How Rich Countries Die

This is a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson.  There isn’t a whole lot about how nations pulled themselves out of their medieval stagnation (see A Farewell to Alms for that), so a better title for this still-in-print book from 1982 would be “How Rich Countries Die.”

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.  If we have grown larger it is because our population has expanded much faster than the European countries.

Chapter 2 summarizes Olson’s groundbreaking work on how interest groups work to reduce a society’s efficiency and GDP.  Some of this work seems obvious in retrospect and indeed Adam Smith noted that businessmen rarely met without conspiring against the public interest.  There are a handful of automobile producers and millions of automobile consumers.  It makes sense for an automobile company, acting individually, to lobby Congress for tariffs.  The company will reap 20-40 percent of the benefits of the tariff.  It doesn’t make sense for an individual consumer, however, to lobby Congress.  It will cost him millions of dollars to lobby against Congress and preventing the tariff will save him only a few thousand dollars on his next car purchase.  The economy suffers because some resources that would have been put to productive use are instead hanging around Washington and because cars are more expensive than they should be.

Labor unions are a drag on the economy, but a labor union that represents all of the workers in a company will be less of a drag than a union that represents only a small percentage of workers in each of hundreds of companies.  The single-company labor union will have some interest in keeping its host company alive by not bleeding it too much.  A union that represents only 10 percent of a company’s workers will recognize that it can drive up compensation to double or triple the market-clearing wage without, by itself, killing the host company.

Citizens won’t bother to inform themselves about public policy, especially the details.  Given the lack of influence of a single vote, it doesn’t make sense for a non-specialist to invest the time.  Olson says this is why we have a progressive income tax, obvious to all voters, and a lot of obscure loopholes that benefit the wealthy and influential.  He notes that the benefits of Medicare and Medicaid to the old and the poor are publicized, not the fact that they are “implemented or administered in ways that resulted in large increases in income for prosperous physicians and other providers of medical care” because “the many smaller choices needed to implement these programs are influenced primarily by a minority of organized providers.”

Chapter 3:It takes a long time for special interest groups to form.  Olson cites the fact that it was in 1851, a century after the start of the Industrial Revolution, that the first modern trade union formed in Britain.  The longer that a society remains stable, the more freighted down with special interest groups it becomes.

The president of the U.S. would like to see greater economic efficiency in the U.S. as a whole.  Individual congressmen, however, will push for pork-barrel legislation that benefits their district even if the cost to the overall economy is hundreds of times greater than the benefit (their constituents will pay 1/435th of the cost and receive 100 percent of the benefit).  This leads to a perennial conflict between the president and Congress.

Unions or cartels of businesses slow an economy’s response to change because they require the assent of many members in order to effect a change.  This makes wages and prices much stickier than in a classical free-market economy.  Unions will negotiate agreements that favor senior workers at the expense of junior members and young people just entering the workforce.

Olson would not be surprised by the current auto industry bailout: “Special-interest groups also slow growth by reducing the rate at which resources are reallocated from one activity or industry to another in response to new technologies or conditions.  One obvious way in which they do so is lobbying for bail-outs of failing firms, thereby delaying or preventing the shift of resources to areas where they would have a greater productivity.”

Special interest groups create complexity,  by getting special rules established for their benefit, and thrive on complexity.  If a tax or tariff code were only three pages long, an average citizen would be able to spot the sweetheart deals.  If a code runs to 1000 pages, however, nobody will ever understand all of it.

Special interest groups may create government regulation.  Prior to the Ford Administration’s mid-1970s push to deregulate railroads, trucking, and airlines, for example, the U.S. government was very effective at ensuring profits and excluding new entrants to the market.

Chapter 4 compares countries in the post-World War II period.  Olson says that 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. [Olson wrote this book just as Margaret Thatcher was coming to power.]  The venerability and power of its professional associations is also striking.  … Britain also has a strong farmer’s organization and a great many trade associations.”

“[Britain's interest groups] are narrow rather than encompassing.  For example, in a single factory there are often many different trade unions, each with a monopoly over a different craft or category of workers…”

Olson notes that slow growth can’t be due to something inherent in the British character, because the country was the world’s fastest growing from 1750 until 1850.

