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Mr. Olson’s Planet
IN THE MID-1950s, a young American traveling in Europe was struck by an economic oddity. The United Kingdom had won two great wars and enjoyed all the splendors of empire, yet it suffered from economic anemia—so much so that people came to speak of the “British disease.” Germany had been defeated in two wars and then was broken in half, yet West Germany was booming—so much so that people came to speak of the German “economic miracle.” Why would two European economies, of roughly comparable size, with well-educated populaces and with similar technological bases, perform so differently?
That question led the young man to ponder a broader one. Why do stable societies seem to wind down over time? Great Britain was only the most recent example of a society that emerged rapidly, flowered brilliantly, and then sank into torpor and decay. Germany, on the other hand, had suffered cataclysmic destabilization, yet was full of vigor. Most explanations resorted to specific events like wars, spun vague theories about culture, or resorted to clichés about countries’ becoming “tired” or “lazy” or “old,” as though countries were people. The young American, still fresh out of university and on his way to a career in economics, was unsatisfied. There ought to be a more systematic answer, a regular mechanism to explain a regular pattern. He turned the problem over in his mind for decades. In 1982, he proposed a striking solution.

The Logician of Collective Action

Mancur Olson was born in 1932, sixty miles north of Fargo, North Dakota, on a farm by the Red River, which forms the border with Minnesota. His forebears migrated from Norway, but the peculiar first name was not Norwegian. It was passed down from his father and probably came from the Arabic name Mansur, meaning “victorious”—thus it was pronounced “Mansir,” not “Mankur.” Though he held a Harvard Ph.D. and a fancy title at the University of Maryland, even in his later years he could still repair a tractor, and he retained a midwestern matter-of-factness that made his writing, like his speech, vigorous and to the point. Yet an intellectual fire burned in him. He had a jumpy, delighted, almost pixieish excitability when he talked about ideas. He would ask visitors to let him pace while he spoke, and then he prowled the way some people gesticulate, as though the movement helped him form words. The effect was pleasantly gnomish.
Olson was a man who cared passionately about finding out why economies work and don’t work, and also about making them work better, especially in the hardest cases. In 1990, he established a center devoted to helping post-Communist and developing economies find their feet. When he died, in 1998, he was on the campus of the University of Maryland, a few miles from where I was working, but word of his death reached me by way of an e-mail from Armenia. Earlier in his career, however, he made his name as a theorist. The larger world first heard from him in 1965 with the publication of a short, tightly reasoned book titled The Logic of Collective Action, in which he turned conventional wisdom on its head.
The standard theory was that human beings in general, and Americans in particular (as Tocqueville, among others, had said), were natural joiners, combining readily into groups large and small. The result was interest-group democracy, in which business interests competed with consumer or labor interests, animal-rights interests competed with hunting interests, sludgemaking interests competed with environmental interests, and out of the whole raucous bazaar came a more or less balanced policy.
Wrong on all counts, said Olson. First of all, forming groups is not easy, it is hard, and it does not happen naturally Very small groups, true, are fairly easy to form, but forming middle-sized groups is much harder, and very large groups, representing millions of people, literally cannot be formed without using coercion or offering special rewards for joiners. The reason is this: The larger the group, the greater everyone’s temptation to let others do the hard work of joining and organizing.
Suppose that three people in a rural neighborhood share a private road or driveway. They might easily form a group to repave their road; each one will pay something, but all will benefit. If all three chip in, the road is fixed at minimal cost to each. But now suppose there are a hundred people sharing the road. Then the temptation becomes strong for each person not to chip in. Each one thinks, “Someone else can worry about filling potholes. I’ll let other people fix the road, and then I’ll be able to use it for free.” If enough people think that way, the road never gets repaved.
The problem here is an ancient one, namely, that people try to ride for free if they think they can get away with it. It involves what economists call public goods: goods (or services) that everyone can enjoy even if only one person takes the trouble to pay for them. Roads are one classic example; national defense is another. The classic solution is for a majority to require everyone to contribute to road building and national defense, through taxes. Otherwise, too few roads would be built, and too few soldiers recruited, because too many people would wait for someone else to do the building and recruiting.
