The New Humanities

economic growth, stagflation, and social rigidities
(Yale: 1982)

“Many have been puzzled by the mysterious decline or collapse of great empires or civilizations, and by the remarkable rise to wealth, power, or cultural achievement of previously peripheral or obscure peoples.... [This] was evident among the Greeks city-states at the time of Herodotus, who said that ‘the cities that were formerly great have most of them become insignificant; and such as are at present powerful, were weak in olden time.” ...It was not in the awesome Egyptian empire that the Mediterranean achievement attained its fullest expression, but among the previously inconsequential peoples of the Ionian Peninsula...[which] were of course eventually supplanted by the Romans, who before their amazing conquests had been a people of little note. The civilization of Western Christendom that had by the end of the nineteenth century come to dominate the entire world sprang from the backward and chaotic societies of Western Europe in the Middle Ages...[whilst] the parts of Western Europe that paced the advance of the West were often areas that had previously been peripheral or unimpressive...[and] in the second half of the nineteenth century it was long-quiescent Germany and distant ex-colonies in North America, rather than the British Empire at its apogee, that carried that revolution farthest.... The standard accounts do not, however, provide anything resembling a complete or compelling explanation.... Something important must have been left out. Accordingly, one of my questions is, What has been left out or overlooked in the conventional accounts? Or, more precisely, What has been left out that is so crucial that we cannot get a convincing and satisfying account without it?”

(Olson, pp.1-7)

One of the key trends in social and political theory over the last few decades has been the seemingly inexorable rise of what is usually termed “rational choice” theory, in which the assumptions and approaches of economics have been applied to a much broader range of questions. Unfortunately, however, much of this work has been ideologically-driven, marked by overly narrow neo-liberal assumptions, and of dubious scholarly merit...but there have certainly been exceptions to this, which have made substantial contributions to our understandings of social processes. Perhaps the most distinguished of these has been the later work of Mancur Olson...an economist who demonstrated a real feel for complex causation, and yet was able to reconcile this with highly detailed work on a very specific hypothesis. And, as we shall see, he (thankfully) also found no need for many of the other unrealistic assumptions beloved by the neo-classical economic mainstream...

“Although we should not be satisfied with any theory that fails to explain a lot with a little, we need not of course expect any one theory to explain everything, or even the most important thing. Absolutely nothing in all of epistemology suggests that valid explanations should be monocausal...[and] nothing could be farther from my intention than to provide a monocausal or complete explanation of social or economic phenomena, or even the particular historical phenomena analyzed here. At most - at the very most - the aspiration is to provide the equivalent of Sherlock Holmes’s observation of the dog that didn’t bark: to provide a missing clue that gives us a better understanding of the whole story. [And,] since no monocausal explanation is offered, one well-known test of validity is not applicable. It is often said in methodological discussions that every meaningful scientific theory must specify one or more possible events or observations, or experimental results, which would, if they occurred, refute the theory. [But] this rule has no applicability to multicausal conceptions unless a perfect experiment is performed, or one so nearly perfect that we could be certain that it was the error in the theory rather than the flaw in the experiment that accounted for the result.... What we should demand of a theory or hypothesis, then, is that it be clear about what observations would increase the probability that it was false, and what observations would tend to increase the probability that there was some truth in it.”

(Olson, pp.14-15)

“It may seem strange, at a time when so many find fault with economics, that an economist should claim to extend existing economic theory in such a way that not only explains the ‘stagflation’ and declining growth rates that have given rise to recent complaints, but also provides a partial explanation of a variety of problems usually reserved for other fields - the ‘ungovernability’ of some modern societies, the British class system and the Indian caste system, the exceptionally unequal distribution of power and income in many developing countries, and even the rise of Western Europe from relative backwardness....[For] this book attempts to show that, if we take the trouble to look to the side, at the domains of other disciplines, we shall gain a different conception of the entire landscape. In part because this book encompasses several disciplinary domains, and even more because it aspires to reach policy-makers and students, I have worked hard to write this book in [more accessible] language.... Luckily, most of the ideas I have come upon here turn out, once they are properly understood and explained, to be astonishingly simple.”

(Olson, pp.ix-x)

“Only a madman - or an economist with both ‘trained incapacity’ and doctrinal passion - could deny the reality of involuntary unemployment.”

