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Power and Prosperity

by Mancur Olson

“What we call Man’s power over nature turns out to be a power exercised

by some men over other men with nature as its instrument.” C.S. Lewis

Mancur Olson divides the world into hunter-gatherers, anarchies, autocracies and democracies. Anarchies, he argues, are the worst. In anarchies, citizens are subject to myriad evils, including attacks by roving bandits. Because economic activity in an anarchy is so hazardous, the number of goods produced plummets.

A roving bandit sometimes discovers that it is his or her self-interest to become in Olson’s words a stationary bandit. A stationary bandit—an autocrat—sets up a mafia-type protection racket. Autocrats wrap their power and violence in supernatural auras. The autocrat suppresses other bandits, economic performance improves and the autocrat extorts riches from citizens to serve his or her vision of power and glory. Olson analyzes in detail Joseph Stalin, a most infamous stationary bandit. Olson calls Stalinism “From each according to his abilities, to the man in charge.” (Not that real Marxism would have been better. Real Marxism is an instant recipe for anarchy. Where governments do not enforce laws, there might as well be no laws.)

Contrary to beliefs about work incentives under communism, Stalin created large, Byzantine incentives to work. Work less than overtime earned starvation wages. Overtime hours paid at somewhat market levels. Imagine a system that paid one dollar an hour for the first 40 hours of work and five dollars an hour for anything above that. If that did not inspire, there was always the threat of a purge. Anxiety is an ally of authoritarians.

He would have been more effective in achieving his nefarious goals if he simply introduced a market economy with a 40 percent flat tax and required everyone to work 15 hours a day 7 days a week, but then it would be tougher to wrap that system in egalitarian Marxist ideology.

When Communism works as well as it can, says Olson, it is barely semi-efficient, at least compared to Tsarism and for those not rotting beneath the tundra. But that does not last. Communism inevitably sinks into a bureaucratic abyss. Corruption, incompetence and interest group dynamics create a sclerotic condition that gradually makes a bad thing worse. No matter how hard people work, planning and management are terrible and keep getting worse because managers are able to create ever greater levels of subsidization for ever worse levels of production. Commusclerotic forces became so bad that by the late 1980s, Soviet products were not worth the effort it took to produce them.

Olson says the collapse of the Soviet Union was in part due to a lack of revenue. The Soviet Union had a multitude of interests clamoring for subsidies, yet little tax revenue. It elected to subsidize by printing more money, which led to disaster, even more commusclerosis.

Even recent privatization efforts in Russia are a joke. The old groups are still in charge and equipment is obsolete. Work habits and training are so terrible multinational firms avoid hiring Russians with experience in the same industry. Hotel chains would rather hire a Russian coal miner than a Russian who worked in the Russian hotel industry. A blank slate is better than a screwed up slate. Today much of Russia represents subsidized, consumerist communism. The problem with Russia is not that they tried capitalism and democracy and it does not fit them. The problem is that Russia has gone nowhere near far enough with reforms.

Olson warns not to place much hope in any dictatorship. Even somewhat benevolent dictatorships such as Singapore are a poor option. Dictators die. The new boss is usually worse. Autocracies may prosper for a while but eventually leaders emerge who are unmitigated disasters. Extortion, cronyism, capriciousness and the general cruelty of autocrats seriously conflict with the things that matter in an economy.

What are the things that matter? Here are Olson’s major conclusions:

· Clear, secure property rights, impartial enforcement and lack of banditry are necessary for long-term economic growth. He argues that rights are not mere luxuries, but essential. Less developed countries that forego rights because they think other things are more important make a big mistake.

· Practices such as piling up debts, printing too much money, lobbying by interest groups, and defaulting on loans ruin economies. Their siblings—organized crime, collective subsidization, leadership greed, and official corruption—wreck economies too, even when there are plenty of investors, technologies and hard working citizens.

· Economies should have a high rate of long-term investments. This is getting harder in present preoccupied democracies. It is almost impossible in autocracies. Even autocrats who want stability, have a strong incentive to borrow, default, print too much money and arbitrarily confiscate property. Investors know this. Investors will ignore seemingly low-risk investments in autocracies because they know the situation could change tomorrow.

Markets are not as important as many claim. Markets are ubiquitous. Even the poorest nations have plenty of sellers. Stable property rights, contract enforcement, liquid capital markets, limited liability corporations matter more according to Olson. Among contracts, those relevant to mortgages are especially important.

Prosperous countries are those that experiment with lots of economic endeavors. Subsidizing industries that lose money is a huge drag, bigger than the direct costs of subsidization. It does not matter the losing industries are losers merely because of bad luck. He writes that any protections should be on the level of individuals, not industries. Transfers to industries designed to help the individuals in the industry are economic disasters. A coal subsidy is far worse than unemployment insurance for fired coal workers. Arguing that power markets are better than socialism is like arguing that the fourth grade basketball team is better than the kindergarten basketball team. The NBA of economics has yet to be created on this planet.

Democracies also have serious flaws: Interest group demosclerosis and rational ignorance of voters. Olson says the flaws of democracy can be fixed with knowledge and education.

Olson suggests some factors that led to the first stable democracies:

· Geographical or other protection from conquest by autocracies

· Balanced, scrambled and dispersed power within the democracy so that it is difficult for autocrats to emerge

· A chief executive with enough power, but not too much, and independent powers that enforce succession

Olson dissects the incentives on individuals in various group situations. He points out that the famous prisoner’s dilemma has limited application in social science because two prisoners in separate interrogation rooms can not communicate or sign binding contracts.

This is not a book on the more technical matters of economics. Olson downplays the matters that get latter day Friedmans and Keynesians fired up and well as other important factors. It is hard to have a biotech research belt in a land where most people are illiterate. According to Lawrence E. Harrison in another book, the terrain that separates progressive cultures from dying cultures includes:

· Emphasis on future in word and deed

· Merit orientation

· Secular civic affairs

· Leadership arising at various levels

· Positive-sum beliefs

· Virtue rewarded during lifetime

· Rigorous ethical codes and enforcement of those codes, preventing corruption and incompetence

· Emphasis on education

· Belief in control over future

· Personal identification beyond family and selfish interest groups

· Work promoted for achieving good life

Olson concludes that ultimately dictatorships and sclerotic activities in democracies must be fought with economic knowledge. “No historical process that is understood is inevitable.” Highly recommended.

—Book review article by J.T. Fournier.

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