In The Logic of Collective Action, Olson showed that the freerider problem applies to private collective projects no less than to government. The bigger the class of people who benefit from collective action, the weaker the incentive for any particular beneficiary to join or organize, and thus the less likely that a group will coalesce. “In short,” wrote Olson, “the larger the group, the less it will further its common interests.”
If that is true, the implications are unsettling. “Since relatively small groups will frequently be able voluntarily to organize and act in support of their common interests,” Olson went on, “and since large groups normally will not be able to do so, the outcome of the political struggle among the various groups in society will not be symmetrical.” In other words, small, narrow groups have a permanent and inherent advantage, and “often triumph over the numerically superior forces because the former are generally organized and active while the latter are normally unorganized and inactive.”
Experience confirms the prediction. A dozen companies making left-handed screwdrivers may organize to get themselves a tax break. If they win a loophole worth $12 million, each earns a cool million, and the investment pays off handsomely. Their tax break comes out of the pockets of everyone else—but the cost is spread out among millions of Americans. And so it would be pointless for someone to try to organize 270 million Americans to win back a fraction of a cent each.
People have tried organizing groups to represent very broad interests, without notable success. The National Taxpayers Union, which lobbies for reductions in what it regards as wasteful government spending, has managed to enlist only about 300,000 members. Out of a total pool of about 120 million Americans filing tax returns, that is a participation rate (about one in four hundred) that borders on insignificance. Out of 100 million or so American voters, not one in three hundred is a member of Common Cause, a group that advocates political reforms to reduce the influence of moneyed special interests. By contrast, the American Federation of State, County, and Municipal Employees—a group representing a narrower interest—boasts 1.3 million members, or one of about every six full-time state and local government workers (not counting teachers, who are organized by other unions). Still, the class of state and local government workers is a big group, which is a reason why five of six workers don’t join. A very narrow interest—say, the three major American auto companies—can produce much higher rates of participation.
Olson’s argument became a staple of college political science courses and a pillar of a rising economic literature on what’s called “public choice.” But Olson wasn’t finished. If he was right, what would his theory mean for a large country like America? He began to think about the ways in which the interest-group dynamic might affect an economy over time. The result was his 1982 book The Rise and Decline of Nations.

On a Tilt

As Olson pointed out in The Logic of Collective Action, organizing a group to seek collective benefits is difficult. The effort costs money, takes time, and risks failure, and organizers face an uphill battle against skepticism and apathy. However, one at a time, little by little, over a long period, groups do manage to overcome the obstacles.
Modern trade unions, for instance, didn’t appear until almost a century after the Industrial Revolution. Though farmers have plowed the American soil for hundreds of years, farmers’ groups didn’t appear on a national scale until around World War I, and only since World War II have they really proliferated. Social Security dates to 1935, but the recipients’ main interest group, the American Association of Retired Persons, didn’t coalesce until more than twenty years later.
“Organization for collective action takes a good deal of time to emerge,” wrote Olson. Having introduced the element of time, he then added another element, that of directionality. Once groups form, they rarely disappear. Rather, “they usually survive until there is a social upheaval or some other form of violence or instability.” The two elements combine in a conclusion that Olson italicized: “Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time.”
In effect, Olson posited a social field of force. Just as the earth’s gravitational field makes it harder to walk uphill than to walk downhill, Olson’s directional force points to the emergence of more and more pressure groups in any stable society. Figuratively speaking, society is not on a flat surface, where groups come and go depending only on the politics of the moment; it is on a tilt, so that groups gradually but steadily pile up. This is true even in small societies such as universities, where ethnic and single-issue groups tend to establish themselves and then colonize bits of the curriculum or the campus. Moreover, if the groups are swept away for some reason, over time they will tend to reemerge. When Newt Gingrich and his Republicans took over the House of Representatives in 1994, they acted on their pledge to eliminate funding for the Babel of House caucuses that had accumulated over the years of Democratic control. By 1998, as David Grann noted in The New Republic, dozens of new caucuses had sprouted, including the Missing and Exploited Children Caucus and the Pro-Family Caucus (all competing, noted Grann, to achieve their narrow interests).