Olson cites a study by Murrell testing the hypothesis that Britain’s slow growth was due to special interest groups that took time to form.  Murrell looked at new versus old industries in Germany and Britain.  The disparity in growth rates was significantly larger in Britain than in Germany.

Britain during the time of the Industrial Revolution had more social mobility and less class consciousness than other European nations.  Napoleon and totalitarianism destroyed the Continent’s nobility, reversing the relationship between Britain and the rest of Europe.

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.”

Olson asks why the U.S., given its stable government and lack of invasions, hasn’t done very poorly.  The first answer is that the U.S. has done poorly, growing slower than France, Germany, and Japan.  The second answer is that the U.S. is not uniform.  Some parts are relatively recently settled (the West) and/or relatively recently recovered from the Civil War (the South).  It turns out that these are precisely the regions of the U.S. that have enjoyed the fastest rates of growth:  “the longer a state has been settled and the longer the time it has had to accumulate special interest groups, the slower its rate of growth.”

Chapter 5 looks at medieval guilds and foreign trade.  Olson finds that the countries with the lowest tariffs had the highest growth rates.  The countries with the fewest restrictions on immigrant labor had the highest rates of growth in per-capita income.

Chapter 6 is titled “Inequality, Discrimination and Development.”  Japan’s history is mined for evidence supporting Olson’s theory.  The country was stable until the mid-1800s.  This led to “tolls, tariffs, regulations, and legal monopolies”; the country was a basketcase economically.  The nation was opened up via gunboat diplomacy, which shattered the feudal system and high tariffs.  The country grew so quickly that it defeated Russia in 1905 and came close to humiliating the U.S. in 1941.

Olson quotes Nehru explaining that Muslims were able to conquer India because of the “growing rigidity and exclusiveness of the Indian social system as represented chiefly by the caste system.”  Olson compares the caste system to the medieval guilds.  The barring of marriage outside of one’s caste is explained by the desire of a caste to retain the fruits of its economic exclusivity.

South Africa is next.  The mine owners wanted to hire mostly Africans because they could be paid less than whites.  The trade unions were controlled by whites and wanted to force the mines to employ at least one white for every 3.5 black workers.  Bitter strikes led ultimately to the rise of white supremacist political parties and legislation limiting employment opportunities for blacks.  Restrictions on labor were naturally followed by restrictions on social interaction and marriage.

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.

Chapter 7 is very timely, being about stagflation and business cycles.  Olson points out that no standard economic theories explain how the U.S. and Britain could have suffered high unemployment rates for the full decade of the 1930s.  Keynesian economics could not explain the simultaneous high unemployment and high inflation of the 1970s.  Olson points out that no economic theory explains why “unemployment is more common among groups of lower skill and productivity, such as teenagers, disadvantaged racial minorities, and so on” (classical economics would have these folks working at the same rate as anyone else, but at lower wages).

Classical economics does not allow for involuntary unemployment.  If the labor supply increases or the economy worsens, wages should fall until everyone is working for a wage that clears the market and that enables employers to make a profit despite lower prices for final products.  “The main group that can have an interest in preventing the mutually profitable transactions between the involuntarily unemployed and employers is the workers with the same or competitive skills.”  In other words, a company would prefer to replace a $60 per hour 50-year-old unskilled white worker with two $15 per hour black teenagers who would get a lot more done, but the old whites will form a union and prevent the company from hiring the young blacks.  If the company does need to hire someone it will be stuck paying $60 per hour and it might as well hire someone with an advanced degree and a lot of skills, which explains why the unskilled are disproportionately unemployed.

How could the Great Depression have lasted so long?  Olson suggests assuming that a lot of prices are fixed by colluding business cartels and/or by government regulation.  The prices are fixed higher than they would be in a free market, which imposes costs on society and guarantees supranormal profits to cartel members.  If there is inflation, the losses to the economy from the cartel are ameliorated.  The fixed price is no longer than much higher than what would have been the market price.  In the event of deflation, however, the fixed price is now ridiculously high, demand for such an overpriced product plummets, and production plummets.  Investment in new factories will fall to zero almost immediately.

