Mancur Olson's analysis of how special interests can weaken democracy helped to shape the policies of Tory governments in the 1980s. But Olson did not believe that all government was bad, says Iain McLean. He favoured a limited government able to encompass wide, not narrow interestsby Iain McLean / May 20, 1998 / Leave a comment
Published in May 1998 issue of Prospect Magazine
Mancur Olson, who died of a heart attack on 19th February outside his office at the University of Maryland, was one of the most distinguished economists of our time. His dissertation, The Logic of Collective Action, revolutionised the way we think about political lobbies as well as most other areas of social interaction. A later book made controversial claims about the relationship between lobbies and growth. His third blockbuster, not yet published, analyses why some societies do well and others badly as they emerge from autocracy. The Economist obituary said in print what academics had been whispering for years: why did he never receive the Nobel prize for economics? Was it because economists, despite their notorious imperialism, do not really approve of colleagues who speculate so widely about politics and society? The politics of the 1980s led careless readers to label Olson a slash-and-burn Thatcherite. In fact, his views differed fundamentally from those of the Virginia “public choice” school with which they were conflated. Virginians believe that all government is bad (except, perhaps, the Pentagon, which is in Virginia). Marylanders, such as Olson, think that some governments do some things well. Olson was born in Grand Forks, North Dakota and retained his Scandinavian accent and delightfully plain-indeed comically humble-manners throughout his life; he was surely the only world-famous economist who prefaced his curriculum vitae with his social security number. It was his Harvard doctorate, The Logic of Collective Action (LCA), published in 1965 which made his name. Before Olson, political scientists had assumed that the interplay of pressure groups was the essence of democracy. Some got their way, others didn’t. This was because the first had more members than the second, or members who cared more deeply or both. This “pluralism” both described and celebrated lobbying in a democracy. The standard textbook on pluralism was AF Bentley’s The Process of Government (1908). Bentley argued that American cities often “prescribe the width of wagon-wheel tires in proportion to the load carried, so as to save the pavements from the injury caused by narrow tires and heavy loads.” He predicted that the hauliers “will strenuously resist the adoption of the regulation. Nevertheless the movement, or some substitute for it, is bound to win after a greater or less time… because the organisation that leads it genuinely represents the mass of indifferent taxpayers.” Rarely has a piece of conventional wisdom been so instantly annihilated as when LCA was published. Lobbies, it turns out, are not so simple. According to Olson, Bentley failed to appreciate that lobbies, like governments, produce public goods. A public good-in this context-is a good which, if it is made available to anybody, is necessarily made available to all. Clean air is a public good; so is a tax policy, or a regulation about tyre widths. If anyone in a group enjoys it, everyone does. But a public good does not have to be good for everybody. Clean air is good for everybody; a regulation enforcing wide tyres is good for everybody except hauliers; a tax policy that redistributes income from the rich to the poor is good for the poor and bad for the rich. There are more poor people than rich people in any democracy. So why do they not always club together and enforce tax policies that redistribute riches to themselves? This possibility has haunted anti-democrats since Aristotle. But Olson showed that there was no reason to suppose that any individual poor person had an incentive to lobby or campaign (or even bother to vote) for such a tax policy. Some lobbies (the poor or consumers) are dispersed. Others (the rich or producers) are concentrated. All consumers have a common interest in keeping down the price of cars (or food or textiles). Domestic producers have a common interest in keeping them up. There are more consumers than producers, so governments never artificially raise car prices, right? Wrong. They do, all over the developed world. As an individual consumer, it is rational for you to contribute time or money to the Consumers’ Association if, and only if, your contribution makes the difference between the consumer lobby’s success and failure. It is highly unlikely that it does. Therefore, in the term popularised by Olson, you “free ride.” About 1m British consumers are members of the Consumers’ Association-45m are not. Most of the 1m join for what Olson termed the “selective incentive,” namely Which? magazine. It is essential to the success of the Consumers’ Association that Which? is available only to its members. However, it is also available through public libraries. Thus, you can still free ride. When buying a washing machine, more people look up Which? in the library than subscribe to it. By contrast, as an individual car maker it makes a great deal of sense for me, the managing director of Cars UK, to join the Society of Motor Traders and Manufacturers and lobby for protection and tax breaks. These privileges are worth hundreds of millions of pounds to me, many times more than the comparatively trivial cost of lobbying. So I do not free ride, and that is why cars cost up to 25 per cent more in Britain than on the continent, even within the supposed free-trade area of the EU. If you, and millions of people like you, had all joined the Consumers’ Association, its 40 years of lobbying against this boondoggle might have been more successful. On the other hand, if you alone had joined, it would have made no perceptible difference. Typically, the boondoggles of producer groups are not tariffs. That would be too obvious. They are non-tariff barriers with soothing names such as the Multi-Fibre Agreement or the Common Agricultural Policy. This might seem trite now. But that is only because Mancur (with a soft “c”) Olson made it