What would be the effect of the piling up of interest groups? To see the answer, you have to look at the economics of what the groups are likely to be doing.
Economic thinkers have recognized for generations that every person has two ways to become wealthier. One is to produce more. The other is to capture more of what others produce. The former is productive activity. The latter is redistributive activity—transfer-seeking, an investment of time or energy in transferring wealth from other people to oneself.
Olson pointed out that no group has much incentive to organize with the goal of increasing productivity for the society as a whole. In metaphorical terms, it pays much better for a group to try to enlarge its share of the pie than to try to make the whole pie bigger. To see why, imagine that you live in a country of a million people. Then imagine a group of a hundred people called the Coalition to Make Ourselves Rich (C-MOR). C-MOR’s members make up only one ten-thousandth of the society. If they lobby for a universal job-training program that makes the whole society better off by $1 million, then C-MOR’s members will pay the whole cost of their lobbying effort, but they must share their $1 million reward with a million people. Each of C-MOR’s members winds up only a dollar better off for his effort—hardly worth the trouble, especially given that agitating for social change is expensive. Now suppose instead that the group organizes for a $1 million tax break focused exclusively on C-MOR itself. This time C-MOR members split the booty a hundred ways, not a million. That translates into $10,000 per member, which is fine boodle. For interest groups, then, the bigger payoff is in redistributing the pie, not enlarging it.
Suppose people in a group wanted to focus more social resources on themselves. How might they do it? If they were competitors in a market, they might organize a cartel to exclude newcomers and then jack up prices. And, indeed, businesses notoriously do attempt that. However, cartel formation is outside the scope of this book, and in any case it has turned out not to be as serious a problem as Americans used to think, partly because the economy has changed. Early in this century, heavy industry called for economies of size, summoning forth corporate giants. Today, flexibility and economies of speed matter more, so that gigantism is often the path to downfall rather than domination.
Even in a closed market, maintaining a cartel is difficult; bickering and opportunism tend to crack and then destroy cartels in not much time. In today’s relatively open world market, which reaches across national boundaries, maintaining a cartel is more difficult still. If cartels organize the domestic market, as some people believed the Big Three automakers were informally doing through the 1970s, their fat profits lure in imports that bust the trust, as Detroit discovered the hard way. In the early 1970s, populists and consumerists regarded General Motors as a domineering titan, a sovereign economic state impervious both to market forces and to the public interest. “If they wanted to wipe out everybody by 1980,” one American Motors executive said in 1976, “the only one who could stop them is the government.” If so, someone forgot to tell the customers and the Japanese. By the 1990s, a gasping GM was shutting dozens of plants and laying off workers by the tens of thousands.
There is a second way to organize for redistribution, though. That way is political and substitutes public policy and the strong force of law for private cartels and the weak force of corporate solidarity.

Getting Organized

Consider two real-life bicycle couriers in Washington, D.C. Couriers in the District of Columbia are basically independent contractors working for thirty or so little companies—enough competition so it’s safe to assume that the couriers’ wages are at about the level that the market will bear. That level isn’t very high, partly because fax machines are driving messenger services out of business. One courier, who calls himself Suicide, has a plan: Organize Washington’s messengers and strike for better wages. “If we could have a work stoppage,” he told W Hampton Sides in a New Republic article describing couriers’ peculiar subculture, “you’d hear it around the world! This city would grind to a halt, man, just completely shut down! They would never fuck with us again.” In effect, Suicide’s idea is to form a union, or a labor cartel. The collective strike threat would win him and his companions better pay or benefits. On the other hand, courier service would become more expensive, and some customers would switch to fax machines or Federal Express. The end result is likely to be that couriers with jobs will earn higher wages, but fewer new couriers will be hired. Money would be redistributed to the ins at the expense of the outs, with some loss of efficiency along the way. Newcomers lose, Suicide wins.