(Olson, p.195)

“In this book, I do not assume there is perfect competition, even in the absence of special-interest groups...[for] the assumption here is that in most markets firms can choose the prices at which they will sell their outputs, and that the quantity they sell will vary inversely with the price they charge - that is, that there are normally elements of monopoly power. This assumption is in accord with everyday observation of most firms and is also, unlike any straightforward model of perfect competition, consistent with a firm’s decision to advertise. My argument, accordingly, does not imply that a market system in the absence of special-interest organization and collusion is ideally (Pareto) efficient. Neither does it assume that the market system is static, as do most formal perfectly-competitive and general-equilibrium models.”

(Olson, p.59)

Now, whilst Olson may have been appropriately modest and preferred to base his work on more realistic assumptions, this of course does not guarantee quality...it merely forestalls the main pitfalls into which “rational choice” work has all too often stumbled. However, the most basic problem seemingly persists - the fact that such modelling assumes rational actors, rather than the jumped-up apes we certainly remain. Yet, if you think about it, once we are committed to a modest pluralism, such approaches can serve us well - as long as they are used in conjunction with other work which adequately addresses itself to our less rational sides.

For, in the long run, it is evident that rational choices do get made...particularly where incentive patterns remain stable, and payoffs relatively predictable. And the foundational paradox which underlies this work certainly is acted upon - as the historical record clearly shows - even if, to non-economist readers, it may come as something of a shock. Because, it is surprisingly difficult to promote effective collective action...for there are highly rational reasons eroding such involvements, which social theory - until recently - has tended to underestimate.

“The argument of this book begins with a paradox in the behavior of groups. It has often been taken for granted that if everyone in a group of individuals or firms had some interest in common, then there would be a tendency for the group to seek to further this interest.... [But] let us now ask what would be the expedient course of action for an individual.... Since any gain goes to everyone in the group, those who contribute nothing to the effort will get just as much as those who made a contribution. It pays to ‘let George do it,’ but George has little or no incentive to do anything in the group interest either...[so] the paradox, then, is that (in the absence of special arrangements or circumstances to which we shall turn later) large groups, at least if they are composed of rational individuals, will not act in their group interest.”

(Olson, pp.17-18)

“Other things being equal, the larger the number of individuals or firms that would benefit from a collective good, the smaller the share of the gains from action in the group interest that will accrue to the individual or firm that undertakes the action. Thus, in the absence of selective incentives, the incentive for group action diminishes as group size increases, so that large groups are less able to act in their common interest than small ones. If an additional individual or firm that would value the collective good enters the scene, then the share of the gains from group-oriented action anyone already in the group might take must diminish. This holds true whatever the relative sizes or valuations of the collective good in question.”

(Olson, p.31)

“The argument...predicts that those groups that have access to selective incentives will be more likely to act collectively to obtain collective goods than those that do not, and that smaller groups will have a greater likelihood of engaging in collective action than larger ones.... [And] in no major country are large groups without access to selective incentives generally organized - the masses of consumers are not in consumers’ organizations, the millions of taxpayers are not in taxpayers’ organizations, the vast number of those with relatively low incomes are not in organizations for the poor, and the sometimes substantial numbers of unemployed have no organized voice.... [However,] even though the groups that the theory says cannot be organized do not appear to be organized anywhere, there are still substantial differences across societies and historical periods in the extent to which the groups that our logic says could be organized are organized. This, we shall argue, is a matter of surpassing importance.”

(Olson, pp.34-5)

The keys to effective group action, it turns out, are selective incentives - positive or negative - which, unlike the collective goods themselves, can be restricted to active participants. The importance of such, and our tacit understanding of same, is perhaps best highlighted in these examples, where participants effectively force themselves to act correctly, whilst at the same time attempting to freeload:

“Workers who as individuals tried to avoid paying union dues at the same time as they voted to force themselves all to pay dues are no different from taxpayers who vote, in effect, for high levels of taxation, yet try to arrange their private affairs in ways that avoid taxes.”

