on December 8, 2004
Power and Prosperity is an example of economics at its best. First of all, it takes a balanced or neutral approach to its subject matter. The author is not out to prove the superiority of either markets or government. Governmental power is a double edged sword to Olson. Government power promotes prosperity by restraining 'roving bandits' or special interests. Government power is also susceptible to the influence of special interests. Olson also discusses the merits and faults of markets. Markets are ubiquitous and can lead to prosperity, but often do not. Government has a role in this. That is, he finds blame for this in the most negative aspects of government. Olson does not assume market efficiency either. He explains it, as well as some possible limitations to markets.
This is also a highly insightful book. Much of his analysis derives from his earlier work on "the logic of collective action'. He also uses some transaction costs and basic supply and demand/substitution effect reasoning to explain historical events. Students in my comparative classes had more trouble with this book than any other, but it is still manageable. Reading it might be difficult for those who lack an education in economics. But I am not sure if there is an easier way to say what it says, and what it says is most interesting. The concepts the author employs makes a greater understanding of different economic systems and historical periods possible. This is penetrating analysis.
It is also highly relevant. Much of this book focuses on the Soviet Union. One could say that the USSR is a done deal- it failed so forget about it. It is, however, important to understand why it failed so as to avoid repeating such errors in the future. This is what the Author is driving at with in his use of the Soviet example. There were reasons for the failure of the Soviet system that also apply to problems in other nations- not to mention Russia today. The misuse of power has the potential to prevent prosperity as much now as it did under Stalin and Khrushchev.
Does this book have faults? Certainly. Olson takes too positive a view of Stalin's industrialization program (not that he praises Stalin). Olson dismisses complete privatization, or anarchy, too easily. There is nothing wrong with arguing against anarchy. But, his arguments against privatizing the state (i.e private police and courts) are little more than an unsupported dismissal of such arrangements. If he did not want to debate that issue, he should not have taken such a strong stand. He also might have mentioned a few things about FA Hayek- especially on p136 where he wrote "a bureaucracy cannot process all the information needed to calculate an optimal allocation or put it into practice".
While there are a few faults to this book, it is still excellent. It is a must read for anyone interested in either comparative economics and politics, Globalization, or the economic history of the Soviet Union.
on April 22, 2001
Why are all the rich countries in the world capitalist democracies? Isn't a dictator the best way to turn around a country in economic trouble? Why did Germany and Japan grow so fast after the end of World War II? Why have Russia and the Warsaw Pact countries done so poorly after the end of the Cold War? And what should the rich, successful, First-World countries do to enjoy continuing prosperity?
Olson's only book written for the general public, "Power and Prosperity" addresses all these questions and more, in well-written prose, fairly free of economic jargon, and filled with easy-to-follow examples. Not too long, at less than 200 pages excluding the notes, any educated layman should have no trouble getting through the whole thing.
The book primarily focuses on how governments use and abuse power and the impact that has on economics. In particular, Olson hypothesizes a "second invisible hand" as a partner to Adam Smith's famous invisible hand of the marketplace. Olson's invisible hand represents the unintentional good that even the most selfish regimes accidentally do for the public in the process of maximizing the good of the rulers. (E.g. the King fights bandits because they reduce the take from his taxes, but he only does this up to his own point of diminishing returns.) Apparently original with Olson, this idea earned him a prominent place in academia, and it's impressive to see how far he can take it.
So if you have any interest in politics and economics, by all means read this book. Even if you don't agree with it all, the ideas in it are priceless. Skip Charles Cadwell's foreword though; it's dry and dull and doesn't add much to the book.
on June 18, 2000
Mancur Olson takes the same approach that has worked well for economists in other areas: Assume that governments are run by self-interested, profit-maximizing "autocrats." This means that the country will score broad gains if the "autocrat" is a broad democratic majority, but even a dictatorial bandit will have some advantages if the bandit has long-term stability and is therefore interested in maximizing his profits over a long rather than a short term. Olson applies this formulation with success to the Soviet Union, showing why there was considerable growth in the days of Stalin but an inevitable sclerosis set in in the later years. He argues in his final chapter that the key to a successful transition from dictatorship to democracy is the assurance of individual property and contract rights, and that in the absence of such assurance the transition is certain to be problematic.
