Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

by Mancur Olson

Why do some economies do better than others? How does society encourage the kind of market economy that generates continually increasing incomes? How do particular styles of government affect economic performance? World-renowned economist Mancur Olson tackles these questions and others in what will surely be regarded as his magnum opus. Olson contends that governments can play an essential role in the development of markets. Reliable enforcement of private contracts and protection of individual rights to property depend on governments strong enough not to undermine them. His exploration of "market-augmenting governments" will stand as a cutting-edge work on economic growth and provide a useful framework in which to consider the Asian financial crisis and its aftermath. As Susan Lee noted in Forbes, "his pioneering insights might have won a Nobel Prize for Olson had he lived a bit longer."

Genres: Economics, Politics, Nonfiction, Political Science, Sociology, History, Philosophy

272 pages, Paperback

First published January 19, 2000

About the author

American economist and social scientist who, at the time of his death, worked at the University of Maryland, College Park. Among other areas, he made contributions to institutional economics on the role of private property, taxation, public goods, collective action and contract rights in economic development. Olson focused on the logical basis of interest group membership and participation. The reigning political theories of his day granted groups an almost primordial status. Some appealed to a natural human instinct for herding, others ascribed the formation of groups that are rooted in kinship to the process of modernization. Olson offered a radically different account of the logical basis of organized collective action.
In his first book, The Logic of Collective Action: Public Goods and the Theory of Groups (1965), he theorized that “only a separate and ‘selective’ incentive will stimulate a rational individual in a latent group to act in a group-oriented way”; that is, members of a large group will not act in the group's common interest unless motivated by personal gains (economic, social, etc.). He specifically distinguishes between large and small groups, the latter of which can act simply on a shared objective. Large groups, however, will not form or work towards a shared objective unless individual members are sufficiently motivated.
In 1982, he expanded the scope of his earlier work in an attempt to explain The Rise and Decline of Nations. The idea is that small distributional coalitions tend to form over time in countries. Groups like cotton-farmers, steel-producers, and labor unions will have the incentives to form lobby groups and influence policies in their favor. These policies will tend to be protectionist and anti-technology, and will therefore hurt economic growth; but since the benefits of these policies are selective incentives concentrated amongst the few coalitions members, while the costs are diffused throughout the whole population, the "Logic" dictates that there will be little public resistance to them. Hence as time goes on, and these distributional coalitions accumulate in greater and greater numbers, the nation burdened by them will fall into economic decline. Olson's idea is cited as an influence behind the Calmfors-Driffill hypothesis of collective bargaining.
In his final book, Power and Prosperity, Olson distinguished between the economic effects of different types of government, in particular, tyranny, anarchy and democracy. Olson argued that a "roving bandit" (under anarchy) has an incentive only to steal and destroy, whilst a "stationary bandit" (a tyrant) has an incentive to encourage a degree of economic success, since he will expect to be in power long enough to take a share of it. The stationary bandit thereby takes on the primordial function of government - protection of his citizens and property against roving bandits. Olson saw in the move from roving bandits to stationary bandits the seeds of civilization, paving the way for democracy, which improves incentives for good government by more closely aligning it with the wishes of the population.

Reviews

[Athan Tolis · Rating 5 out of 5]

A bit like Thinking Fast and Slow, but with a lot less rambling and almost zero cross referencing in the main text, this is a book that's meant to summarise a career's findings. It's written by somebody who both knows a whole lot and wants to tell you everything he knows. And it's written so beautifully, you keep asking yourself "why did I not think of that?" To which the answer, of course, is "because it's only so clear once somebody has told you."

Mancur Olson, the man who explained in his youth one of the main problems of our otherwise quite solid market economy, the tendency of concentrated interests (such as lobbies, oligopolies and unions) to prevail over the interest of the silent majority, spent the last couple years of his life writing this primer that sheds light on some of the big questions in politics. Here's a list of my favorite examples:

1. How come most countries on earth used to be run by a dictator / tyrant / king? Answer: because it beats the hell out of what was the alternative at the time, namely being raided by itinerant hordes. Not unlike a mafia don, a "Stationary Bandit" had every interest in seeing his people prosper and every interest in providing them protection from roving bandits. So that's the system that prevailed everywhere for a long, long time.