Olson divides the economy into a fixprice sector and a flexprice sector.  The fixed price part of the economy includes government workers, union workers, products produced by cartels, agriculture supported by government, and imported raw materials whose price is set on world markets.  The flexprice sector would include simple services such as cleaning houses and babysitting,  In the event of deflation, the output in the fixed price sector will collapse, driving a flood of young and newly unemployed workers into the flexprice sector.  The schoolteacher will continue to earn $100,000 per year and retire at 52.  The laid-off manufacturing worker will find that the market-clearing wage for cleaning houses is one third of what it was before the economic downturn.  This is in fact what happened during the Great Depression.  Folks who kept their jobs sailed through; folks tried to make a living as street vendors could not earn enough to eat.

“The economy that has a dense network of narrow special-interest organizations will be susceptible during periods of deflation … to depression or stagflation.”

Olson looks at the tough times of 1975-76, with the world reeling from an oil price shock, and finds that the U.S. had an unemployment rate of 8 percent compared to Germany’s 4.5 percent and Japan’s 2 percent.  Is that the only evidence that the U.S. is plagued with special interests?  No.  Phillip Cagan looked at U.S. price and output statistics since 1890 and “found that the tendency for prices to fall during recessions has declined over time.  … an increasing proportion of the effect of any reduction in aggregate demand shows up as a reduction in real output.”  [in other words, when times get tough in the modern U.S., we shut down our factories rather than running them with lower wages and lower prices for finished goods; in the event of deflation reducing collectible property taxes, a city will fire half of its schoolteachers rather than cut any teacher's wage]

Conclusion

Olson showed back in 1982 that modern macroeconomic theory was basically worthless in developed stable countries.  Macroeconomics posits a free market in which wages and prices adjust dynamically.  That applies to an ever-smaller sector of the U.S. economy.  We have a rapidly growing governnment that directly or indirectly employs more than one third of our workers, many of whom are unionized.  We have a health care system that consumes 16 percent of GDP and is staffed with doctors who restrict entry into the profession via their licensing cartel.  The financial services sector is about 10 percent of the economy and they now tap into taxpayer money to keep their bonuses flowing in bad times.  The automotive industry kept itself profitable over the years by successfully lobbying for import tariffs.  When the profits turned to losses, they successfully lobbied to have taxpayers pick up those losses.  A university-trained macroeconomist might be able to predict what will happen to babysitters in a depression, but not the price of cereal, the wage of a manufacturing worker, or the fate of those Americans who collect most of our national income (e.g., Wall Street, medical doctors, government workers).

A cashflow approach is much more effective for figuring out where we’re headed.  Money flows out to the folks on Wall Street who bankrupted their firms, to schoolteachers who’ve failed to teach their students, to government workers who feel that simply showing up to work is a heroic achievement, to executives and union workers in America’s oldest and least competitive industries.  If times are tough and money is tight, that means almost nothing is left over for productive investment.  What would have been a short recession will turn into a long depression and decades of higher taxes and slow growth to pay for all of the cash ladled out.  Special interest groups will continue to gain in power.

Practical Value

What practical advice can an individual citizen draw from this book?  On the surface, it would seem to be a useful investment guide.  Short New York and California; go long on Alaska and Hawaii.  Invest in countries that have recently gone through a revolution or are recovering from an invasion (Cuba? Iraq?).  One problem with the latter strategy is that instability itself makes it tough for an investor to make money.  Only in hindsight do we know that World War II was the last war to rage through France and Germany during the 20th Century or that Red China’s conversion to running dog capitalism would last for decades.

How about as a guide for voting?  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).  If we ever had the opportunity to vote for something that would restrict the influence of lobbyists and special interests, we should do it, but Olson would predict that such an opportunity will never arise.