Unfortunately for him, organizing hundreds or thousands of independent couriers is very difficult, as Mancur Olson showed. Another courier, Scrooge, has a different approach: to raise the prices of the competition and so raise the wages that couriers can command. One way to raise the competition’s price, of course, is to get rid of the competition, which is what Scrooge turns out to have in mind. “I’m going to create a [computer] virus that will ruin all the fax machines,” he says. “I’m gonna send it out over the phone lines like an epidemic. Then watch out. All bike couriers of the world will unite! And we’re going to take this country by storm!”
Scrooge’s problem is that the mass murder of other people’s fax machines is illegal. He will soon figure this out, at which point he may forget about the whole idea. On the other hand, he may not. Rather, he may organize a group, hire a lobbyist, and start a political action committee. If he can’t destroy the fax machines, he can achieve a similar result with a law banning them, or at least restricting their use to long-distance calls, or taxing them heavily, or whatever. Or he can seek a subsidy or tax credit for people who use courier services, diverting business away from fax machines and his other competitors. Or, if he prefers, he can seek a direct subsidy for bicycle couriers, capturing a monopoly claim on a chunk of tax money. All of those tactics are safe, effective, legal, and as American as apple pie.
In practice, that kind of anticompetitive group action goes on all the time, and has for years. Beginning in 1874, with the introduction of margarine into the United States, the American dairymen found themselves facing a new kind of competition, just as Scrooge has. The dairymen did exactly what Scrooge wants to do. For years, the National Milk Producers Federation made war on margarine, declaring in 1935 that “the oleomargarine problem” was its top priority. The dairymen successfully pressed for taxes on margarine and duties on imported food oils and for restrictions on the way margarine could be advertised and sold (“Retail packages of oleomargarine must not be over one pound, must bear the words ‘oleomargarine’ or ‘margarine’ in type at least as large as any other lettering on the package,” and so forth). But that was long ago, you say? In 1991, the dairymen, complaining that milk prices were too low, fought hard but unsuccessfully for a federally enforced, farmer-directed milk cartel. Had they won, a board of dairymen would have been legally empowered to restrict milk supplies and block entry into the dairy business, thus raising milk prices (and hurting consumers, especially poorer ones). Not long afterward, in 1996, a coalition of northeastern dairy farmers managed to sneak a sort of regional dairy cartel into the law. The legislation empowered a group of northeastern states to raise milk prices throughout the region.
The bicycle couriers or dairymen or whoever may fail at first, but eventually some of them succeed in forming groups and capturing subsidies or anticompetitive rules or other benefits for themselves at the expense of others. True, some groups may seek arrangements that they think benefit society as a whole as well as themselves. Bicycle couriers might argue for road improvements and safety rules. Dairymen might argue for purity standards for milk. But Olson found that as groups accumulate, they will tend to make society as a whole poorer than it would have been. Remember, the payoff is always higher for a narrow, focused benefit than for a broad, publicly available one. “The great majority of special-interest organizations redistribute income rather than create it, and in ways that reduce social efficiency and output,” said Olson. Groups rarely propose “social benefits” that don’t also handsomely benefit themselves.
I remember fondly how a public-spirited car-alarm manufacturer, deeply concerned about public safety, proposed that alarms be made mandatory in New York City. In 1999, the Associated Press reported delectably on a group called the Alliance for Safe and Responsible Lead Abatement. “Its target audience is Americans concerned about the environment. And its stated goal is to protect drinking water from being poisoned by lead paint removed from older homes and apartment buildings.” Behind the alliance was none other than the lobby for the lead-abatement industry, which was trying to protect its $50 million a year in business from an Environmental Protection Agency proposal that would let contractors dispose of lead-painted debris in landfills, instead of having it expensively removed by—guess who? You don’t need to have X-ray vision to spot the pattern. A lobby demanding that railroads be required to install expensive new safety measures claims to be representing the nation’s children and turns out to be backed by the trucking industry. A lobby demanding lower limits on trucks’ size and weight claims to be representing the nation’s highway users and turns out to be backed by the railroad industry.