2. What does it take to get rid of the dictator / tyrant / king once you're fed up with him? Answer: first, a big event that upsets the applecart, such as a famine or a plague or a discovery; second, a multitude of interests on the ground so no single successor scheme take over where the previous tyrant left off and third, no external threats. Daron Acemoglu goes a lot deeper in trying to explain this in his book from 12 years later, but still, what a beautiful summary!

3. How come oligopolies and concentrated interests can form and thrive when we know that even two people can sometimes not agree to collude? Ah, that would be because the prisoner's dilemma never occurs in nature. Most economic agents who matter can talk and compare notes. And they are not prisoners. Hell, even prisoners can get it done if the game is repeated.

4. If one day we achieve perfect information and zero transaction costs, will the diffuse interests of the consumers, the poor or the unemployed finally prevail over concentrated interests? Erm, probably not. And that's because the basic problem will not disappear. The marginal member of these groups will still do best if somebody else does the hard work for him. The incentive to free-ride will remain.

Then he moves to the meat of his book, namely the dissection of why the fall of the Soviet Union did not lead to prosperity. It's still a step by step series of answers to questions. Stuff like

5. How come Sergei Bubka broke the world record for pole vaulting 17 times, nine of those by just one centimetre? Ah, because under Stalinism the able and the unable got paid the same up to the fortieth hour of work, but after that they got something a lot closer to market rate. So the able, those who could do superior work, would not only (a) get underpaid for their first forty hours of work, thereby giving the state their labor for super cheap, but also (b) they would work as much as possible past that fortieth hour, since that's the bit of their labor that got compensated well. Also, they could be guaranteed to gravitate toward the jobs that required skills. My choice of example, of course, was meant to prove that you could go around the system. Bubka could probably have set the bar fifteen centimeters higher twice, rather than a couple centimeters seventeen times, but that would have landed him two bonus apartments, rather than seventeen.

6. What are the main ways to collude against the hyper-extractive Stalinist regime? Two mainly: first you can work together with the guy right above you and the guy right below you in the chain of production to sell privately excess resources that have been allocated to your endeavor; second, you can work together with state-run near-competitors to trade with one another excess resources, rather than ask for them from above.

7. What's the one biggest difference between Germany post WWII and Russia post Communism? In Russia the main source of corruption, the informal markets that dealt in the re-allocation of misallocated resources, not only survived the transformation intact, but by definition reached into everywhere. By dint of having set prices and quantities, indeed by having set them wrong, the system had not only given birth to a parallel, informal market system for the reallocation of resources, but had actually forced every single citizen to deal with this system (or alternatively perish). The people in charge of these informal networks continued to thrive after the transition, except they no longer had anybody to fear whatsoever. They could carry on their previous trade legitimately. Only they knew how the system worked.

8. What's the difference between Russia and China post Stalin/Mao? Mao had purged all Communist party insiders during the infamous Cultural Revolution. When Deng took over, there was no entrenched bureaucracy of party cadres who could resist him. The market reforms imposed by Deng were only resisted by elements in the very top echelons, but the rank and file knew not to stand in the way.

Finally, Mancur Olson presents us with the big idea of his book. Again, it's a question: How come market system fails in some places? How come the logic of the market does not prevail everywhere? When we visit third world countries it is quasi impossible not to bump in to a suk or an open market. If indeed nothing can go wrong in a society that encourages mutually beneficial trading, how come only some countries allow millions of mutually beneficial trades to turn into one big vibrant market-clearing machine?

The answer is that there are two types of markets: spontaneous markets and socially contrived markets.

Spontaneous markets are the ones that will appear regardless. The author goes as far as to say that spontaneous markets are irrepressible. Essentials will find their way to people regardless of how bad the government is, regardless of how extractive a despot is, regardless of how poorly the price has been set. When no capital investment is necessary for the production of a good, for example, it will be traded as many times as necessary, formally or informally, until it reaches whoever needs it most. Only two conditions need to be met: first, both parties must stand to gain from the trade and second, both parties must be able to somehow enforce contracts, a la limite by threatening to refrain from repeated trades. So that's how come markets are ubiquitous.

Socially contrived markets, on the other hand, are the markets that need the support of the state to exist. If it is essential to invest in capital (such as plant and equipment) or human capital or intellectual property to provide a particular good or service, then it is equally essential that a government exist to guarantee those property rights. And it is in the provision of the property rights which support socially contrived markets that Mancur Olson identifies the difference between rich countries and poor countries.

Pretty simple once somebody has pointed it out, no?

I really really enjoyed this book.