One thing an individual can do is choose where to live and in which industry to work.  The logical conclusion from reading this book is to prefer a new state to an old state, a newly stable state to a long-stable state, and a new industry to an old one.  The worst thing that a young person could do, for example, would be to move to Michigan to work for G.M.’s automobile division.  The second best thing would be to move to Alaska or an up-and-coming foreign country and work to extract some new kind of energy.  The very smartest choice would be to move to Washington, D.C. and work as a lobbyist for a decaying industry that is bleeding the U.S. economy and taxpayer…

More: Read the book

31 Comments

  1. Tim

    March 16, 2009 @ 5:35 pm

    1

    That is the most depressing thing I’ve read in a while.

    I will observe that my home state, Texas, is doing relatively well economically and has been stable for a while. I don’t know how to date that exactly (since Reconstruction?) but “as long as California” seems reasonable.

    Perhaps Olsen would attribute this to some of the features of our state government, such as the fact that the legislature meets only every other year and that our constitution (current version adopted 1876) requires amendments for many things that can be handled by simple laws in other states.

  2. philg

    March 16, 2009 @ 5:46 pm

    2

    Tim: It is rather a depressing book, especially when you consider how prescient Olson was about how our government would handle this current crisis (the guy died in the 1980s but he apparently knew that we’d be handing taxpayer dollars to GM and Chrysler, bailing out friends of the Treasury secretary, shoveling money toward the least efficient states and their public employee unions, etc.).

    There is a glimmer of hope that the U.S. might escape the special interest death spiral charted out by Olson. We had some boom years in the 1980s and 1990s that seem to have come from lighter government regulation, a lowering of taxes, and the benefits of new technology, especially computer software and communications. I wonder if Olson were alive if he would say that these were temporary because the special interests hadn’t yet figured out how to capture for themselves 100 percent of the benefits of, say, the Internet.

  3. b

    March 16, 2009 @ 6:31 pm

    3

    There is another hypothesis I picked up from John Robb’s blog that seems to me to be related: The idea is that states are basically problem solving machines, and the longer they live the more complicated their apparatus has become, making adapting to and solving new problems ever more difficult. Here we are in the US, with in one of the oldest states around, finding it very difficult to solve our currently pressing problems…

  4. JimmyZ

    March 16, 2009 @ 8:33 pm

    4

    I don’t see how the U.S. will escape the special interest death trap. Those groups will continue to whine louder and demand more taxpayer money as free market opportunities wither away. I might agree with Olson that special interests will find ways to exploit the three benefits you mention: regulations are almost certain to tighten, it’s hard to see a future of lower taxes will larger public debt loads, and the future of technology is industries which require large public and capital support (mainly, energy). Computer software was lucky that it was cheap and open, but it was probably an anomaly.

  5. Gordon

    March 16, 2009 @ 8:53 pm

    5

    Interesting – as a Canadian I wonder if part of the Canadian growth has been continued tension between French and English Canada. Any mention in the book of Canada specifically or other nations in which there is a strong independence faction?

  6. Fazal Majid

    March 16, 2009 @ 9:29 pm

    6

    Another thing to factor is that the US gets a 2-3% growth boost from the fact the dollar is the world’s reference currency:
    http://www.j-bradford-delong.net/movable_type/2005-3_archives/001182.html

    If that were not the case, economic performance would be even more dismal.

  7. SnippyHolloW

    March 16, 2009 @ 9:52 pm

    7

    It’s sort of true in all the ways but I don’t think that only schoolteachers failed at teaching their students. I think it’s the problem of all the society and mainstream medias more than the internet and violent video games. Responsibility fall to parents first. Anyway, in France they’re paid ~$30,000 / year (which is not enough to get enough good schoolteachers) and retire at 60 that will soon be 65.

  8. Peter

    March 16, 2009 @ 10:39 pm

    8

    This is one of the best books I read back in college in the 1980s. It is also the only economics book that I actually enjoyed. Since then I have been telling myself every few years that I need to replace my lost copy and reread it. Well, now it’s on order from Amazon. I’d also like to recommend Joseph Tainter’s The Collapse of Complex Societies.

    http://www.amazon.com/Collapse-Complex-Societies-Studies-Archaeology/dp/052138673X/ref=sr_1_1?ie=UTF8&s=books&qid=1237257084&sr=1-1

    Fans of John Robb should also check out http://www.jeffvail.net.

