> Table 1.1 shows annual rates of growth in per-capita GDP for each of three decades, the 1950s, 60s, and 70s, in a range of rich countries. Contrary to our perception of the U.S. as a growth dynamo and the Europeans as sclerotic, France and Germany tremendously outperformed the U.S., as did most of the other countries.
It's easier to grow fast if you're a country that has been blown to bits and is putting everything back together, rather than one that's already prosperous.
Yes but why did Britain become "the sick man of Europe" at the same time?
"Germany and Japan did well because their special interest groups were shattered by military defeat. When new labor unions formed in Germany and Japan, they tended to be very broad-based and therefore had an incentive in the overall welfare of their societies.
'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 [a] powerful network of special-interest organizations. The number and power of its trade unions need no description.' " (2nd quote written pre-Thatcher)
Britain also rebuilt but at a slower rate. The point is the longer a society remains (politically?) stable the more cruft it accumulates, like the dirty copper bottom of a long sailing ship.
Germany and Japan, once the war was over, were prevented from re-arming.
Think of the amount that the UK and US spend on expensive weapons systems, compounded over that period of time.
It's not really surprising, given those additional funds that Germany was able to do so well. I can't speak at all to Japan, since they have had their own problems.
The end and contraction of the empire probably had a lot to do with it. The Commonwealth was so widely spread it may have led to the Britain having the greatest exposure... (Perhaps?).
>> It's easier to grow fast if you're a country that has been blown to bits and is putting everything back together, rather than one that's already prosperous.
Yup. In 1949 the US had had something like 80% of the world's manufacturing capacity. From there, it had no place to go but down. Or more exactly, the others had no place to go but up.
Also, we think of the Euro-zone economies as being sclerotic because for the last 20 years most of them have been. The book was published in 1982, before the European regulatory and welfare spending onslaught. Averaged over the last ten years, Germany has had little growth.
The East Germans were incredibly well educated. Yes, their physical infrastructure was far behind West Germany's, but reunification should have been profitable almost from the beginning.
Reunification should have been like the end of WWII but with less damage and more and better help.
A deep education according to Marxist principles that explain all economic growth as being the result of central planning, and all problems as being the result of competition is worse than no education at all.
For evidence of this, look at Eastern Europe.
...or the humanities department at any Ivy League college.
It's the 80s and 90s where the US and the UK became distinctly more free-market oriented than the rest of Europe. During the 50s-70s there wasn't that much difference between the economic policies of say France and the US.
During the 80s and 90s unemployment fell in the US and UK with respect to Europe and growth rates increased.
Olson preempts the question of “How come the Swiss aren’t poor given that they’ve had stability for so many centuries?” by looking at their constitution, which “makes it extremely difficult to pass new legislation. This makes it difficult for lobbies to get their way and thus greatly limits Switzerland’s losses from special interest legislation.”
Switzerland is like a hack of democracy, worth studying.
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Great article, this quite stuck with also: Olson suggests that a rational voter should remain as ignorant as possible about politics and policies. Even if special interests manage to siphon off 80 percent of the voter’s income, the voter is better off devoting his or her energy to earning more rather than attempting to change the system (likely to require full-time effort, reducing income to $0, and be futile because the voter has no money compared to the special interests).
Sadly this is the absolute hard truth.
Some of the conclusions use a straw man when it comes to critiquing accepted economic theory. The economics are not quite as simple as their are being presented, never the less the vast majority of that article was excellent.
My understanding is that lobbying is far and away the most profitable industry, with a 100-to-1 return on investment. Rationale: the lobbying industry is about 13 billion per year, and it controls the flow of about 1 trillion per year.
"Olson notes that special-interest groups increase inequality in a society. A union prevents companies from hiring black workers at the same wages at whites. A caste system prevents someone from rising above the station to which he was born. Effective lobbying turns welfare or health care programs into cash cows for government workers or health care providers."
His point is that special interest groups cause inequality, but his last example is government workers. How are government workers unequal? Do postmen think they're superior to those lowly I-bankers? Do school principals look down on lawyers? It's ridiculous. The US does not have a civil service caste; the US bureaucracy does not create inequality, unless we redefine inequality to be something totally different than the normal usage. I'm not just nitpicking: this kind of sloppy thinking absolutely kills this essay.
FTA: "Japan’s history is mined for evidence supporting Olson’s theory."
This is why economics is not yet a respectable science. I can't say that I disagree with the analysis presented in the article, but that says nothing at all about its truth value. Unfortunately, many of the arguments presented by economists, including theories that are diametrically opposed to one another, seem quite plausible and that is precisely the problem with economics as a discipline. The standard of proof is still stuck in the dark ages.
Excellent article. Now the only question is, what to do about it?. It's depressing that (edit: the book) was published in 1984, and yet the mainstream doesn't seem to have learned from it.
You can hope for a popular backlash against big government and associated interest groups. This happens from time to time, and sometimes the interest groups get pushed back somewhat as a result.
I think this is unlikely in the U.S. any time soon. Most people are not really outraged (any more) about the trillion+ bailout to Wall Street. Most people would say that we need to funnel even more money into health care and education than we already do--that is how successful those two interest groups are.