[Rachel · Rating 4 out of 5]

Both force and voluntary exchange are present in every social order. The challenge of designing a successful social order, in Olson's view, is to give the power to make collective decisions to an encompassing interest (rather than to a special interest).

Olson develops the idea of special and encompassing interests in the following way. If a bandit can gain an exclusive power to plunder an area, he will have an incentive to protect the area from other predators. Since plunder removes some incentive to create wealth, the “stationary bandit” also has some incentive to cultivate prosperity in the area he controls. With an exclusive power to plunder, he has acquired an interest in the general welfare – because he now bears a significant portion of plunder’s cost to society. Thus, he will moderate his thievery to maximize his profit. (In contrast, a “roving bandit” bears only an infinitesimal portion of the damage that his behavior brings to society, and therefore will have no reason to restrain himself.) Since governments are simply legal plunderers, this argument applies to them as well as to mafia groups and ancient warlords. If a government’s choices are determined by a sufficiently large portion of society, they will constitute an “encompassing interest,” and will choose policies that are in the best interest of the population as a whole.

What is remarkable about this argument is that it identifies a reason for autocrats and warlords to improve social welfare. This “second invisible hand,” like the “invisible hand” of voluntary exchange which Adam Smith identified, moves self-interested actors to act in the common good.

This theory of the logic of force and the logic of voluntary exchange also had certain implications for the countries that were transitioning from communism to capitalism at the time that Mancur Olson wrote Power and Prosperity. The key issue of transition is not how quickly the transition should occur, but rather whether these countries will transition to systems that give power to encompassing interests.
Olson stresses the importance of private property rights, and the role of governments in protecting these. Some economic exchanges are self-enforcing, but other exchanges depend upon the enforcement of long-term contracts. This is a proper function of government. Olson concludes that the best form of government for prosperity is a democratic one which respects and protects private property rights.

However, this book is more sophisticated than many defenses of free markets and property rights. For example, Olson takes the time to explain why the Soviet system was able to function as well as it did. A kind of “bureaucratic competition” was a countervailing factor in the inefficiencies and lack of information that we would expect to occur in a socialist economy. It was only after enough time had passed for the bureaucrats to collude with one another to serve private rather than encompassing interests that the system collapsed. Thus, Olson demonstrates that his categories of thought deal effectively with historical fact.

[Franz · Rating 4 out of 5]

Olson examines what it takes for societies to achieve economic prosperity by studying pre-capitalist, capitalist, communist, and post-communist economies. In all of them markets are ubiquitous, but in only some capitalist economies is wealth distributed fairly. This isn't the same as equal distribution of wealth, but that people generally have opportunities available to them to achieve prosperity regardless of their social beginnings. There are two conditions a society must satisfy for it to achieve prosperity: one it respect for individual rights, property rights not least; the second is the avoidance of predation, that is, the prevention of economically interests from exploiting those less fortunate. For both these conditions to apply, government regulations of the right sort must be in place: not too much and not too little. Olson is just as opposed to unfettered free markets as he is to command and control economic policies.

One flaw in his argument is his belief that rational self-interest governs economic behavior. Both research and economic history have spoiled that assumption. Written in 2000, Olson practically predicts the 2017 Republican tax bill that overwhelmingly favors the wealthy over every one else. His argument is that such policies will ultimately lead to a far less prosperous society.

[Jorgon · Rating 4 out of 5]

A deep and fascinating study of the development of power and of the resons why post-Communist economies failed to live up to their promise. The internal logic of Olson's theory is deeply compelling, but I am afraid that his view, despite its strong claims to realism is still somewhat Pollyannaish: he assumes self-interest and perfect rationality on the part of all actors, and while the former is certainly realistic, the latter is undermined by much of modern research which shows humans to be deeply irrational. On the other hand, unlike many other political and economical theorists, he at least tries to steer away from the fallacy of the access to perfect information.

In the event, later developments in the post-Soviet economies (the book was written 17 years ago) confirmed his theory to a large degree.

[Sathya Vijayakumar · Rating 5 out of 5]

Like many of the books I pick up, I came to this one because the author, Mancur Olson, was mentioned in several books/papers I've been reading. First, he was mentioned in a book on lobbying I'm reading as representing a school of political economy. Upon googling him, I found that he had written one of the first books on the economic logic of collective action (the topic of one of my first year PhD exams) back in 1965.