  9. philg

    March 16, 2009 @ 11:02 pm

    9

    Gordon: I’m sorry to say that Canada is not in the book’s index, nor can I remember seeing Canada mentioned. I would think that the French/English split would reduce economic growth. There are costs associated with bilingualism. Quebec has behaved like a special interest group, demanding subsidies and preserving a lot of inefficient industries. What explains Canada’s per-capita wealth and growth? A vast open resource-rich land and a small population. Olson makes the point, overlooked in my book report above, that a country with an expanding frontier behaves a lot like a new country; special interests haven’t had time to form in many corners of the country.

  10. Richard Freytag

    March 16, 2009 @ 11:10 pm

    10

    Great entry if depressing.

    I would avoid Hawaii and Alaska as both have significant costs for transport of raw materials. New Zealand is in a relatively permanent recession compared to the rest of the world for this same reason.

  11. Greenstone

    March 17, 2009 @ 1:06 am

    11

    You wrote: “The countries with the fewest restrictions on immigrant labor had the highest rates of growth in per-capita income.”
    This could explain high recent growth in countries like Canada and Australia, with high immigration rates. It could explain why non-immigrant-based countries, like Japan, stagnated as soon as everybody was out of poverty. Will the same happen in China?
    Interestingly, the new US/Mexico border wall will reduce immigration to the US. People in democracies always vote, eventually, for whatever makes their house values go up, so perhaps the US will soon expand its green card system to whoever has the money, i.e. Chinese? Will a massive increase in Chinese immigration to California be another fruit of their lending 1 trillion dollars to the US over the past 30 years? Many Chinese still want to immigrate to the US for what seem to be the same reasons many Europeans have over the past 500 years, i.e., from a traditional restrictive society to a recent freer one.

  12. haig

    March 17, 2009 @ 2:34 am

    12

    I wonder if, using the same magical powers of the internet that helped get Obama elected, a self-organizing special interest group(s) could be formed to lobby on behalf of us, the marginalized majority. An aggregation of small donation by 10s of millions might be able to turn the tables.

  13. Different Peter

    March 17, 2009 @ 8:05 am

    13

    Interesting. I do believe this is a large part of the growth equation. I’ve been trying to do a technology startup, and the corrupt US patent system is making it increasingly impossible. Entrenched companies have, in aggregate, millions of patents, covering largely obvious ideas, and it is impossible to invent new things without stepping on many of them.

    I don’t think the situation is hopeless. We need to focus on political systems more immune to corruption. We’ve been stuck with the same form of democracy for over 200 years now, and special interests are learning to corrupt it quite effectively. We should also focus on simplifying and slowing down government. The problem tends to be not so much with size of government, as with complex, corrupt parts of it.

    I think, however, that this is only part of the equation. I liked “Wealth and Poverty of Nations,” which tied economic growth to culture. In countries with high economic growth, individuals focused on wealth creation. In countries with low economic growth, individuals focused on wealth redistribution. In country with substantial natural resources (e.g. oil), it makes much more economic sense to try to redistribute some of the oil wealth than it does to create new wealth. In rich countries on a decline, it makes much more sense to try to extract some of the old wealth (e.g. work in finance) than it is to create new wealth. When productive people shift into this mode, growth spirals downwards.

  14. Arjen

    March 17, 2009 @ 8:21 am

    14

    Richard: I cannot believe New Zealand is in a ‘relatively permanent recession’. I just checked some stats, and agree with the Wikipedia entry for New Zealand, about the economy:
    “New Zealand has a modern, prosperous, developed economy with an estimated nominal Gross domestic product (GDP) of US$128.1 billion (2008). The country has a relatively high standard of living with an estimated GDP per capita of US$30,234 in 2008, comparable to Southern Europe, e.g. Spain US$33,385, but lower than the United States at US$46,820.”

  15. EZ

    March 17, 2009 @ 9:09 am

    15

    I think the central premise that the growth of powerful special interests is corrosive to progress rings very true. But I would take it further than the author (with his 1980 perspective) does — and it gets even more depressing.