so. His analysis of lobbying subverts left and right. It subverts the right by showing that capitalists will have systematically more effective lobbies than proletarians, and therefore Marx was correct about the balance of power between capital and labour. It subverts the left by arguing that the crucial distinction is between consumers and producers, rather than between capitalists and proletarians. Furthermore, the fact that a class (such as the proletariat) has a common interest does not make it rational for an individual proletarian to act in his or her class’s common interest. So Marx’s politics collapses. Colin Crouch’s book Trade Unions: The Logic of Collective Action (1982) uses Olson’s arguments to explain why it is rational for unions to try to enforce membership and rational for their potential members to try to free ride. Olson’s second big book, The Rise and Decline of Nations (RDN), published in 1982, argued that political stability was bad for growth. Stable democracies suffered from “institutional sclerosis” as their lobbies enforced inefficient redistribution. The German and Japanese economic miracles occurred, not because these countries built afresh on ruined cities, but because they built afresh on ruined institutions and designed more inclusive, efficient lobbying systems. It was RDN which led some readers to the false conclusion that Olson was an anti-government Virginian. The book claimed to explain the British class structure, the hugely unequal distribution of power and income in many developing countries and much else besides, in terms of institutional sclerosis. Slow-growing countries included Britain, India, the US Frostbelt, South Africa under apartheid, Australia and New Zealand. Fast-growing countries included not only postwar Japan and Germany but also the US Sunbelt and the newly recognised Asian tigers. The cause of sclerosis was not always the same: in Britain, Australasia and the Frostbelt it came from entrenched protectionist lobbies; in India from the caste system; and in South Africa from low labour mobility, which Olson ascribed chiefly to white working class fears of job competition. According to RDN, it was trade associations and professional cartels more than trade unions which were responsible for Britain’s slow growth. The former had fewer, and richer, members and suffered less from free riding than did the unions. It was, however, an anti-union reading of the book that drove the labour-market policies of the Tory governments. Margaret Thatcher was much keener to smash the miners than the barristers or the car manufacturers. (The car manufacturers were smashed, but by their own inefficiency, not by government policy). Rereading RDN, I am struck by how much has changed-and how quickly. Australia, New Zealand, South Africa and even Britain have changed beyond recognition since it was published. In the late 1980s, the New Zealand Labour government of David Lange and Roger Douglas mounted what was perhaps the most savage assault on lobbies in democratic history. The only parallel is the repeal of the Corn Laws by the Tory administration of Sir Robert Peel in 1846. Peel and Douglas are unique in democratic history for the ferocity of their attacks on their own side-landowners in the 1840s, trade unionists in the 1980s. Despite the pain (and the destruction of the New Zealand Labour party), the Australasian countries are now free-trading and internationalist, South Africa is no longer a white workers’ cartel, and in Britain some but not all special interest groups have been humbled. Do these dramatic changes undermine the argument of RDN? To some extent they do. The book was too deterministic and pessimistic about the stranglehold of lobbies. But if Olson failed as a prophet it may be partly because he succeeded so well in impressing his ideas upon policy makers. olson’s last ten years were devoted to trying to show that the Virginia school was wrong: the right amount of government can do as much good as the wrong sort can do harm. He set up a research institute at Maryland called the Centre for Institutional Reform and the Informal Sector (IRIS). The motive behind IRIS, and Olson’s third big book, the still unpublished Capitalism, Socialism, and Dictatorship (CSD), was what he saw as a huge gap in conventional neoclassical economics. Conventional theory fails to explain why some emergent market societies become rich and others do not-according to conventional views, in a world of mobile capital and labour, they all should have become rich(ish). In the US, capital is relatively plentiful and labour is relatively scarce. In Haiti the reverse is true. Therefore labour should flock from Haiti to the US and capital should flock from the US to Haiti. The first movement does happen when it can. Haitians, with their stock of human capital educated in Haiti, are the same people when they arrive in New Orleans as when they left Port-au-Prince, yet their income goes up ten times. So whatever is wrong in Haiti, it is not the schools. The flow in the other direction does not happen at all. The returns to scarce capital in Haiti should exceed the returns to abundant capital in the US, but American capital does not flow to Haiti in search of a higher return. Both of these facts suggest something that seems obvious to all but extreme individualists: there is something about the institutions of the US that promotes wealth, and something about the institutions of Haiti that promotes poverty. Markets are ubiquitous in the informal economies of the third world. What do the unsuccessful ones lack? According to CSD, they lack secure property rights which enable people to plan for the future. Secure markets require government intervention-but not too much. An efficient government protects property rights and commits itself not to expropriate earnings. Limited governments can make those commitments credible. Absolutist governments cannot. One of Olson’s late papers, which will be published in CSD, expands this point. Olson shows government evolving from nomadic anarchism to roving bandits and then from stationary bandits to limited government. Nomadic societies can function without leaders or coercion: it is not worth their while to take captives