(Olson, p.22)

Ifirst read Olson’s work many years ago, and each time I have come to it since I have found its relevance increased with every subsequent reading. The “distributional coalitions” Olson speaks of can be found virtually everywhere - including places he does not specifically examine. For a start, bureaucracies are barely touched on here...and yet they form one of the best examples of the trends he analyzes, in which productive approaches - or, shall we say, “task orientation” - is gradually eroded by a hermetic stance supported by entitlement claims. Or, to consider something Olson does not even suggest, it is arguable that the large corporation is (by nature) a Janus-faced entity - on the one hand a productive alliance, and on the other a distributional coalition in itself...being large enough (and certainly unified enough) to act as a lobby without necessarily requiring outside aid. Moreover, if its market position is close enough to a monopoly, it may be able to apply both of the levers Olson identifies:

“To achieve their objectives, distributional coalitions must use their lobbying power to influence governmental policy, or their collusive power to influence the market. These two influences affect not only efficiency, economic growth, and the exclusion of entrants in a society, but also the relative importance of different institutions and activities. Lobbying increases the complexity of regulation and the scope of government, and collusion and organizational activity in markets increase the extent of bargaining and what I call complex understandings. An increase in the payoffs from lobbying and cartel activity, as compared to the payoffs from production, means...fewer resources are devoted to production. This in turn influences the attitudes and culture that evolve in the society.... The limited incentive the typical citizen has to monitor public policy also implies that lobbies for special interests can sometimes succeed where matters are detailed and complicated, but not when they are general and simple, and this increases complexity still further.... The incentive to produce is diminished; the incentive to seek a larger share of what is produced increases. The reward for pleasing those to whom we sell our goods or labor declines, while the reward for evading or exploiting regulations, politics, and bureaucracy, and for asserting our rights through bargaining or the complex understandings becomes greater.... Some observers might suppose that the accumulation of distributional coalitions would make societies evolve in ways that favor the less talented, the weak, and the poor, but this is wrong.... Every society, whatever its institutions and governing ideology, gives greater rewards to the fittest - the fittest for that society.... The competition is not any gentler because it takes a different form. The gang fight is fully as rough as the individual duel, and the struggle of special-interest groups generates no magnanimity or altruism.... Life is not any gentler because of special-interest groups, but it is less productive, especially in the long run.”

(Olson, pp.69-73)

Another thing I find refreshing about Olson is that he is resolute in critiquing restrictive right wing “appropriations” of such arguments, constantly stressing the fact that unions are hardly the dominant form of such “distributional coalitions”, and that business and professional lobbies have much greater legitimacy - and hence, stability and freedom of action. Had the anti-corporate movement emerged from other than the rubble of Marxist illusions, it surely would have built upon Olson’s work as foundational in showing exactly why unrestrained corporate size and power is fundamentally dangerous...but, sadly, we’re still awaiting such a measured and intelligent critique.

Meanwhile, readers should carefully ponder this list Olson made of the implications of his argument, as they become more & more suggestive with time...

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.

2. Stable societies with unchanged boundaries tend 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 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.

(Olson, p.74)

And, if you’d like the potted version of how this pattern usually plays out, Olson is happy to oblige...albeit, he’s also very careful to test such arguments against an exceptionally wide array of problems and examples.

“Associations to provide collective goods are for the most fundamental reasons difficult to establish, and...therefore even those groups that are in situations where there is a potential for organization usually will be able to organize only in favorable circumstances. As time goes on, more groups will have enjoyed favorable circumstances and overcome difficulties of collective action. The interest of organizational leaders insures that few organizations for collective action in stable societies will dissolve, so these societies accumulate special-interest organizations and collusions over time.... These organizations, at least if they are small in relation to the society, have little incentive to make their societies more productive, but they have powerful incentives to seek a larger share of the national income, even when this greatly reduces social output...[and] the barriers to entry established by these distributional coalitions, and their slowness in making decisions and mutually efficient bargains reduces an economy’s dynamism and rate of growth.... Distributional coalitions also increase regulation, bureaucracy, and political intervention in markets.”