I found the book to be interesting on several surface and internal counts. On a surface level, Olson wrote this book in part because he couldn't answer a journalist's questions about whether Russia would have been better off economically with a dictatorship in the early 90s after the USSR fell. He also wasn't sure why the Fascist economies (Germany, Japan, Italy) had economically thrived after WWII while the communist countries of Eastern Europe and Russia had struggled mightily with the fall of the Soviet Union. I've always found one of the glaring oddities of economics (even as a PhD student) to be that it studies economics largely in a vacuum without regard to governments or policy, and Olson in this 2000 book takes a serious shot at remedying this imbalance. As such, I loved the ambition of the author to try to come up with a "theory of everything" of sorts that could explain both public and private sector entities. The result of Olson's work was a book that attempted to answer 4 primary questions. I've related each question below and will summarize Olson's answer and my own thoughts on the matters at hand.

1. Why are markets ubiquitous but only some countries transition from bazaars and peddlers to industry?
- I thought that this was a really interesting question. Anyone who's traveled to a developing country like India or Uganda sees ubiquitous street vendors and peddlers selling everything and anything on the sidewalk, yet not all of these countries generate consistently rising incomes and prosperity. Olson posits that some markets are "spontaneous" and even "irrepressible" in the sense that humans will often engage in some trade regardless of what the government does. His analysis of why bazaars and peddlers seemingly arise like weeds in inhospitable climates suggests that these don't rely on individual rights like property rights (the right to own things without them being stolen) or rights to a fair trial. More complex, wealth-inducing markets are identified by Olson as "socially contrived markets" or markets that rely on courts to adjudicate long-term contracts and property that preclude theft by counterparties. Put another way, he suggests that democratic governments (and even the Fascist ones previously mentioned) tended to protect these rights and not allow thievery to exist as a norm without punishment. As such, he suggests that democratic countries facilitate more complex trade by protecting rights while also explaining how countries like China manage to see high growth without democracy. This jumps into the next key question.

2. Is dictatorship better than democracy at growth in poor countries?
- Olson seems to suggest that democracy tends to encourage stable individual rights more than dictatorships, but doesn't preclude the possibility that dictatorships can facilitate strong economic performance if they too adopt these practices towards property and contract. A quick example will be helpful here. If a bank wants to finance a large long-term project with a lot of vendors like, say, the building of a cathedral, it needs to be able to enter into debt contracts with a general contractor (GC) without worry that the GC will just take the money and run (i.e. contract rights). Further, when the GC uses the capital to buy a specialized machine to treat stained glass for instance, it needs to be confident that the machine can't be repossessed at any time by the government (property rights). As such, Olson identifies socially contrived markets as those markets that depend on contract and property rights

3. Why was there so much corruption in the centrally planned post-communist economies even after the Iron Curtain fell?
- This was another interesting point. Olson suggests that centrally planned economies end up distorting markets so much that just to achieve an order that makes sense, firms have to engage in corruption to move things along. To bring this to life, if the central government gives 2 steel firms 2 different quantities of an input (say copper), A) both firms have an incentive to horde the material and ask for more than they need and B) When circumstances change as they inevitably do requiring that one firm get more copper, they'll have to trade with each other under the table (black market) probably with a kickback to bribe the authorities from reporting them. As such, when the Iron Curtain fell, it revealed massive, unheard of in the West amounts of corruption that pervaded every aspect of society. Rather than just bad actors, Olson showed corruption to be an endemic property of Soviet style autocracy that wasn't present to the same extent in Fascist countries post-WWII.

4. Why did Fascist countries develop so quickly after WWII (Japan, Germany, Italy), yet post-communist countries in Eastern Europe and Russia struggled so much?
- I've kind of answered this above, but Olson boiled it down to the incredible corruption brought on by a massively distorting Communist system as well as bad assumptions on the part of Western analysts about what privatization would bring. Olson points out that, rather than driving efficient capital allocation as they had expected, making these previously state owned conglomerates privately owned with previous bureaucrats turning into CEOs simply created a class of oligarchs competing with the same kind of incentives that prevailed in the previous regime because little had changed with regard to property and contract rights. The court system in Russia is to this day notoriously politicized and full of extralegal carveouts for the powerful, so it was unlikely that they'd see the same economic growth as Germany and Japan for instance whose societies were dramatically overhauled with Western institutions.