    Labor unions and large industries are far from the only special interests out there. And at least they represent the interests of a fairly large swathe of the population, which places certain limits on the destructiveness of the policies they can get away with advocating. But when really narrow slices of society gain entrenched power, there are fewer such limits.

    The policies that Phil called “lower taxes and light regulation” allowed highly concentrated wealth to develop in the 1980s and 90s. (It’s debatable whether they also caused the coincident booms; the post-Cold War peace dividend and the IT revolution were probably more important than tax rates.) The wealth boom in turn caused the finance industry to grow into perhaps the most powerful, self-serving special interest in history. This led to even lower taxes on high incomes and even lighter regulations on the financial sector. Abuses of the less-stringent rules then led directly to the current bust, which has wiped out all the stock wealth generated in the last two booms. The inflation-adjusted Dow is now about where it was 20 years ago, and below where it was 40 years ago. Now *that’s* depressing.

  16. Friedrich

    March 17, 2009 @ 9:10 am

    16

    Here’s another book about that topic:
    http://www.heritage.org/Research/Budget/bg2249.cfm

    and this one is also interesting.
    Collapse: How Societies Choose to Fail or Succeed

  17. Aaron Krowne

    March 17, 2009 @ 10:26 am

    17

    This is a very fascinating study.

    One might also conclude from it that an inflationary money system is a very bad thing to implement, as it allows special interest groups to indirectly claim the wealth of the rest of society (redistribute it) in a manner nearly impossible for most to recognize.

    In fact, I had observed a while ago that the unemployment rate (when honestly assessed) seems to eerily mirror the rate of inflation in a particular country. (Note for example that the unemployment rate is very low in the Swiss Confederation; was nonexistant in Hong Kong before the Dollar peg, was under 3% in the US before the Great Depression…)

    What I had been missing was the delivery channel between monetary expansion and unemployment. I ascribed it to the vague force of “malinvestment”. I still think that is correct; however, Olson fills in much more detail — perhaps the greatest malinvestment enabled by expansionist monetary policy is the opportunity gained by interest groups to insulate themselves from competitive market forces.

    It is enough to make one wonder how powerful all of these interest groups would really be without inflationary (and therefore , continually redistributive) money. Imagine a union attempting to extract above-market wages from a dying GM, without the US government having the ability to “print” tens of billions to bail out GM.

    At any rate, I find the old Keynes quote relevant:

    “Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

    Except Keynes makes one important mistake: it’s not *economic* forces which are engaged into destruction, it is *political* forces. Inflation *politicizes* money, or *de-economizes* it, which is exactly the kind of process Olson is explicitly talking about.

    Failure to recognize this leads to a whole category of mistakes which dominates economics now: the assumption that greater economizing can come through even more politicization.

  18. Brian

    March 17, 2009 @ 11:04 am

    18

    It would appear from your Practical Value section that a revolution may be the fix we’re needing (I’m choosing that over being invaded, even though I’ve never experienced either). From what I’ve read about Thomas Jefferson, he may suggest that too (mostly to keep Government in check than to fix a failing economy, but it seems the two might be related).

  19. Patri Friedman

    March 17, 2009 @ 4:54 pm

    19

    Olson’s ideas support my own vision of Seasteading: solving political problems by engineering city-states on the ocean. Because large buildings can be moved and rearranged, these cities will be temporary, voluntary arrangements. If the government is doing a bad job, a skyscraper can threaten to leave for a better city, and either reform or replace the government.

    This will lead to occasional bloodless revolutions, where the government of a city-state is completely replaced because the residents want to try something new. This will also clear out all the special interests that have accreted, thus leading to more growth and prosperity. On land, where the geographic arrangements are fixed and buildings are trapped in one place, it is much harder to leave, thus you can’t threaten to leave, thus you are stuck with the same decaying government decade after decade.

    The bad news is that we’ve built our civilization on the wrong fundament for politics to work well. The good news is that 70% of the earth’s surface has the necessary characteristics.

