the distributional
  coalition on occasion. It means their
  abandonment in favor of quantity fixing.

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• - after dealing with their own decision, then
  worry about partners and antagonists.
• 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.
• Changing economic environment open up new
  opportunities. Without special interest groups,
  firms and consumers maximize in unconstrained
  markets. No barriers to entry eventually
  eliminate monopoly and shelters.
• Economies of scale - natural monopoly -
  contestable markets.

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• Short term supra normal profits as returns to
  innovation - followed by imitation. Key to
  economic progress.
• Relationship between efficiency and growth rate.
  Distributional coalitions cause one time
  reductions
• (1) in output level, their accumulation reduces
  growth.
• (2) interfere with innovations interest group
  veto changes or consultations. Slow decision
  making progress.
• (3) slow down rate of resource reallocation.
  Declining industries.

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• 8. Distributional coalitions once big enough to
  succeed, are exclusive and seek to limit the
  diversity of incomes and values of their
  membership.

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• 9. The accumulation of distributions coalitions
  increases the complexity of regulations, the role
  of government, and the complexity of
  understandings, and changes the direction of
  social evolution.