Never mind, for now, whether any particular group’s motives are high or low. As a society becomes increasingly dense with networks of interest groups, as the benefits secured by groups accumulate, the economy rigidifies, Olson argued. By locking out competition and locking in subsidies, interest groups capture resources that could be put to better use elsewhere. Entrenched interests tend to slow the adoption of new technology and ideas by clinging to the status quo, as, for instance, the dairymen did when they fought the advent of margarine. The groups can even slow the pace of innovation: If fax machines are restricted to long-distance service, fax producers will enjoy smaller profits, and their incentives to invest and innovate decline.
Further, as interest groups and their deals pile up, so do laws and regulations and the like, and so, therefore, do the number of people who work the laws and regulations. “When these specialists become significant enough,” wrote Olson, “there is even the possibility that the specialists with a vested interest in the complex regulations will collude or lobby against simplification or elimination of the regulation.” At last society itself begins to change. “The incentive to produce is diminished; the incentive to seek a larger share of what is produced increases.” The very direction of society’s evolution may be deflected away from productive activity and toward distributive struggle.
Olson noted one other effect, but only in passing. The accretion of interest groups and the rise of bickering over scarce resources could generate resentment and political turmoil. “The divisiveness of distributional issues,” he wrote, “can even make societies ungovernable.” Alas, Olson, the economist, left this lead unpursued. It remained a tantalizing hint that government, too, could be a casualty of the process he had described.

Down, Down, Down

Even without venturing into politics, Olson produced a theory that was more than broad enough. Here, if he was right, was a mechanism explaining why economies, even whole societies, tend to lose their bloom and then wilt. Instead of relying on ad hoc explanations or clichés, Olson identified a systematic and systemic process that, left unattended, would cause gradual economic sclerosis.
And how far might the process go? Recall C-MOR, which represents a ten-thousandth of the population. Now suppose the evidence mounts that C-MOR’s small but hard-won tax break makes the society as a whole just a bit poorer. You might suppose that C-MOR would see that its actions were impoverishing the larger society and would mend its ways. But it won’t, at least not if it can do simple division. The reason is that the small group collects all the benefit from its loophole, but it bears only a fraction of the social cost. In fact, if you work out the arithmetic, you discover that it pays for C-MOR to keep seeking perks until the social costs of its goody-hunting are ten thousand times larger than the benefits to the narrow group. The bigger the society, the worse this problem becomes. In a society—like America’s—of 270 million people, a group of twenty-five widget makers (a ten-millionth of the population) can continue to earn a profit from new subsidies and benefits until those subsidies and benefits cost society ten million times as much as the widget-making group stands to gain.
The arithmetic dictates that groups can hope to reap large gains from their pie-reslicing activity even as that very activity dramatically shrinks the size of the pie. In fact, if a society begins to grow poorer, interest groups may struggle all the more fiercely to expand their own share. The calculus of distributive warfare implies that interest-group activity can, in principle, drive a society to complete destitution and then keep right on going. At some point, some countervailing force might kick in, but whether that would happen is not at all clear. The Olsonian forces may, in fact, effectively face no natural limit—no point, that is, where interest groups stop being drawn into the benefits-chasing game by visions of profit. Quite possibly, there is no bottom.
However, Olson’s forces can exert themselves only on one condition: Because group-forming is difficult and takes time, the society must be stable enough so that pressure groups have time to form and affix themselves to the body politic. Also, groups need maneuvering room to organize and lobby.
Democracies, of course, guarantee the people’s right to form associations and lobby their government. Moreover, democracies tend to be relatively stable. “The logic of the argument,” Olson wrote, “implies that countries that have had democratic freedom of organization without upheaval or invasion the longest will suffer the most from growth-repressing organizations and combinations.” And so stable democracies are a natural preserve of what Olson pungently called interest-group depredations.
However, democracies are not the only societies that are vulnerable to the Olsonian forces. Stable authoritarian societies also provide happy hunting for pressure groups. In many countries, such the Philippines under Marcos and Zaire under Mobutu, interest groups collaborated with the regime to rob the country blind; in the former Soviet Union, the entrenched industrial barons and state apparatchiks made the economy into a desert. For that matter, a large private company can turn sclerotic if operating units or management cliques become vested interests—at which point the company either reforms or goes broke and is replaced by a more flexible company. The tendency toward interest-group sclerosis isn’t unique to democracy. But, if Olson is right, it is inherent in it.
