In 1981, the social scientist Mancur Olson published his magisterial The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. Olson had already won acclaim for The Logic of Collective Action, which explained why some groups received an outsize slice of the political pie. In his new book, Olson turned to the question of why nations fail. His thesis: nations lost dynamism when insiders managed to stack the rules against disruptive outsiders.
Stable societies with unchanged boundaries, Olson observed, “tend to accumulate more collusions and organizations for collective action over time.” Instead of accepting rules that encourage overall growth, these collusive organizations — trade groups and labor unions were paradigmatic examples — fight to keep what they have, slowing down “a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions,” thus reducing economic efficiency. Decline follows.
Olson pointed to Japanese stagnation under the Tokugawa shogunate, when, “before Admiral Perry’s gunboats appeared in 1854, the Japanese were virtually closed off from the international economy.” Ruling Japanese society, he writes, “were any number of powerful za, or guilds, and the shogunate or the daimyo often strengthened them by selling them monopoly rights.” The guilds “fixed prices, restricted production and controlled entry in essentially the same way as cartelistic organization elsewhere.”
A second example: Great Britain, “the major nation with the longest immunity from dictatorship, invasion and revolution” and, consequently, Olson explained, suffering “this century a lower rate of growth than other large, developed democracies.” In Olson’s view, the weak performance resulted from limits on change established by a “powerful network of special-interest organizations,” which included labor unions, industrial groups, and aristocratic cliques. By the 1970s, after the conservative government of Edward Heath fell in a losing battle with striking miners, many deemed Britain ungovernable. Olson contrasted the British situation with that of postwar Germany and Japan, where the chaos and destruction of wartime defeat wiped away established industrial and retail groups, leaving the field open to newcomers like Soichiro Honda or the Albrecht family (creators of international supermarket giant Aldi), who could work economic magic.
The word “ungovernable” was also used to describe New York in the 1960s and 1970s, when Mike Quill’s transit union ran roughshod over Mayor John Lindsay’s attempts to control public-sector wage growth. New York was a long-established city with lots of political collusion. The old Tammany Hall could broker deals to keep Gotham going, but Lindsay’s successor, Abe Beame, proved too weak to resist any special interest that wanted more spending or government favors. New York’s spending kept rising even as public services worsened, until bankruptcy loomed and public power wound up in the hands of the unelected Municipal Assistance Corporation. Thankfully, New York reformed itself economically, at least to some extent, under Mayors Rudolph Giuliani and Michael Bloomberg, as Britain did under Prime Minister Margaret Thatcher. Sufficiently strong leaders can buck entrenched insiders.
Edward L. Glaeser, “How to Fix American Capitalism”, City Journal, 2020-12-13.
March 30, 2021
QotD: Static societies and disruptive outsiders
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