because the cost of guarding the captives exceeds the extra revenue the captives could bring in. Agriculture changes this. Any settled population which has planted crops or raised animals is vulnerable to bandits. The worst sort are roving bandits, who plunder and move on. A stationary bandit, who plunders and stays put, sounds worse but is not as bad. This is because he has, in Olson’s key phrase, an “encompassing” interest in the prosperity of the society he plunders. If a stationary bandit takes the whole of this year’s produce, there will be less for him next year than if he allows the peasants to build up some wealth. His future stream of tax revenue (or theft income, if you prefer) is maximised not by expropriation but by leaving something behind. Olson goes on to argue that a democratic regime has a “super-encompassing interest” that is broader than the stationary bandit’s, and therefore it will take a lower proportion of output in tax and will distribute the proceeds among more people. What, then, is good about the government of the US and bad about that of Haiti? The government of the US is limited by federalism and by checks and balances. James Madison and his fellow federalists wrote these limits into the US constitution for the very reasons that Olson extols. For Madison, the virtue of a large federal republic was that no one special interest could dominate it. The limited government of the US protects property rights, and therefore gives controllers of the factors of production the assurance that they will not be expropriated. But this same limited government, hedged about by checks and balances, is one of the causes of the sclerosis that Olson deplored in RDN. With power dispersed, society is vulnerable to special interests. If those special interests are under attack from the legislature they can seek protection from the judiciary, as when certain restrictions on campaign spending were ruled unconstitutional in the Supreme Court case Buckley v. Valeo in 1976. Special interests can thus continue to prey on what Olson calls the “rational ignorance” of the citizen. But strong government is no solution either. The dramatic fall of the Asian tigers in 1997-98 showed that neither the South Korean, nor the Indonesian version of strong government was as robust as imagined. One reason is that strong government is often crony government. But how do we prevent limited government from becoming special-interest government? Olson had a touching faith in education. He argued that, if given the chance, true economics would drive out false economics. People would learn that tariffs, protection, cartels and special interests destroy wealth. I doubt it. It cannot be denied that there is a serious tension between RDN and CSD. The limited government Olson recommends in CSD may lead to the sclerosis he deplored in RDN. For the last two years a series of conferences have discussed the manuscript of CSD, often in Olson’s presence, and this criticism was made to him several times. He may well have addressed it in the final version of his book-we will have to wait and see. But a reconciliation might look something like this. You cannot say that one form of government is right for a democratic capitalist regime. Different governments are optimal at different stages of development. The best government is one that ensures that encompassing interests prevail over narrow interests. But you cannot directly infer a constitution from that Olsonian prescription. In some times and places, encompassing interests are promoted by government. In the 1960s, Germany and Sweden were both believed to have successful welfare states because government incorporated the social partners-capital and labour-and a series of encompassing bargains were struck. Strong federal trade unions restrained wage claims; the government restrained the money supply; capitalists restrained their profit-taking; the government promoted the welfare state on behalf of both capital and labour. When RDN was published, this model seemed much more successful than class and conflict-ridden Britain. Yet it was Anglo-Saxon economies, with centralised Westminster institutions, that succeeded in the 1980s and 1990s. They have not succeeded as dramatically as the Thatcher-Blair school claims, but they have defeated the sclerosis that Olson described in RDN. Who is promoting “encompassing” interests in Britain? For a brief time, the Labour party has done so. It brutally abandoned its traditional special interests between 1987 and 1997. It came to power on a wave of tactical voting and disgust against the Tories. It is still taking an encompassing view of some issues, such as welfare reform. But it seems to have slipped back into special-interest government in other areas, notably in its wide-eyed approach to business. Where once the barons were union leaders, now they seem to be Bernie Ecclestone and Rupert Murdoch. Political parties, even with state funding, are too frail to be vehicles for encompassing interests. Perhaps the best hope is regulators who actually regulate in the public interest. Olson does not talk much about regulators. Virginians take regulatory capture for granted; they assume that every regulator sooner or later ends up regulating an industry for its convenience, not for the public interest. But the government of Britain has almost accidentally acquired a set of regulators whose jobs are wide enough to serve the public interest. The regulators of gas, electricity and telecoms have held down prices. The rail regulator has threatened both operators and Railtrack with penalties if they do not improve punctuality or safety. True, the lottery regulator was captured; but he was then sacked. Perhaps regulators are the encompassers of the future: strong enough to enforce the public interest, but not so strong that they can rig the government in favour of their cronies. Olson’s work raises the question: what, after all, is a strong government? Sometimes, the weak look strong (as in federal Germany in the 1960s). Sometimes, the strong look weak (as in Malaysia today). This is one of the most exciting topics in political economy today. Olson did not have the last word. But he has helped to set the terms of the debate.