At last we arrive back at the question that posed itself to Olson during his student days in Europe. Why did Germany thrive economically while Britain wound down? True, Britain was hurt by World War 11, but Germany was hurt even more severely. True, a devastated country like Germany should enjoy a spurt of catch-up growth. But that would not explain why the “economic miracle” continued there long after the Germans were fully caught up to their prewar level. Moreover, it seemed unlikely that Germany’s boom was a peculiar case, because the same thing had happened a hemisphere away, in Japan.
Perhaps, then, the explanation is this: Occasionally some cataclysmic event—foreign occupation, for example, or revolution—might shake a society, sweep away an existing government, and shatter the society’s network of interest groups. The old order would be scuttled, and the barnacles would sink with the ship. In the aftermath, the restored economy would be freed from its accumulated burden of protective perks and anticompetitive deals.
Now the theory’s darkest implications come into view. “If the argument so far is correct,” Olson wrote, “it follows that countries whose distributional coalitions have been emasculated or abolished by totalitarian government or foreign occupation should grow relatively quickly after a free and stable legal order is established.” And that is just what happened in Japan and West Germany after the war. In the case of Japan, decades’ worth—even centuries’ worth—of cozy deals and insider cartels were upset by General Douglas MacArthur and his occupation forces. As resources were freed from groups that had captured and monopolized them, an “economic miracle” followed. By contrast, Olson noted, Great Britain is “the major nation with the longest immunity from dictatorship, invasion, and revolution.” It has also, in the twentieth century, “had a lower rate of growth than other large, developed democracies.”
Sometimes a slashing fire can rejuvenate a forest by clearing away clots of undergrowth and deadwood. Olson was suggesting that something analogous had happened to Germany and Japan. The fires of cataclysm had cleared away the detritus of stability.
His hypothesis suggested a social cycle. A country emerges from a period of political repression or upheaval into a period of stability and freedom. The country is, at first, relatively unencumbered by interest groups and their anticompetitive deals. If other conditions are favorable, rapid growth ensues. South Korea and Taiwan, both emerging from dictatorship and both growing rapidly, would be in that stage today; China, which grew spectacularly as economic controls were lifted, looks to be next. Gradually, however, interest groups form and attach themselves to the body politic. Each group secures some sort of subsidy or anticompetitive rule. Those benefits accumulate, each jealously defended, and all distorting the economy. Over time, growth slows—as it has done in Japan and Germany in recent years—and anemia sets in.
The idea is difficult to test. Olson and a colleague tried a statistical test comparing forty-eight American states. They looked at the length of time each state had been settled and at each state’s rate of economic growth. They found a negative relationship: “The longer a state has been settled and the longer a time it has had to accumulate special-interest groups, the slower its rate of growth.” The states of the former Confederacy, which suffered governmental upheaval in the Civil War, enjoyed fasterthan-average economic expansion; so did the states of the West, which were comparatively recently settled. The pattern seemed to hold also within each region; it seemed to hold even when other differences between states, even differences in their climates, were taken into account. Among municipalities, the pattern also held: The most economically troubled cities tend to be the older ones, which often suffer most from fractious interest-group politics, bloated bureaucracies, and aging political machines. Think of Washington, Philadelphia, Detroit.
Still, such tests are hardly conclusive. Scholars have found more than a few bones to pick with Olson: too broad, too glib, too fatalistic, too this or too that. Like all grand unified theories, his seems to explain rather too much—though, to his credit, Olson never said that his ideas explain everything that goes on all the time, but only some of what goes on most of the time.
Yet the evidence in his favor—evidence that he was on to something important—is becoming harder to wave aside. In the 1970s, an intelligent observer of politics could have dismissed Olson’s ideas, but in today’s Washington a person would need to be a tree frog not to notice hints, traces, even outright demonstrations of Olsonian forces at work. Even more troubling is the evidence of American society itself. Olson’s theory coincides eerily well with the most important change in the structure of the American body politic in the twentieth century, namely the breathtaking growth of groupism.