Olson died before he believed the book ready for publication, and the final effort shows it. Although the prose is polished and extremely readable, the argument tends to be quite skimpy. For example, he argues that the reason for widespread corruption is governmental price-fixing, which he applies to the Soviet experience. I would have liked more detail here, and in particular an analysis of the American experiences with prohibition and the ban on recreational drugs. Also, Olson's theory does not fully explain why third-world democracies have not been more successful. After all, you would think that at some point the "autocrats" would secure the individual rights necessary to maximize their "profits." It will necessarily fall to others to expand Olson's arguments and to determine if this plausible-sounding approach is correct. Meanwhile, we have this fascinating outline.
on February 12, 2012
If there is a leading economic text to act as a guide to the new milenium it is probably this one.
Olson firmly rejects the idea that economics can be understood without the political context of power relationships that surround commercial activity.
He makes the interesting observation that lively markets exist throughout the Third World and he refers to these as "self-regulating" markets with a notable characteristic being their short time horizon. Essentially there is the simultaneous payment for and delivery of goods.
He contrasts this with advanced democracies that have "NON self-regulating" markets i.e. what he calls "socially contrived markets" that allow much greater predictability and longer time horizons based on contract law and state protected property rights, allowing such things as long-term capital investment, stock markets, complex manufacturing and banking.
An established democracy with widely spread power and solid property rights is clearly desirable but he makes the point that democracy is a historically recent invention that has only partly displaced traditional autocracies. Autocracies (dictatorships) concentrate power in one person or a small group at the expense of the majority and are maintained by the threat of force and often use an "ideology", for example Communism of Fascism, to justify their exclusive and permanent right to power.
The book shows that democratic free markets with an impartial rule of law will in the long rule out distance unstable dictatorships, but he proceeds to suggest that long-established democracies are prone to a few problems of their own, that in some cases can prove fatal. Most notably special interest groups can gain (undemocratic) special access to political power for their own gain at the expense of the national majority. A fine example would be the enormously costly bailout of the speculative bad debts of Wall Street banks passed onto American taxpayers, or alternatively (again in the U.S.), the medical/ insurance lobby that manages to deliver a less health population at twice the cost of similar European systems.
An interesting observation is that the remarkable success of German and Japan after WW2 was in large part the result of the complete destruction intricate systems of special relationships allowing a fresh start along clean free market lines, but of course, at the great social cost of war.
on December 24, 2013
A bit like Thinking Fast and Slow, but with a lot less rambling and almost zero cross referencing in the main text, this is a book that's meant to summarise a career's findings. It's written by somebody who both knows a whole lot and wants to tell you everything he knows. And it's written so beautifully, you keep asking yourself "why did I not think of that?" To which the answer, of course, is "because it's only so clear once somebody has told you."
Mancur Olson, the man who explained in his youth one of the main problems of our otherwise quite solid market economy, the tendency of concentrated interests (such as lobbies, oligopolies and unions) to prevail over the interest of the silent majority, spent the last couple years of his life writing this primer that sheds light on some of the big questions in politics. Here's a list of my favorite examples:
1. How come most countries on earth used to be run by a dictator / tyrant / king? Answer: because it beats the hell out of what was the alternative at the time, namely being raided by itinerant hordes. Not unlike a mafia don, a "Stationary Bandit" had every interest in seeing his people prosper and every interest in providing them protection from roving bandits. So that's the system that prevailed everywhere for a long, long time.
2. What does it take to get rid of the dictator / tyrant / king once you're fed up with him? Answer: first, a big event that upsets the applecart, such as a famine or a plague or a discovery; second, a multitude of interests on the ground so no single successor scheme take over where the previous tyrant left off and third, no external threats. Daron Acemoglu goes a lot deeper in trying to explain this in his book from 12 years later, but still, what a beautiful summary!
