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The Rise and Decline of Nations 1982

Logic of Collective Action 1965

Decline and rise of empires & civilizations

Decay or external threat

Little understood and inadequate data

More recently: WW2 - Japan, W. Germany, G. Britain

U.S. - N.E. & old mid-W. great cities, here decline

- W. & S. rise

Mancur Olson

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Growth accounting & ultimate causes of growth. 1. Advance of knowledge 2. Physical capital accumulation - vintage 3. Political & military stability inducement to K-accumulation (or expectations)

K - destruction due to war.

France grew faster than Great Britain despite greater political instability.

Six common market founders France, Germany, Italy, Belgium, Holland, Luxemburg grew faster than US, UK, Australia, New Zealand. Former also grew faster in the 1960’s than 1950’s after common market was formed.

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U.S. grew rapidly until WWI

United Germany grew rapidly in 19th Century

Japan after Meiji Restoration in 1867-68

Rise of the West

Involuntary unemployment in Great Depression. May occur with rational individual behavior.

Ungovernability of a nation: single issue politics and lack of party discipline.

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Top heavy societies dominated by top firms & families in largest cities. Unequal distribution political instability, underdeveloped economy.

Social mobility and class rigidity. Why differ in different times and across societies.

Ad hoc arguments are insufficient because they can never be tested on a wide array of data. Non-verifiable. Uniquefeatures e.g. cultural arguments (sophisticated versions are persuasive) but a theory must be able to explain a diverse set of phenomena.

Construct irrefutable arguments after outcome is known. Infinitely many ways of doing this.

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History is often rewritten again and again because an infinite number of stories can be built. No accumulation of knowledge of cause and effect.

Confidence is an explanation depends on power and parsimony. Simplicity of argument and diversity of facts explained is essence of establishing correct theory. Not selective choice of facts.

But this does not mean that mono-causal explanations can account for everything, or even the most important ones. Guard against excessive simplicity. Should not rule out, however, remote the possibility, that many facts are in fact due to a diversity or numerous causes. Sometimes the multiplicity of causal forces can make a true theory appear false, and a false theory true.

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1. Paradox of behavior of groups: individuals with common interest would come together to seek to further than interests.

2. Politics as the process of competing groups. Each individual belonging to many groups. Outcome as balance of countervailing power of organized groups. Marx. Galbraith. Dahl.

3. Free rider problem imply that large groups in the absence of special arrangements & circumstances will not act in group interest.

The Logic

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4. Collective goods provided to associations spill over to non-members, hence, rationally governments, lobbies, cartels would not exist unless they provide something else.

5. Governments exist by compulsory taxation & provide public goods: constitutional contract.

6. Other organizations use selective incentives. Positive or negative. Applied selectively to individuals contingent on their performance in contributing to the provision of collective goods.

E.g. Early phase of unionization involve violence. Private goods provided to members may be contingent on performance.

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Small groups or federal groups have an additional form of selective incentive based on interpersonal interaction - social selective incentive is powerful and inexpensive but available only in special situations. Homogeneous groups, small ones (interaction among large members costly)Political entrepreneurs & managers use indoctrination & selective recruitment to increase the homogeneity of their client groups.

Information & calculation about a collective good is also a collective good. Rationally ignorant. Unless information about public affairs is interesting and entertaining.

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Private rewards in these areas accrue to politicians, lobbyists, journalists, social scientists. Even stock market investors.

Limited knowledge explains effectiveness of lobbying.

Benefits to individual enlightenment spread out among population rather than accrue to the person who seeks enlightenment.

Explains “man bites dogs” criterion of newsworthiness. Rather than typical events. Not complexities of economic policy or quantitative analyses of public problems.

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Explains “in democracies income tax brackets all progressive, but loopholes favor the wealthy.” Former is understood by all but latter is complex and reflects interests of small numbers of organized, prosperous tax payers.

Health insurance provide gains to those with low or middle income but implemented & administered to the benefit of physicians.

Voluntary contributions in large groups must be small, unless there are selective incentives, for them to be forthcoming. Sign petitions, vote, express opinions.

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For small number of beneficiaries, voluntary contributions work, bargaining & policing easier in cartel arrangements or cost-benefit calculations favorable enough to ignore free rider problems.

Similarly logic extends to groups with a few large members but many small members.

Lobby in small jurisdictions more intensive than in large ones. Given same size firms more would have to cooperate in larger jurisdiction & more severe free rider problems. On per capita basis more lobbying intensity.

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Differences in intensity of preferences. For same aggregate level of willingness to pay, small group of zealots more willing to lobby. Historical significance of fanatics.

Groups who have access to selective incentives more likely to act collectively.

Latent groups: consumers, taxpayers, and the poor in contrast to professional groups and business firms. There are variations across nations and historical periods. This is crucial to the rise and decline of nations.