You can also hope for increased productivity and economic growth. Competent interest groups won't stop trying to shape the system to favor themselves and call it progress, but you can have real progress at the same time.
But I doubt there is a real, permanent solution to the basic problem of interest groups getting control over the systems of a society and eventually dragging it down. It is just the way the world works.
The sad pattern is that because of special interests, inefficiencies grow to a point where you have something like a revolution.
Then there's revolutionary reform and the cycle starts again, I can think of Britain and Sweden off the top of my head. Two states that were big and bloated, slimmed down and then started bloating again.
Seastead governments, having fewer barriers on exit for their citizens, will face better incentives to govern for the social good.
In more general terms: the interesting suggestions require rethinking how governments are organized, not just passing some suite of legislation in our current democracies.
Of course, it may turn out that technological progress generates new wealth faster than government can waste it, and we all turn out alright in the end, just not as well-off as we could have been.
>"If individuals do not own their own seasteads, barriers to exit may be higher on some seasteads."
Yes. Patri hopes for modularity, but there is no guarantee that a huge monolithic seastead won't be cheaper and more appealing to potential residents.
Still, I am in favor of trying new things. One of them might turn out to be a good idea. Having 95% of the world covered by liberal democracies nearly identical in governing structure does not appeal to me, as I am not sold on the optimality of liberal democracy.
Yea. I became a big fan of Olson when someone else on this forum brought him up - I never heard of him before then.
I've been thinking about the issue and it just seems that the only people who can make a change are the ones who benefit from keeping things the way they are.
I think it would be difficult to improve things gradually and you'd need something more urgent - maybe this crisis will lead to that, who knows.
I missed the date, and honestly thought it had been written recently in response to the 2008 crisis. (Edit: never mind; the blog post was. Apologies for misunderstanding you.)
The title is slightly misleading. Olson discusses how the economic growth of countries slows down through the process of accumulating interest groups ("economic sclerosis", if memory serves). However, I don't think he has an example of economic growth going negative.
"How Young Countries Age" fits better than "How Rich Countries Die".
Well spotted - a very good summary of an thought-provoking & well reasoned argument. This has some interesting macro insights for startups, I'd not thought about socio-economic development in this light before.
This is true for now. But software sells, and the big software companies (Microsoft, Intel, IBM, Oracle, Google, etc ...) practically have unlimited financial power. I do understand why most computers come with a Windows-tax, but it's not because of technical superiority.
The only thing that's stopping them is the fast progress of technology, and the inability to scale your production by hiring all the programmers you can get your hands on ... thank God it's still an industry that requires talent, making it very hard to beat a handful of talented engineers with 100 day-workers.
But I wouldn't bet against such groups in the future. DRM is failing because it's a poor technological solution applied to a social problem, but I'm waiting for the day when the Internet will be regulated ... it's already happening.
I agree, but I think it's something we may come to regret. While I don't see hackers unionizing, I wouldn't be at all surprised if the "it's just a job" programmers do, and as they count for the majority of programmers, that might leave the rest of us in an awkward position (or not?).
I don't see unions ever becoming necessary for hackers. Such organization might become for someone with highly-specialized, non-transferrable skills, such as operating Ford auto plant equipment, or engineering Amtrak trains. If you've devoted your career and livelihood to a single company, the thinking is that that company has certain responsibilities to care for you (whether this is indeed the case is an argument for another day).
Quality programmers, on the other hand, are highly mobile, highly sought-after, and can quickly and easily upgrade and alter their skillset. They aren't married to a single company, or even a single industry.
I think unions can be can't be considered even marginally feasible unless available labor supply outstrips demand. In this case, the situation is reversed, and I can't imagine what benefit unionization could possibly bring to the programming industry.
You might have been able to blame labor unions for the economic problems of the 1970's, but capital has been ascendant everywhere since the 1980's. Power has become increasingly concentrated in the hands of the rich, and now there's only one part of society to blame for the economic crisis.
Yes, the UAW plays a role in the problems of the US auto industry. The financial services industry, which is at the epicenter of the current crisis, is not unionized. You can't blame unions for AIG, Lehman Brothers, Bank Of America, Merrill Lynch, CDOs or the housing bubble.
I'm sick and tired of the "Atlas Shrugged" fantasies that many people have. Most billionaires are billionaires because they own large blocks of stocks in public companies. These are worth billions because:
(i) People buy their stock in the (false) hope that they will grow in value faster than the GDP and finance a comfortable retirement ()
(ii) There's a large population of people who have money to spend on goods and services. Mass prosperity is the trunk of the tree that holds the rich up.
(iii) People do work in their companies that creates a stream of revenue.
I'm no communist.
Capitalists play an important role in deciding where resources can be profitably used. The root of the financial crisis is that the financial system is no longer capable of performing this crucial role.
Capital and labor need to be in balance. The growth of capital's power over the past 30 years has destroyed the social infrastructure that it needs to create wealth: thus we've got a deflationary process that is making wealth disappear..
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() The stock market finances retirement on a pay-as-you-go basis, just as does social security. The number of dollars spent buying stocks has to equal the number of dollars made selling stocks. It's simple math.
