Power and Prosperity, by Mancur Olson

Power and Prosperity, by Mancur Olson

Recommended in The Economist, this is a book studying how economics relates to political systems. How does a society make the leap from unorganized tribe, to autocracy, to democracy? Olson studies how those in power benefit from each transition, demonstrating the economic incentive. Fascinating, easy-to-read book, as he has left all the heavy math to citations to economics papers. Olson, who died as he was finishing this book, wrote The Logic of Collective Action, apparently a seminal book on how interest groups form.

I don't have the book with me while I write this review, and it has been close to two months since I finished reading it, but I will list some of the observations that really struck me while reading this book. One caveat is that, since Olson is an economist, everything is treated as an economics problem (When all you've got is a hammer...). However, given that bias, I think he has some really interesting things to say.

Olson's account of how a society can progress towards democracy, explained solely in terms of individuals' self-interest, is compelling. It may be a bit simplistic, but it provides an overall structure within which many interesting observations can be made. I think that's what I thought was most interesting: Olson postulates only one force driving people, that being self-interest. By examining closely the incentives influencing a member of society, he uses this postulate to explain many behaviors.

For instance, he points out how democracies will inevitably be subverted by narrow interest groups, an effect which is obvious to any American. His explanation goes roughly as such: let's say that the interest group represents about 1% of society. Hence, it will feel 1% of any society-wide economic effects it induces. However, it will reap the benefit of 100% of any group-specific benefits it can arrange. In other words, its lobbying would have to be one hundred times as harmful to society as its perceived benefit before it is uneconomic for them to proceed. Narrower interest groups have even more incentive to harm society.

A similar problem arises in the area of public goods. Take a public good such as a fire department. This is of obvious benefit to everybody in society. In fact, its benefits are so manifest that people would be willing to pay more than their minimum share to create a fire department. And therein lies the problem. A situation has now been created where everybody would benefit from this public good, but not everybody needs to pay for it. A rational society member would thus try to position themselves as one of the ones that benefits, but does not pay for the public good. It's still valuable enough to everybody else that they will maintain it, and the member gets out of paying their share. It becomes a game of manipulation: if not enough people support it, then it doesn't happen and nobody gets the benefits, but as soon as there are enough people, everybody tries to get out of paying for it.

Olson details several other breakdowns of democracy in this vein which are fascinating. I won't go into each one here, since his book does a better job of describing them.

One last example that I thought was interesting was his examination of the Soviet economic system, its origins, and the legacy it left to now-struggling democracies overwhelmed with corruption. He points out that Stalin created an immensely efficient system, which served to create more wealth for the Soviet government (and therefore, Stalin), than any other system in history (Olson died in 1998 before Silicon Valley went really wacky :) ). By arranging incentives such that working a "normal" day gave workers a subsistence wage, but letting them keep a progressively larger percentage of their production as they worked overtime, the system encouraged all workers to produce an insane amount, of which the state kept an enormous percentage. However, without Stalin's guiding hand at the top, it quickly deteriorated into a system of corruption, where each level of the bureaucracy strove to keep as much of that production for themselves as possible. This endemic corruption contributed to the difficulties that the Soviet societies have had in changing to a market economy.

Golly. This is all from memory, without the book on hand, over a month after finishing it. So you can tell that it made quite an impression on me. It makes a lot of sense to me that, at the core, most people's decisions are driven by self-interest. It also points out the idea that to get a desired effect involves creating an incentive system which encourages that effect. This has been a running thought of mine recently (see my unformed thoughts), and I have been trying to figure out how such ideas could be put in place in a company.

Eric Nehrlich's WWW home page / nehrlich@alum.mit.edu