Mancur Olsons Power and Prosperity - Book Report/Review Example

Mancur Olson’s Power and Prosperity INTRODUCTION Mancur Olson’s Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships was published posthumously from a manuscript that was being prepared for publication. It follows a lifelong research program of one of the world’s most influential political economists, perhaps on his way to a Nobel prize (Sandler 1280; McLean 651). The key problem addressed in this book came from a columnist friend’s assertion to Olson that his hitherto body of work suggested that what the former Soviet Union needed was a “no-nonsense dictatorship that would impose a free-market regime on the Soviet Union” (xxiii). Olson did not agree, and this book represents his answer. Olson’s main argument is that individual rights are a cause of prosperity, not a luxury that the less developed countries may need to do without (187). These individual rights must be protected from predation by government or by other private parties. Finally, the most likely environment where these two conditions are satisfied are “secure, rights-respecting democracies where institutions are structured in a way that gives authoritative decision making as much as possible to encompassing interests” (198). This places Olson alongside Nobel prize-winner, Amartya Sen, who argued a similar case in his famous book, Development as Freedom. ARGUMENT Olson follows the long tradition of analysts who seek the explanation of social phenomena by deductive reasoning about the behavior of abstract self-interested individuals (Berliner 755), accepting Adam Smith’s famous argument that an “invisible hand” makes the pursuit of rational self-interest more effective in promoting society’s interests than conscious intentions by individuals. Olson builds his argument on his path-breaking theory developed in 1965 in his book The Logic of Collective Action, and extended in 1982 to the realm of political science in The Rise and Decline of Nations where he established, even among devotees of Adam Smith, that there were particular conditions where the rational pursuit of self-interest could be demonstrably proven to be detrimental to social welfare. In Power and Prosperity, he uses the collective action framework to develop answers to his new questions. Olson begins by asserting that the establishment of clear incentives for firms and individuals “to make” rather than “to take” is the most important factor that allows societies to prosper (1). He argues that these incentives are established by those in power, and that accordingly we must find out what “those in power have an incentive to do and why they obtained power” (3). Olson then elaborates his theory of government by using the metaphor of criminals – stationary bandits and roving bandits – arguing that stationary bandits have an interest in ensuring that the people from whom they are stealing have an incentive to produce over the long term. Stationary bandits have an “encompassing interest”. Roving bandits, on the other hand, will take as much as they can and move on. Accordingly, the time duration of rulers, i.e. the “bandits”, becomes important: the longer time-horizon that rulers have, the more their interests are aligned with the general social welfare. It is accordingly the task of constitution and policy makers to create incentives for encompassing interests to prevail in society. However, this becomes difficult as over time, lobby groups with narrow interests begin to accrete, and eventually the society and economy becomes “sclerotic”, showing little growth. As an empirical referent, Olson compares the experiences of Britain with Germany and Japan after World War II. He argues that the tremendous growth of Germany and Japan was due to the crushing of the narrow interest groups after the defeat of the Axis powers, while in Britain the interest groups remained, dragging down the country’s growth (98-100). This adds dynamism to Olson’s theory, and places him alongside such thinkers as Paul Kennedy as a theorist of decline (cf. Schofield 94-104; Rosser Jr.). Olson then analyses the Soviet Union and post-Soviet Russia, forwarding an unconventional interpretation of Josef Stalin as a sort of genius “bandit” who was able to extract maximum surplus from the country by creating a brutal system of incentives – including below-subsistence wages, incentives to work overtime, no income taxes, heavy taxes on state enterprises, the collectivization of agriculture, the destruction of narrow lobby groups, diversion of resources, and other elements. After Stalin’s death, however, special-interest lobby groups began to build up in the system, and even after the end of communism, these groups continued to hold powerful sway in Russian