(Olson, p.75)

“The logic of the argument implies that countries that have had democratic freedom of organization without upheaval or invasion the longest will suffer the most from growth-repressing organizations and combinations. This helps explain why Great Britain, the major nation with the longest immunity from dictatorship, invasion, and revolution, has had in this century a lower rate of growth than other large, developed democracies. Britain has precisely the powerful network of special-interest organizations that the argument developed here would lead us to expect.... In short, with age British society has acquired so many strong organizations and collusions that it suffers from an institutional sclerosis.... This explanation of Britain’s relatively slow postwar growth, unlike many other explanations, is consistent with the fact that...during their Industrial Revolution the British invented modern economic growth...[as well as] the gradual emergence of the ‘British disease.’...[for] Britain began to fall behind in relative growth rates in the last decades of the nineteenth century, [but] this problem has become especially notable only since World War II.”

(Olson, pp.77-9)

One of the key implications of Olson’s argument, spelt out below, is that much of our “understanding” of market and government behaviour is profoundly mistaken, driven far more by the ideological preconceptions on both sides than it is by any attempt at genuine realism. For the truth of the matter is that both laissez-faire and welfare-state expansionism are failures...for they are both partial means, ideological figleaves for considerably less "elevated" aims...and, neither can reliably deliver what their ideological champions proclaim:

“I submit that the orthodox assumption of both Left and Right that the market generates more inequality than the government and the other institutions that ‘mitigate’ its effects is the opposite of the truth for many societies, and only a half-truth for the rest.... The trouble is that the current orthodoxies of both Left and Right assume that almost all the redistribution of income that occurs is the redistribution inspired by egalitarian motives.... In reality many, if not most, of the redistributions are inspired by entirely different motives, and...a very large part of the activities of governments, even in the developed democracies, is of no special help to the poor and many of these activities actually harm them.... [For] there is greater inequality, I hypothesize, in the opportunity to create distributional coalitions than there is in the inherent productive capacities of people. The recipients of welfare in the United States are not organized, nor are the poor in other societies. But in the United States, as elsewhere, almost all major firms are represented by trade associations and the professions by professional associations. There are admittedly differences in the productive abilities of individuals, just as there are differences in height. But such measurement as we are now capable of suggests that the individual differences are normally distributed - the vast majority at least fairly close to the middle.”

(Olson, pp.173-5)

“Most of the great examples of the freeing of trade and factor mobility have come about not because the recommendations of economists were followed, but wholly or largely as an incidental consequence of policies with other objectives...[and] the most notable reductions in barriers to the flow of products and productive factors have been reductions in the length rather than in the height of barriers.... The jurisdictional integration brought about by the the centralizing monarchs of early modern Europe was not inspired by liberal teaching, but by the monarch’s lusts for power and pelf. The jurisdictional integration of the United States and Germany owed more to nationalistic, political, and military considerations than to economic understanding; the mainly inadvertent character of the massive liberalization these two countries brought about is proven by the tariffs, trusts, and cartels they accepted at a national level. Even the creation of the [European] Common Market owed more to fears of Soviet imperialism, to a desire to insure that there would not be yet another Franco-German war, and to imitation of and uneasiness about the United States, than it did to a rigorous analysis of the gains from freer trade and factor mobility.”

(Olson, pp.141-2)

“If freer trade leads to more rapid growth, why does it not show up in the measures of the gains from the transactions that the trade liberalization allows to take place? The reason is that there is a further advantage of freer trade, that escapes the usual comparative-static measurements. It escapes these measurements, because the gains are not direct gains of those who take part...but other gains from increases in efficiency in the importing country - increases that are distinct from and additional to any that arise because of comparative advantage...[and which stem from] the constraints that free trade and factor mobility impose on special-interest groups.... [For] with free trade amongst independent countries, there is no way the coercive power of governments can be used to enforce the output restriction that cartels require. There is also no way to obtain special-interest legislation over the whole set of countries, because there is no common government.”

(Olson, pp.137-9)

“I want to underline the contrast between the argument here and the classical liberal or laissez-faire ideology.... As I read it, the ark and covenant of the laissez-faire ideology is that the government that governs least governs best; markets will solve the problem if the government only leaves them alone. There is in the most popular presentations of this ideology a monodiabolism, and the government is the devil. If this devil is kept in chains, there is an almost utopian lack of concern about other problems. [But] if the less optimistic theory in this book is right, there often will not be competitive markets, even if the government does not intervene...[as] government is by no means the only source of coercion or social pressure in society. There will be cartelization of many markets even if the government does not help. Eliminating certain types of government intervention and freeing trade and factor mobility will weaken cartels, but will not eliminate many of them. Moreover, the absence of government intervention (even if it were invariably desirable) may not be possible anyway, because of the lobbying of special-interest groups, unless we fly to the still greater evil of continuous instability.”