The average return on investment across the economy equals the rate of growth of GDP in the long term: where can you get the returns from? from changing the way that wealth is partitioned in the economy. Some inequality of wealth creates an incentive for people to work and invest -- but the game ends when all of the money is in one person's pocket, just as it does in the game of monopoly.
We've managed to fool ourselves in the last decade by (i) taking on unsustainable debts, and (ii) stealing from ourselves as workers in the name of (imaginary) returns that we thought we'd benefit from when we're retired. Trouble is, the jig is up,
I disagree with him strongly on a lot of political issues, but he's right on the overarching philosophical point that people in most circumstances (business bureaucracies with extensive lobbying arms being the worst offenders) want exemptions for themselves from "market discipline". It's amusing to me that those who seem to be in full support of "capitalism" still want an byzantine, violent (cf. Iraq) and incredibly expensive welfare system to protect their own standard of living.
It seems that the secret for success in such an economy is to create a game in which nearly everyone's "wealth" increases, so no one gets pissed off because the game's being played in accordance with the comfortable and decadent lie that no one's standard of living can ever go down. Gradually this game drifts from reality, but aggregate psychology is such that the disparity isn't noticed until enormous, at which point a massive and painful correction occurs. This is when the maestros say "Sorry, we fucked up, but we can't help you now!" while chuckling all the way to the bank. Well... at least, that is what they do supposing there still are banks.
People you think who are full supporter of capitalism, are actually supporter of bastarized capitalism.
You want people who are called anarcho-capitalists.
These group of people litterally believe that everything should be run by the free market. IE. polycentric law system, private courts, and private defense agencies.
One interesting study of free market anarchism is midevial iceland. It managed to last for centuries.
Basically, the title and office of cheftain were litterally for sale and anybody can buy the title. However, those cheftains doesn't collect taxes. No, they compete for people to follow them. This creates virtual jurisdictions rather than physical. Cheftains's job is to appoint judge and keep the peace.
It work well too. In fact, abritation was so deeply embedded in their society, that they even tries a ghost for trespassing a house, making it haunted. They were confident that a good icelander ghost would respect the court.
Even murder was treated as a private matter too. The dude that murdered the other dude have to pay the family's such and such fines after settling. If the family is too poor, they can sell the claim to somebody who can persecute the murderer.
Otherwise, if the murderer refuse to pay his retribution fines. He will have no protection under the law and anybody can kill him with no consequences.
A murderer also can be punished even harsher if he tries to conceal his guilt. Upon the murder of a man, he have to announce the fact and not travel beyond a certain distance.
The eventual collapse of system is due to the fact that cheftains voted unanimously to convert to Christianity. So they got the first real tax in the form of a chruch tithe, which everybody is bound to support. The cheftains, no longer contrained by competition, can start misbehaving. Eventually it got so bad that the icelanders choose a Danish king over those warring cheftains.
That was fun, but... a clan culture as a better way for modern society? :-)
I thought a clan society was by definition made up of organized special interest groups?
Just consider hiring someone at a company that wasn't from your clan, when your clan eldest/boss tell you that your idiot cousin needs a job. :-)
The article formalized things for me I've always wondered about. But it reminds me a bit of the laments during the dying of the Roman empire. Everyone saw the problems but couldn't solve them.
Is there any work on how to organize a society which avoids special interest groups? Or, at least, keeps the light on them?
The clan society actually remind me more of modern day Somalian system rather than Iceland. That society was actually doing better in comparsion with their neighbors in some aspect. Did you know that they have the cheapest international call rate on the continent?
However, I know little about them since I never travel there.(Iceland is historical so that's a different story) One has to travel to Somalia to decide for themsleves if anarchy actually work. Even then, you have to take into political situtation so you don't get a skewed view.(The UN is trying to establish a state I heard)
In as so much for special interest group. I thought such society will undobutly exists in a free market society but they probably will be kept in check by the free market. My big worry is more about the system collapsing into a centralized system, which become a big vector for corruption.
If you want the definte work on how a free market society might work, you might want to read the Machinery of Freedom, written by David Friedman.
However, I know no such works dealing only with organizing a society's incentive and disincentive structure to deal with corruption.
Check the term "holmgang" for an insight into how life was in the bad old days.
I'm not an expert but from what I've read, research implies that the "ting" was more regulating/discussing the clan quarrels/warfare than judging as we define it today. (No reference saved, sorry.)
Afaik, traditional societies before a central violence monopoly were generally, well, violent. Iceland was a hard place to survive, so the population might have had to work more and "play" less.
(You can make some form of analogy between the old times and present international interactions; there is no police force to stop violence -- and clans with mutual support agreements abound... Ask an expert.)
As a hard line atheist, it is not an easy thing for me to say that Christianity seemed to be an improvement. :-)
Anyway, there is an old joke that the problem with anarchy is that it is too unstable. The time before a central state wasn't fun. I believe the tribal areas of Pakistan is a good indication on how it worked in Scandinavia.
It's easier to grow fast if you're a country that has been blown to bits and is putting everything back together, rather than one that's already prosperous.