  20. Murali

    March 17, 2009 @ 10:47 pm

    20

    Lawrence Lessig launched an effort, currently underway, to reduce the influence of special interests. The idea is to have regular folks explicitly withhold donation money for any congressman who accepts it from lobbying groups.

    http://salsa.wiredforchange.com/dia/track.jsp?v=2&c=oFoR29%2FTRtgdnZZ5mhxufruhQj66fWTd

    So far politicians have lost more than a million by accepting money from special interest groups. Politicians like Barbara Boxer have already committed to declining money from special interests. 1 million is still pocket change, but if this effort turns viral it could work.

  21. philg

    March 17, 2009 @ 10:52 pm

    21

    Murali: Lessig and Co. surely have a good idea, but Olson’s point was that a Congressman and his or her constituents are THEMSELVES a special interest. The Congressman will try to get the federal government to spend $435 million in his or her district even if the results of the spending are worth only $1.01 million to the overall economy. The taxpayers in the district will fund only 1/435th of the cost of the project and therefore don’t mind if up to 434/435ths of the money is wasted.

  22. Scott Mitchell

    March 18, 2009 @ 1:19 am

    22

    One question to ask yourself, though, is, “Is it better to be in a slow growing, stable state or a fast growing, less stable state?” Given the fact that over the past several years hundreds of people were dying per month in Iraq, I’d much rather choose a slow-growing, stable state like the US, Canada, or Europe, over living in Iraq, even though I may have a great chance of advancing my social standing.

    Likewise, China’s growth has been explosive, and that’s great if you can profit from it. However, I’d wager that there are many Chinese factory workers who would trade places with a soon to be laid off automotive employee in Detroit.

  23. bgc

    March 18, 2009 @ 6:37 am

    23

    Would I be correct in assuming that one implication of Olson’s analysis (as described above) would be that _if_ current politicians were _really_ concerned about the present recession, than they would be focusing on micro-economics (incentives) rather than obsessing about macro/ stimulus/ interest rates etc; and that the complete ignoring of micro reform suggests that there is really _no_ attempt to treat the recession and generate growth but in fact current economic policy is _entirely_ about redistribution towards pressure groups who support the incumbent governments (including the older generation) – and that therefore the recession will _certainly_ be made deeper and longer than it would have been spontaneously?

    One thing which apparently Olson failed to predict was the UK economic miracle of the 1980s, whereby several decades of relative decline was reversed and the UK moved up from being a mid-teens ranking economy to fourth in the world (for a while).

    So the declining trend of an old economy was, as a matter of fact, reversible. Maybe constructive change is possible – but it requires a political genius like Thatcher to do it.

    And the effect was temporary and the UK is now back in its bad old habits (as described by Olson) ust as in the 1970s, with no prospect of positive radical reform visible even on the horizon.

    See: ‘Seeking a premier economy: the economic effects of British economic reforms 1980-2000′, by David Card et al.

    http://books.google.co.uk/books?id=XUGqOHKOWP4C&dq=card+freeman+economy+britain&printsec=frontcover&source=bl&ots=URUcq19p3q&sig=bp-vJEQTBYBiYpG65OtbwPqS7kI&hl=en&ei=uczAScDOLZG3tweYjuDSCg&sa=X&oi=book_result&resnum=6&ct=result#PPA3,M1

  24. Vinny

    March 18, 2009 @ 9:08 am

    24

    What we effectively need is profiling, review, and style rules for laws. Profiling will cause hotspots will arise, helping to reduce the apparent complexity of our laws. This will uncover surprising details that seem counterproductive, as well as vast quantities of unused complexity. We should then revise laws to reduce their code size while maintaining their intent – what can be said in 10 words should not be allowed to be said in 1000. Lastly we need rules for the structure of new laws to prevent bugs from creeping back in.

    Luckily we have invented complex machines to help us. They make this immense task manageable, but more importantly their existence has created a population of people who manage intent in complex systems every day. They are an economically and politically diverse group with an inherent distrust of corruption and a bias for science and transparency.