(Olson, pp.177-8)

As I noted earlier, Olson is seriously intent upon testing his theory, and his discussions of other evidence - whether from the Indian caste system, Chinese guilds, or medieval commercial cities - is exemplary, albeit brief. He also takes a serious look at how his arguments play out in profoundly unstable societies, again finding insight.

“When testing any theory, it is by no means enough to find a few cases that seem to support it.... [So,] we must ask whether the coalitional processes described in this book are dependent on certain cultural or religious attitudes, and confined more or less to Western civilization.... [But] there is, in fact, massive evidence of coalitional processes in a variety of non-Western societies. There have been guilds, for example, in Moslem countries (and even in Mecca), in Byzantium, in China, in Hellenistic times, and even in Babylonia. These guilds, moreover, bear the same dead-giveaway signs of cartelistic purposes: restrictive membership, price-fixing, long apprenticeships from which the sons or relatives of members are often exempt, and rules limiting output and innovation.... [And] whereas those parts of the world that have never developed very far cannot show us quite the contrasts that European economic history offers, it is still clear that guilds and other distributional coalitions have normally had the same harmful effects on economic efficiency and growth, whatever the culture.”

(Olson, pp.146-8)

“The dense network of distributional coalitions that eventually emerges in stable societies is harmful to economic efficiency and growth, but so is instability. There is no inconsistency in this: just as special interest-groups lead to misallocation of resources and divert attention from production to distributional struggle, so instability diverts resources that would otherwise have gone into productive long-term investments into forms of wealth that are more easily protected, or even into capital flights to more stable environments.... The theory here predicts that the unstable society will have fewer and weaker mass organizations than stable societies, but that small groups that can collude more easily will often be able to further their common interests.... The most basic implication of the theory for unstable societies, then, is that their governments are systematically influenced by the interests, pleas, and pressures of the small groups that are capable of organizing fairly quickly.... In one period they might be landed oligarchs, in another manufacturing firms; in one country they might have a vested interest in exports, in another, in import substitution. Again, it is important to respect the diversity and detail of actual experience and not to push this theory, or any other general theory, farther than it can go.... Nonetheless, the general nature of the process is clear. The most substantial and wealthy interests are relatively better organized in the unstable society, but they often own an unrepresentative mix of the country’s productive factors. They obtain policies that favor themselves and work in different ways against of the larger unorganized groups in the society, thereby...[promoting] inefficiency and stagnation, as well as inequality.”

(Olson, pp.165-70)

Mancur Olson’s The Rise and Decline of Nations is a genuinely important work in the social sciences and, to my mind, by far the best to have emerged from rational choice theorizing. For by relaxing the (usually utopian) assumptions which underlie such work, and paying more attention to the comparative historical record than to mathematical modelling conventions, Olson has both seriously enriched economic theory, and fleshed-out the social implications of a key aspect of human behaviour sadly underestimated in the rest of social theory.

For whilst humans are only partially rational creatures, we underestimate the importance of incentives (both positive and negative) at our peril...particularly where incentive structures have a fundamental stability which encourages the reconsideration of commitments. It is in such areas that “rational choice” theories can make the greatest contribution and, although such will never stand alone, we do need to learn from their best insights. And, of these, I would argue, Mancur Olson’s are the most important, changing the way we view collective action and social evolution...and teaching us exactly why & how all elites decay, and the ways in which the corruptions of power ramify well beyond its exercise. We would do very well to listen to him.

“The theory offered here explains at least the most strikingly anomalous growth rates among the developed democracies, and no competing theory developed so far can do this. Although this is an important argument in favor of the present theory, my impression is that many readers of early drafts of the argument have been too easily convinced by it. Intellectual history tells us that there is a considerable susceptibility to new theories when the old ones are manifestly inadequate, and this is as it should be. Yet, just as it is understandable that a drowning man should grab at a straw, so it is also unhelpful. We should look skeptically at the theory offered here, however it may compare with the available alternatives.”

(Olson, p.95)