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

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



The Pequod Review:

Published in 1982, Mancur Olson's The Rise and Decline of Nations is an analysis of regulatory creep. While Olson's examples are now quite dated and his prose is rather dry, he persuasively shows how collusive and inefficient regulations not only accumulate over time but can be difficult to roll back. Well-organized and passionate special interest groups work to preserve their perks, and previously dynamic economies become stifled and sclerotic. It is only through a fundamental break in the pattern — e.g., a natural disaster, an economic downturn, or a regime change — that the regulations can be cleared away. (The supposed mystery of why authoritarian regimes often realize significant short-term economic growth becomes much less mysterious under Olson's theory.)

Other implications follow, as Olson helpfully summarizes:

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. 

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

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 collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive. 

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. 

6. Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining tables, and more often fix prices than quantities. 

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. 

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

9. The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution. 

Overall, Olson's analysis is relentlessly logical and lucid, and his book has rightly earned its reputation as a classic work of political economy.