society. This is how Olson explains the slow and even negative growth in post-Soviet Russia, as opposed to the fast growth in post-Fascist Germany or Japan. Against the counter-example of China, Olson argues that the Cultural Revolution of Mao Tse-tung in the 1970s provided that force which swept away the old narrow interest groups that had privileged positions in government, and this “cleansing” allowed the country to grow afterward (167). Finally, Olson addresses the type of markets that are needed to ensure prosperity. Olson notes that markets exist extensively in poor countries, but they are short-term ones: face-to-face and immediate. In order for more complex exchanges to occur – over long periods of time, and involving many persons – a proper system of individual rights, impartial enforcement of contracts, and the suppression of predation of any kind must be in place. This argument is supported by thinkers such as Francis Fukuyama who, in his book Trust: the Social Virtues and the Creation of Prosperity, comes to similar conclusions from a historical and cultural perspective. Olson argues that democracies, because of their “encompassing self-interest” and long-term stability, have the greatest incentive to respect individual rights and enforcement of contracts. Democracy, then, is not a luxury for poor countries, but a necessity. This is the final element of this theory. ANALYSIS Olson’s argument is rigorously logical and his main points are presented in ways that are easy to understand. Among his many admirers are reviewers who have argued that this book completely succeeds in “in all of its ambitious goals” (Sandler 1280). The respected journal, Foreign Affairs, has noted that Olson’s two chapters on the postcommunist transition to capitalism are especially worth attention (Cooper 163). There are critics, of course. At least one academic (Höijer 24-38) has alleged logical inconsistencies in Olson’s theory of state formation. More than a few have criticized the disjointed argumentation, which may be the result of Olson’s passing before finalizing his manuscript (e.g. Vanhuysse 236; Anderson 85; Niskanen 138). The major criticisms of this book, in my view, derive from Olson’s theoretical perspective. First is his tunnel vision with regard to his collective action theory in particular, and mainstream economics in general. For instance, Olson begins the book with a surprising declaration that “These days, virtually all economists (and I think also most people in other fields) would agree that societies are most likely to prosper when there are clear incentives to produce and to reap the gains from social cooperation through specialization and trade” (1). Olson simply dismisses acknowledgement of other schools of thought in the social sciences (for instance, those who oppose globalization, or operate outside of free trade perspectives), which then allows him to bypass fundamental questions and concentrate on his collective action theory (cf. McLean 666). This tunnel vision extends to other explanations and theories even closely related to his. Vanhuysse (236), for example, has argued that the role of market-augmenting government and the structure of Soviet and post-Soviet societies have been discussed more extensively, and more persuasively, by Douglass North and János Kornai. Höijer (25) notes that Gambetta in the 1990s and Oppenheimer as far back as 1914 have made almost identical theoretical arguments, but were not credited by Olson. Olson’s deductive theoretical orientation, too, prevents him from systematic examination of the empirical record. Anderson (87), for instance, has been critical of Olson’s knowledge of historical facts, particularly with regard to the large-scale capital investment from the West that allowed industrial production to increase under Stalin, as opposed to Stalin’s system of incentives. Berliner (757) has argued, too, that the difference between Russia, on the one hand, and Germany and Japan, on the other, may not be the collective-action power of enduring elites, but that postwar West Germany and Japan did not need to undertake a total transformation of their economic system as the former communist countries had undertaken to do, and that the old enterprises were most likely maintained in post-Soviet Russia because of the potentially disastrous consequence of the massive unemployment that would result if all inefficient enterprises were shut down at once. Olson never explores any such alternatives. Olson’s overwhelming theoretical concentration on rational self-interest is also problematic, not least because Olson himself has admitted that history has been significantly shaped by principle, morality and temperaments, not only self-interest (3). McLean (665) notes, interestingly, that