Saturday, October 2, 2010

Book Review: The Rise and Decline of Nations

It’s not often a book from 1981 advances an argument that seems to implicate the present, but Mancur Olson’s The Rise and Decline of Nations appears to do just that. Olson’s theory is simple enough to state but nuanced enough to read a book about: it’s that nations that spend a long period of time experiencing prosperity under a stable system, unthreatened by invasion or something of the like tend to develop nasty special interests that are more interested in grabbing a bigger slice of the pie than in growing the pie. This means stagnation.

As a gloss of current problems, this seems fair enough. His observation is that cartels, professional associations, unions and the like tend to erect barriers to entry—intellectual property, government tax assistance and the like—and I was reminded of one of Lawrence Lessig’s points about The Social Network (Lessig gets overheated about the message of the film, which he seems to think is anti-internet, which I think is far off base):
Zuckerberg faced no...barrier. For less than $1,000, he could get his idea onto the Internet. He needed no permission from the network provider. He needed no clearance from Harvard to offer it to Harvard students. Neither with Yale, or Princeton, or Stanford. Nor with every other community he invited in. Because the platform of the Internet is open and free, or in the language of the day, because it is a “neutral network,” a billion Mark Zuckerbergs have the opportunity to invent for the platform. And though there are crucial partners who are essential to bring the product to market, the cost of proving viability on this platform has dropped dramatically. You don’t even have to possess Zuckerberg’s technical genius to develop your own idea for the Internet today. Websites across the developing world deliver high quality coding to complement the very best ideas from anywhere. This is a platform that has made democratic innovation possible—and it was on the Facebook platform resting on that Internet platform that another Facebook co-founder, Chris Hughes, organized the most important digital movement for Obama, and that the film’s petty villain, Sean Parker, organized Causes, one of the most important tools to support nonprofit social missions.

It’s not an accident that the parts of the American economy that look best these days are the internet-inflected ones: there are virtually no barriers to entry these days; computing power is awfully cheap and labor is highly flexible. And given that the internet is the most penetrating medium to date, what we are seeing is a media revolution. And given that demand for media is highly flexible in a free country, the information sector is ripe for revolution daily, and it’s never been better to be interested in media of various sorts.

But there are parts of the American economy that are considerably sclerotic, parts that are dragging the economy back: my (relative) expertise is in health care, so let’s consider that. Information is jealously guarded: drug companies keep much of their data secret, medical device companies keep their data secret, and any federally-funded comparative effectiveness research has been resisted at every step. Cartelistic organizations operate with free reign—look at physician’s and dentist’s professional associations, which artificially limit their numbers (forcing many interested and qualified prospective med students to do stuff like go to the Caribbean for their education.). The payment system is the root of the problems, distorting incentives (and of course hospitals and doctors prefer the system that way). The industry is getting bigger and bigger and yet there’s little evidence that it delivers better results, and while it’s getting bigger it’s taking money from other sectors of the economy.

But if these are the symptoms of a rich economy, how are they differentiated from undeveloped economies? And how do rich economies restart their economies? Olson’s theory relies on anemic growth in the U.S. and in Great Britain, but both economies gave the lie to his theory in the decades immediately following Olson’s book. Are we to believe that they suddenly shed most or all of its special interest groups? The eighties and nineties are not exactly decades free of the depredations of special interests in America (and I’d bet similarly for Great Britain.)

And then there’s undeveloped countries and regions. Here’s Olson’s theory of the American South:
…[M]y very tentative hunch now is that many of the organized interests in southern communities realized that any substantial outside investment or in-migration from the North would disrupt or at least endanger the Jim Crow system and the lattice of vested interests intertwined with it...
Can you spot the problem? I’ve bolded it: doesn’t “lattice of vested interests” sound a lot like a special interest in of itself? And if that’s just a synonym for special interest, doesn’t that disrupt Olson’s descriptive claim? The South didn’t really experience much propulsive growth until later in the twentieth century after Jim Crow was legally dismantled, as Olson’s claim would expect; what it wouldn’t expect was the vested interests in the first place, which should emerge in a stable, prosperous system.

His theory is also less than convincing in explaining India or Latin America, which he dwells on but never convincingly explains, which means his descriptive claim lacks a certain something, doesn’t it? If that’s so, the question isn’t how developed economies avoid special interest barnacles, but how all economies avoid special interest barnacles, which is somewhat different question to ask. And if all economies tend to develop special interest groups all of the time, doesn’t that somewhat implicate the preferred policy solution for this type of thing (Olson rarely gets explicit, but his advocacy for freedom of movement and flexibility seems to argue for a lot of deregulation, with a fair amount of antitrust)? You need strong institutions and a strong populace to avoid these kind of things, which means the policy response for a developed economy (which has these types of institutions) is entirely different for the ones for a developing economy (which doesn’t). But if you do have these institutions—the kind of antitrust divisions that can take on an AT&T, for example—then those institutions will probably make nuisances of themselves ere long (the kind of antitrust divisions that spend more time investigating Silicon Valley than Wall Street, which basically describes the antitrust in the Obama administration). Which leads to a “Who watches the watchmen?” type of dilemma, meaning that things are, well, complex, more complex than Olson writes about.

At any rate, Olson’s book is well worth reading.

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