The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities New edition Edition

Great insight, hard read. This is the best theory about the decline of the USA that I have ever seen. I bought this book because it was mentioned in a George Will column. I am very glad I did. I did skip over some of the mathematical part though. The theory and conclusions are so obvious once you have read them, but Olson put the idea into words. He was right.

Great book. Not for everyone as the writing is pretty dry and academic, but Mr. Olson after all was an academic. This book was very close to 5 stars and would have given it 4 1/2 if possible, but I try to be stingy with 5 star ratings for those books I will definitely read again or those that have a profound impact upon my thought. I enjoyed his investigations of European growth and development and how he looked at the southern states (of the U.S) in the post Civil War period.

Olson seeks to explain why some nations achieve high rates of economic growth while others suffer bouts of stagflation. He contends that the number and strength of "distributional coalitions," coupled with the length of economic and political stability will influence a nation's rate of economic growth. As such, Olson's hypothesis is two fold. First, Olson argues that states with lower levels of "distributional coalitions" often have higher rates of economic growth. Second, states which have experienced prolonged periods of disorder or armed conflict will have lower numbers of interest-group, or collusion organizations.

Olson's explanation builds upon his early work in The Logic of Collective Action, which holds that "...large groups, at least if they are composed of rational individuals, will not act in their group interest" (18). Rather, the rational actor will seek to further his or her self-interest, and will subsequently free-ride when possible. Olson expands the scope of this logic to encompass not only the rationality of the individual, but the rationality of the firm in explaining The Rise and Decline of Nations.

As the power of the firm expands, the firm seeks to maximize its own utility at the expense of a societal common good. In order to simplify a complex argument, we can think of Olson's theory in this way. An organization or firm will not expend its energy to create a benefit to society writ large, as it, and its members, will only receive a fragment of that benefit in relation to the costs incurred. On the other hand, if the same firm seeks to maximize its utility, it will seek to obtain a larger slice of the social "pie." In so doing, it may lower the benefits of society as a whole, but will significantly expand its own gain and that of its members. Meanwhile the firm will only incur a fraction of the costs such action projects on society at large. As such, Olson writes, "The great majority of special-interest organizations redistribute income rather than create it and in the ways that reduce social efficiency and output" (47).

Olson argues that a society with long-term stability - free from war, and economic and political turmoil - tend to accrue more special-interest and collusion groups. This occurs because it takes time and reasonable amount of stability for such interest-groups to organize, solidify, and begin to achieve some collective benefits for their members. Once collective benefits are seen as the result of organization, a host of other interests will begin to coalesce and seek to obtain gains for themselves. What emerges is a highly pluralistic society.

This leads us to the second part of Olson's hypothesis, those nations with high numbers of special-interest or collusion groups have lower levels of economic growth. Olson writes, "Distributional coalitions slow down a society's capacity to adopt new technologies and reallocate resources in response to changing conditions, and they reduce the rate of economic growth" (65). First, distributional coalitions stymie technological adoption when such innovation stands to benefit a rival group. A present day illustration can be found in a labor unions vehement opposition to the implementation of labor saving machinery. Second, distributional coalitions will attempt to block policy initiatives that change the status quo. When policy needs to be developed to increase economic or social advancement, the special-interest groups are likely to feel a certain displacement and will act to prevent such policy. According to Olson, these actions, coupled with others, often lead to policies which promote policies which have the potential to stifle economic growth.

Like another reviewer, I am puzzled why Olsons work has not become mainstream by now. A comment on page 45 "The argument also has only a lesser applicability to any country in which constitutional and structural factors constrain the number and power of lobbying organizations, as appears to be the case in Switzerland." sent me to the internet to read the constitution of Switzerland, and provides a ray of sunshine. Perhaps we can loosen the grip of trial lawyers, labor unions, the AMA, defense contractors, multi-national corporations, etc. with a constitutional amendment.

The only weakness in Olsons work is references to "growth" without reference to population increase or decrease, one of three factors (population, productivity, inflation) of growth that must be considered. But that was not an obvious issue 25 years ago when Olson wrote, and does not subtract from the brilliance of his theory. I highly reccommend this book.

Olson does a stellar job "proving" his theory using accepted scientific standards. His main thesis is that stable societies, over time, will be stifled by a steady growth of groups each committed to obtaining a disproportionate amount of society's goods. This theory, composed of only nine implications, is parsimonious with wide explanatory power. It helps to explain the post-war growth of coutries such as Japan and Germany, while providing a reason why the growth rates of the United States, and especially Great Britain, have been stagnated. Perhaps the most interesting chapter of the book is the last, in which Olson merges both Keynesianism and monetarism to form a new theory of macroeconomics. By using his theory, he is able to better explain involuntary unemployment than either of the more popular schools of macroeconomic theory. I was amazed at how many phenomena, such as slavery and the Indian caste system, can be at least partially explained by Olson's theory. Anyone seriously interested in knowing the way the world works will want to give this theory substantial consideration.

As a citizen of post communist country I was under constant propaganda of pure scientific economy coming from West. Much like scientific atheism but in realm of economics. Everything was about correct manupilation with numbers. Over time I was more and more convinced that main powers in our society remained same. What changed was only political environment. This book very clearly describes how much influence social groups have on economics. How hard it is to introduce some changes which go against interests of some groups, even when society as a whole would benefit. Thanks to numerous examples given in this book I can be pretty confident, that I am not a crazy person who can hear grass growing.

This theory is very incisive for America today! Had the author lived longer, he would have had a Nobel Prize.