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1. There will be no countries that attain symmetrical organization of all groups with a common interest and thereby attain optimal outcomes through comprehensive bargaining. - logically impossible for a society to achieve equity and

efficiency through comprehensive bargaining. - interest groups who are organized to further their own

interests would choose policies inefficient for society, benefits fall on themselves and costs on the unorganized.

- fairness is not necessarily on the agenda.

The Implications

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2. Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time.

- organization success requires time and effort, strong leadership and favorable circumstances.

- social pressures and rewards as selective incentives requires creating new patterns of social interaction.

- complementarities between activities that promote the collective good and income generation necessary to finance efforts to secure collective good must be found and exploited.

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- societies that have secured selective incentives to maintain themselves survive even if the collective good they once provided is no longer needed. Because selective incentives make indefinite survival feasible - unless major social upheaval, violence, instability.

3. Members of “small” groups have disproportionate organizational power for collective action, and this disproportion diminishes but does not disappear over time in stable societies.

4. On balance, special interest organizations and coalitions reduce efficiency and aggregate income in the societies in which they operate and make political life divisive.

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- in general interest groups all prefer a more prosperous society may therefore work for this goal.

- alternatively they wish to carve out a bigger share through redistribution.

- promoting efficiency lobbies are rare because most benefits accrue to others - a public good - because such lobbies tend to be small.

- redistributive lobbies benefit from being small, despite loss of efficiency - public bad - to society such lobbies make no commensurate sacrifice to compensate for costs imposed.

- distributional coalitions or rent seeking groups. Cartels or lobbies seek legislation that reduce efficiency or output in order increase income for themselves.

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E.g. taxes or subsides - transitional gains to interest group but lower efficiency for all, because private return equalize over time. Rent accrues to specialized factors.

E.g. reduction of entry usually imposes even more social costs : rent dissipation.

E.g. cartelization with barriers to entry : triangle loses versus rent dissipation.

- sometimes lobbies may support efficiency enhancing measures, largely because they are major beneficiaries of such policies.

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- others suffer from inefficiencies obtained by other distributional coalitions and therefore lobby to oppose them.

- distributional conflicts tend to be zero sum pervasive in political life & makes it divisive and encourage intransitive, irrational, or cyclical choices making relatively lasting or stable political choices less likely, and societies ungovernable.

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5. Encompassing organizations have some incentive to make the society in which they operate more prosperous, and an incentive to redistribute income to their members with as little excess burden as possible, and to cease such redistribution unless the amount redistributed is substantial in relation to the social cost of the redistribution. - Federations of labor unions. - Chambers of commerce & industry - Willing to promote efficiency gain measures, and to

bargain with others for such a purpose. - Some special interest organization will be

encompassing in relation to a particular firm or industry, and have an incentive to help it prosper.

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- However industry wide unions may encourage firms to organize to form a cartel, that maximize joint monopoly gains to firms & workers.

- Scandinavian example demonstrate less parochial views. USA - parochial congressional interests, party discipline and national policies as a whole. E.g. president try to limit pork-barrel legislation and congressmen who promote them.

- all encompassing organizations may not always serve public interest if information is costly and agents behavior difficult to monitor. Less diversity of advocacy, opinion, and policy and fewer checks on erroneous ideas.

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6. Distributional coalitions make decisions more slowly than the individuals and firms of which they are comprised, tend to have crowded agendas and bargaining table, and more often fix prices than quantities.

- such coalitions use consensual bargaining and constitutional procedures.

- consensus: voluntary provision is not optimal but requires unanimity through bargaining. And is difficult to achieve since members have conflicts of interest over cost sharing.

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- constitutional procedures necessary when it is too costly to bargain due to large numbers or as a cost saving device to engage in continuing collective action. But it takes time. Typical procedural rules in democratic bodies tend to favor the status quo.

- many decisions to make with various delays. - resort to impartial outsiders, simple formulas,

seniority rules that apportion the costs of collective action among participants.

- price fixing leaves allocation decision to the impartial forces of the market. Although this may work against interest of the distributional coalition on occasion. It means their abandonment in favor of quantity fixing.

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- after dealing with their own decision, then worry about partners and antagonists.

7. Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth.

Changing economic environment open up new opportunities. Without special interest groups, firms and consumers maximize in unconstrained markets. No barriers to entry eventually eliminate monopoly and shelters.

Economies of scale - natural monopoly - contestable markets.

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Short term supra normal profits as returns to innovation - followed by imitation. Key to economic progress.

Relationship between efficiency and growth rate. Distributional coalitions cause one time reductions:

(1) in output level, their accumulation reduces growth.

(2) interfere with innovations: interest group veto changes or consultations. Slow decision making progress.

(3) slow down rate of resource reallocation. Declining industries.

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8. Distributional coalitions once big enough to succeed, are exclusive and seek to limit the diversity of incomes and values of their membership.

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9. The accumulation of distributions coalitions increases the complexity of regulations, the role of government, and the complexity of understandings, and changes the direction of social evolution.