Mancur Olson and The Current Economic Crisis

By February 2, 2009Economy, Energy, Trade

David Leonhardt of the New York Times was on NPR this morning, discussing his Sunday NYT Magazine piece, “The Big Fix,” a rumination on the economy, industry and infrastructure.

“Green jobs” are no panacea, Leonhardt said this morning:

“They’ve oversold green jobs a little bit.”

He notes that the president has talked about green jobs “almost like they’re a free lunch — that they will bring a huge economic boom, and they’ll bring these environmental and political booms.”

Obama’s energy policy, according to Leonhardt, is actually aimed at making “dirty energy” more expensive to encourage the use of cleaner energy technology. “And raising the cost of dirty energy isn’t a great force for an economic boom,” he said.

The he turned to a discussion of the institutional and political forces that discourage economic growth a transformation, citing the work of Mancur Olson.

We’ve always appreciated Mancur Olson because he was a North Dakota farm kid who made it big in the field of economics. (New York Times obit.) In his Sunday Magazine piece, Leonhardt finds continued relevance in his works:

Olson, a University of Maryland professor who died in 1998, is one of those academics little known to the public but famous among his peers. His seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.

In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.

Olson’s book was short but sprawling, touching on everything from the Great Depression to the caste system in India. His primary case study was Great Britain in the decades after World War II. As an economic and military giant for more than two centuries, it had accumulated one of history’s great collections of interest groups — miners, financial traders and farmers, among others. These interest groups had so shackled Great Britain’s economy by the 1970s that its high unemployment and slow growth came to be known as “British disease.”

Germany and Japan, on the other hand, were forced to rebuild their economies and political systems after the war. Their interest groups were wiped away by the defeat. “In a crisis, there is an opportunity to rearrange things, because the status quo is blown up,” Frank Levy, an M.I.T. economist and an Olson admirer, told me recently. If a country slowly glides down toward irrelevance, he said, the constituency for reform won’t take shape. Olson’s insight was that the defeated countries of World War II didn’t rise in spite of crisis. They rose because of it.

Not just the interest groups, but decades of industrial and infrastructure accretion were wiped away, setting the foundation for more modern manufacturing, as well.

We’re just skimming through Leonhardt piece now, but it looks to be a thought-provoking article that goes from Wall Street to West Virginia, an experiment in education being conducted at Shepherd University.

And it also adds to the case that Mancur Olson ought to be inducted into North Dakota’s Rough Rider Hall of Fame as a thinker who accurately diagnosed the difficulties we face today.

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