3. How come oligopolies and concentrated interests can form and thrive when we know that even two people can sometimes not agree to collude? Ah, that would be because the prisoner's dilemma never occurs in nature. Most economic agents who matter can talk and compare notes. And they are not prisoners. Hell, even prisoners can get it done if the game is repeated.
4. If one day we achieve perfect information and zero transaction costs, will the diffuse interests of the consumers, the poor or the unemployed finally prevail over concentrated interests? Erm, probably not. And that's because the basic problem will not disappear. The marginal member of these groups will still do best if somebody else does the hard work for him. The incentive to free-ride will remain.
Then he moves to the meat of his book, namely the dissection of why the fall of the Soviet Union did not lead to prosperity. It's still a step by step series of answers to questions. Stuff like
5. How come Sergei Bubka broke the world record for pole vaulting 17 times, nine of those by just one centimetre? Ah, because under Stalinism the able and the unable got paid the same up to the fortieth hour of work, but after that they got something a lot closer to market rate. So the able, those who could do superior work, would not only (a) get underpaid for their first forty hours of work, thereby giving the state their labor for super cheap, but also (b) they would work as much as possible past that fortieth hour, since that's the bit of their labor that got compensated well. Also, they could be guaranteed to gravitate toward the jobs that required skills. My choice of example, of course, was meant to prove that you could go around the system. Bubka could probably have set the bar fifteen centimeters higher twice, rather than a couple centimeters seventeen times, but that would have landed him two bonus apartments, rather than seventeen.
6. What are the main ways to collude against the hyper-extractive Stalinist regime? Two mainly: first you can work together with the guy right above you and the guy right below you in the chain of production to sell privately excess resources that have been allocated to your endeavor; second, you can work together with state-run near-competitors to trade with one another excess resources, rather than ask for them from above.
7. What's the one biggest difference between Germany post WWII and Russia post Communism? In Russia the main source of corruption, the informal markets that dealt in the re-allocation of misallocated resources, not only survived the transformation intact, but by definition reached into everywhere. By dint of having set prices and quantities, indeed by having set them wrong, the system had not only given birth to a parallel, informal market system for the reallocation of resources, but had actually forced every single citizen to deal with this system (or alternatively perish). The people in charge of these informal networks continued to thrive after the transition, except they no longer had anybody to fear whatsoever. They could carry on their previous trade legitimately. Only they knew how the system worked.
8. What's the difference between Russia and China post Stalin/Mao? Mao had purged all Communist party insiders during the infamous Cultural Revolution. When Deng took over, there was no entrenched bureaucracy of party cadres who could resist him. The market reforms imposed by Deng were only resisted by elements in the very top echelons, but the rank and file knew not to stand in the way.
Finally, Mancur Olson presents us with the big idea of his book. Again, it's a question: How come market system fails in some places? How come the logic of the market does not prevail everywhere? When we visit third world countries it is quasi impossible not to bump in to a suk or an open market. If indeed nothing can go wrong in a society that encourages mutually beneficial trading, how come only some countries allow millions of mutually beneficial trades to turn into one big vibrant market-clearing machine?
The answer is that there are two types of markets: spontaneous markets and socially contrived markets.
Spontaneous markets are the ones that will appear regardless. The author goes as far as to say that spontaneous markets are irrepressible. Essentials will find their way to people regardless of how bad the government is, regardless of how extractive a despot is, regardless of how poorly the price has been set. When no capital investment is necessary for the production of a good, for example, it will be traded as many times as necessary, formally or informally, until it reaches whoever needs it most. Only two conditions need to be met: first, both parties must stand to gain from the trade and second, both parties must be able to somehow enforce contracts, a la limite by threatening to refrain from repeated trades. So that's how come markets are ubiquitous.
Socially contrived markets, on the other hand, are the markets that need the support of the state to exist. If it is essential to invest in capital (such as plant and equipment) or human capital or intellectual property to provide a particular good or service, then it is equally essential that a government exist to guarantee those property rights. And it is in the provision of the property rights which support socially contrived markets that Mancur Olson identifies the difference between rich countries and poor countries.
Pretty simple once somebody has pointed it out, no?
I really really enjoyed this book.