ECON 4774: Notes on The Rise and Decline of Nations
Mancur Olson (New Haven, CT: Yale University Press, 1984)
The Questions
Why do countries rise and fall economically?
Why are some countries ungovernable?
Why do countries become top heavy over time (where the political influence of a group of elites becomes dominant)?
Why and how do political institutions in advances economies start to decay?
Chapter 1: The Questions
Lays out the main questions Olson will address.
Focus is on advanced economies such as the USA, the EU, Japan & the UK.
Note the discussion on page 4 where there are implicit references to a neoclassical growth model, like the Solow theory we discussed.
On page 10, Olson discusses the existing hypothesis on the British decline in the 70s & 80s.
What is the problem in his view of these explanations?
Too ad hoc and subjective.
On page 15, he notes the weakness in the macro development literature.
What is the issue?
These macro development hypotheses are not easy to test & refute empirically.
A reason why the field of development is now more micro and RTC oriented.
Chapter 2: The Logic
Here, Olson starts establishing the key ideas of his theory.
Important building block is the Coase Theorem:
As long as private property rights are well defined and there are no transaction costs, market exchange will lead to efficient use of public resources or yield the highest value use of resources.
But when economic transactions have a cost or information is not symmetric, then Coase Theorem may fail.
Second important building block is free riding in public goods use and provision.
Free riding occurs because (non-rival) public goods can be used by everyone. So, no one would like to pay for them but many or all would like to use them.
If everyone free rides, then there wouldnt be public goods.
In order to overcome free riding, then, one needs positive and negative incentives.
Chapter 2 (cont.)
See discussion on page 18 for the classic free rider problem.
In order to understand political and institutional change in democracies, one needs to think of political action committees (i.e., special interest groups & lobbies) as organizations which supply public goods to their members.
Read section (III) on pages 23 to 25 to see Olsons argument about lobbies and political action groups as organizations that supply public goods subject to free riding problems.
A key punch line: smaller and more homogenous groups can overcome free riding problems more quickly. Hence, more focused lobbies which seek political legislations for the benefit of smaller & more homogenous groups will be in action more quickly and more effectively.
As a corollary, we have: larger and more diverse groups cannot overcome free riding problems quickly. Hence, lobbies which seek political legislation for the benefit of larger & more inclusive groups will organize more slowly and less effectively.
Please read the last paragraphs on pages 26 and 28 on related important observations.
Then, for a relevant example read pages 32 & 33.
The main takeaway is this: not all groups in society will have equal influence on the political process and institutions. Smaller lobbies will have an advantage because they can overcome free riding more quickly.
Chapter 2 (cont.)
Chapter 3: The Implications
Main model summaryis on page 74.
The key question is this: would the presence & influence of special interest groups in politics lead to Coasian efficient social bargains?
No. Since smaller and more homogenous special special interest groups are more nimble and effective, the influence of lobbies on politics will almost always lead to inefficiency and pressure on institutions and the political system.
For some relevant discussions, see final paragraphs on pages 37, 39 and 40.
Chapter 3 (Cont.)
Nine key predictions of Olsons model:
Lobbies (or special interest groups) are asymmetric in size and homogeneity. So no society will achieve Coasian efficiency through their roles in politics.
Advanced economies grow slower over time and stabilize. They will accumulate more lobbies over time.
Smaller & more homogenous lobbies overcome free riding sooner and start to lobby more effectively and sooner. So they have an advantage in influencing institutions and their policies. This advantage diminishes over time but does not disappear.
By pressuring for change of govt policies in their favor, lobbies reduce economic inefficiency and they create more social divisions.
Larger lobbies are more inclusive and serve a more diverse body of members.
Chapter 3 (Cont.)
Nine predictions of Olson model continued:
But, as a result, they are slower in overcoming their free-riding problems. So they have less influence, although in advanced, slow growing economies they become relatively more influential.
As economies slow, they thus involve more lobbies in politics. And more lobbying activity, in turn, further slows down economic growth.
Lobbies are distributional coalitions, that are designed to benefit their members at the exclusion of all others.
Thus, increased lobbying activity in advanced, slower growing economies distort politics, lead to inefficiencies in government policies and lead to a deterioration of a countrys institutions.
Read pages 43, 47, 48 through 53 and 59 for some related points.
Chapter 6: Some historic Examples
Read & study the historical examples in this chapter on your own please.
With special emphasis on India, China, Japan and South Africa.
What is Olsons view on the role of culture in economics? See pages 150-51.
When youre done, think about how Olsons theory compares and contrasts with the main institutions literature founded by Douglass North and which we studied earlier.
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