    The real difficulties would be finding a basis for profiling (likely based on opinions of lawyers and judges and possibly some machine analysis), and creating a capable political movement interested in changing our government.

  25. Scott Mitchell

    March 18, 2009 @ 5:49 pm

    25

    I wager that special interest groups are able to become more effective as the ratio between constituents and legislators grows larger. If there were, say, 10 constituents for every 1 Congressman then special interest groups would have no hope for two reasons: first, there would be way too many legislators to lobby, and second, legislators would know that they had to keep those 10 constituents happy or they would not get re-elected.

    The problem with the US government, and in many states where you cite slowed economic growth, is that there are too few legislators representing too many constituents. What does my Senator in Washington care what I think when I only represent 1 out of 15,000,000 constituents?

  26. Alex Bowles

    March 19, 2009 @ 3:49 pm

    26

    @Murali & philg

    You both make excellent points about the central issue, which is the use of congress as the basic mechanism for increasing the power of any cartel that wants to take for itself instead of providing for others.

    And philg, you’re especially right to note that ending privately financed elections (an obvious recipe for corruption) is not the be-all-end-all solution. Rather, it is one of three essential steps that must be taken.

    The others are an and to earmark privileges, and an end to gerrymandering. Gerrymandering, of course, allows politicians to select the voters who can elect them, insulating themselves for any meaningful opposition by competing parties. And earmarks, though inconsequential in terms of the overall budget, are a great way to beat back challengers for one’s seat.

    However, publicly financed elections, for people who were subject to competitive forces, and unable to choose of buy off voters could have a transformative effect on Congress.

    When the Congressional body becomes a source of fear for abusive special interests, as opposed to their most valuable tool, then we may have achieved a state of perpetual revolution that Jefferson seemed to regard as essential to the preservation of liberty.

  27. Mike Woods

    March 24, 2009 @ 8:44 pm

    27

    @philg – great entry, even if a bit depressing. Ironically, the ‘glimmers of hope’ seem far out in the distance as Obama appears to favor significant government expansion and has the skills and popularity to achieve his agenda. After the body blows of the Bailouts and Stimulus, will we survive further government control of healthcare and industry?

    @22, Scott – Your question “Is it better to be in a slow growing, stable state or a fast growing, less stable state?” is incredibly apropos. There is a significant value judgement involved. Through our collective actions today, we are making that choice.

    I strongly believe that America has prospered for an out-sized amount of time precisely because we as a culture opted for Liberty over Security. The “cowboy” was internationally famous as the icon of this mindset: tough, self reliant, free. Something the whole world was fascinated by.

    Today, our cultural perspective is almost 180degrees opposite – with a “culture of fear” which pushes a nanny state, continually trading liberty for safety. The downside to the slow stable state is the inability for the Individual to choose or affect his destiny. Great if you are born a Gates or a Bush or a Clinton…not so great if you are born to a housekeeper.

    If the US continues to stagnate, unable to escape the trap…better keep your Karma up!

  28. Craig Meyer

    March 27, 2009 @ 4:37 pm

    28

    It always surprises me–because I do this to–when people talk about the USA being a new country, a new society, etc.

    In ways that’s true, but we also have the OLDEST government in the whole world (with surely a few “minor” exceptions like Iceland or Switzerland or someplace.)

    Huh.

  29. Fibonacci

    April 26, 2009 @ 7:29 am

    29

    Why don’t free markets self-correct like my economics book told me?
    See http://rudd-o.com/en/archives/why-dont-free-markets-self-correct-like-my-economics-book-told-me

  30. zapiens

    May 30, 2009 @ 1:35 pm

    30

    The Coming of the Fourth American Republic

    “The Special Interest State that has shaped American life for 70 years is dying. What comes next is uncertain, but there are grounds for optimism…”

    http://www.american.com/archive/2009/april-2009/the-coming-of-the-fourth-american-republic

    A little on the optimistic side, perhaps?

  31. Andrew S

    May 31, 2009 @ 4:00 pm

    31

    Alaska is an exception and does not serve as a good example. Despite being relatively new, the state is full of government pork and special interest influence because of the oil dollars there.

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