Olson deleted passages from his earlier draft which elaborated on this, due to criticisms that these observations about the importance of principle went against his whole body of work. Finally, Olson’s theory appears to be too malleable, and unfortunately strengthens the appearance of self-promotion. Niskanen, for instance, finds Olson’s contention that “Russia did not go through enough of a crisis to strip away the layers of special interests accumulated during the Stalin period” (130) to be unconvincing. Indeed, Olson appears to willing to privilege his theory over the empirical record. If an explanation can be fashioned for every counter-argument, then Olson’s theory cannot be falsified, and it therefore does not meet the scientific standard identified by Karl Popper. This I believe to be a serious weakness. CONCLUSION This reviewer is in agreement with Kudrna (6), Vanhuysse (236), and Anderson (87) that Power and Prosperity is clever (because of its logical insights into rich and poor societies), but flawed (because of its historical lacunae, its theoretical restrictions, and poor organization). While one’s choice of theory is to some extent subjective and temperamental, I believe that Olson’s theory has to better define its terms, such as “encompassing interest” and “dominance”, or else the theory becomes self-referential. It cannot be that only after one observes a sclerotic economy, one searches for the narrow interests, or after one observes a prosperous economy one looks for encompassing interests. As Kudrna has argued, Olson has left a theory and research agenda which still must prove its viability (6). Indeed, it would be useful to empirically test his ideas about democracy and prosperity, as many still favor autocratic solutions, pointing to the economic success of China and Singapore, in particular. Olson’s assertion that “the only societies that will have secure property and contract rights across generations are lasting democracies or other representative governments” (99) needs substantiation. Given the current recession in the US and Europe, many may look with skepticism at Olson’s argument that “it is no accident that the developed democracies with the best established individual rights are also the societies with the most sophisticated and extended transactions (such as those in futures, insurance, and capital markets) for realizing the gains from trade” (187). With Power and Prosperity, Olson has left an important analytical tool for social scientists and policy-makers, and has made valuable intellectual contributions. However, his theory may at best be an important guide to principled action and policy formation, rather than a guide to rigorously understand the past. Works Cited Anderson, William L. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. Quarterly Journal of Austrian Economics 5.2 (2002): 85-7. Print. Berliner, Joseph S. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. Economic Development & Cultural Change 50.3 (2002): 755-8. Print. Cooper, Richard N. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. Foreign Affairs 79.3 (2000): 163. Print. Fukuyama, Francis. Trust: The Social Virtues and the Creation of Prosperity. New York: Free Press, 1995. Print. Höijer, Rolf. “Theft by Bandits and Taxation by Kings: A Critique of Mancur Olson on State-Formation.” Political Studies Review 2.1 (2004): 24-38. Print. Kudrna, Z. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, 2004. Web. 20 Oct. 2011. McLean, Iain. “The Divided Legacy of Mancur Olson.” British Journal of Political Science 30.4 (2000): 651-668. Print. Niskanen, William A. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. CATO Journal 20.1 (2000): 137-40. Print. Olson, M. Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships. New York: Basic Books, 2000. Print. ---. The Rise and Decline of Nations. New Haven: Yale University Press, 1982. Print. ---. The Logic of Collective Action. Cambridge, MA: Harvard University Press, 1965. Print. Popper, Karl. The Logic of Scientific Discovery. 1959. London: Routledge, 1992. Print. Rosser Jr., J. Barkley. “The Rise and Decline of Mancur Olson's View of The Rise and Decline of Nations.” Southern Economic Journal 74.1 (2007): 4-17. Print. Sandler, Todd. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. Journal of Economic Literature 39.4 (2001): 1280-2. Print. Schofield, Norman. “Power, Prosperity and Social Choice: A Review.” Social Choice & Welfare 20.1 (2003): 85-118. Print. Sen, Amartya. Development as Freedom. Oxford: Oxford University Press, 1999. Print. Vanhuysse, Pieter. Rev. of Power, Prosperity and Social Choice: Outgrowing Communist and Capitalist Dictatorships, by Mancur Olson. West European Politics 24.1 (2001): 235-6. Print. Read More