5. Other interesting elements from the book.
- Olson distinguishes between roving vs. stationary bandits to describe why so many global societies had experimented with autocrats in their history. Basically, he suggests that as agricultural made societies more stationary, it behooved roving bandits to simply settle down, monopolize coercive force, and get taxes from townspeople in exchange for protection from roving bands and other autocrats rather than stealing from them outright. It's useful because it underlines the lack of legitimacy of autocracy- they're not legitimate leaders in a democratic sense, but stationary bandits. Finally, he talks about their incentives to tax up to the point that taxing more won't make them wealthier as they're pretty purely self-seeking, while democracies may tax somewhat lower depending on the strength of the governing majorities' "encompassing interest". He does point out that democracies may be overrun by interest groups which have incentives to distort democracy in their own favor since they have a lot to gain and almost nothing to lose from lobbying. These ideas are formalized with economic logic.

6. Conclusion
The WSJ wrote of this book that "Olson's analysis is fascinating... Power and Prosperity is an important book, written with clarity and verve." Overall, I think this is a pithy and apt description on all counts. While the book isn't for the faint of heart as it's primarily meant to influence an economist audience, anyone can read it and gain from Olson's insightful writing. My only critique is that it's incredibly simplifying to describe these concepts using profit maximization and assumptions ported without dramatic adaptation from microeconomic theory, but it's a testament to these incentives' strength that his theories still describe a lot of behavior in a way that isn't easy to capture without incentive based arguments.

[Dio Mavroyannis · Rating 4 out of 5]

The book tries to use the logic outlined in "the logic of collective action" to discuss soviet politics. I think the book is pretty great in many respects and has a very clear argumentation style. That said I don't feel like he argues against the Coasian paradigm very clearly. The technical exposition with the graphs also didn't seem very well labeled, it would have been better in an appendix with more technical detail. Pretty good read though not as good as the logic.

Some basic takeaways, the dictator has an incentive to invest in public goods and the more the surplus of the dictator has to be split(many dictators), the more the decisions will favor growth.

[Lewis Wilkins · Rating 5 out of 5]

By a Nobel prize-winning economist, this text required for my interdisciplinary International Relations major at the College of William and Mary explains the dynamics that lead civilization to arise from anarchy, the forces that cause communism and democracy outperform, and equilibriums to keep in check.

A critical manual for any aspiring dictator or democrat.

[Jason Reeves · Rating 5 out of 5]

Best book I've read about economics, really easy to understand and has good theories.

[Musaadalhamidi · Rating 4 out of 5]

لماذا يكون أداء بعض الاقتصادات أفضل من غيرها؟ كيف يشجع المجتمع نوع اقتصاد السوق الذي يولد الدخول المتزايدة باستمرار؟ كيف تؤثر أنماط معينة من الحكومة على الأداء الاقتصادي؟ يعالج الخبير الاقتصادي المشهور عالميًا مانكور أولسون هذه الأسئلة وغيرها فيما سيعتبر بالتأكيد أعظم إبداعاته. يؤكد أولسون أن الحكومات يمكن أن تلعب دورًا أساسيًا في تطوير الأسواق. يعتمد الإنفاذ الموثوق للعقود الخاصة وحماية الحقوق الفردية في الملكية على الحكومات القوية بما يكفي لعدم تقويضها. إن استكشافه لـ "الحكومات المعززة للسوق" سيكون بمثابة عمل متطور بشأن النمو الاقتصادي ويوفر إطارًا مفيدًا للنظر في الأزمة المالية الآسيوية وتداعياتها. كما لاحظت سوزان لي في مجلة فوربس ، "كان من الممكن أن تكون أفكاره الرائدة قد فازت بجائزة نوبل لأولسون لو أنه عاش لفترة أطول قليلاً."

[Cris Crawford · Rating 5 out of 5]

When you're done reading this book, you think, OMG that's so simple. But it's not really, it takes a lot of intellectual power to see the fundamental truth of something as huge as the Soviet economy, and prosperity. Olson's gift is to be able to explain it so that you get it clearly. What a genius and how sad that he did not live longer. Property rights are fundamental to prosperity, and you don't have them without the government. Also, as time goes by, corruption increases, even in a constitutional democracy.

[Илья Дескулин · Rating 4 out of 5]

In "Power and Prosperity" everything is laid out in a logical, I dare to say Austrian, way. That's why Olson's work should be read in tandem with Hoppe's "Democracy: The God That Failed". These two authors will complement and challenge one another, thus, making you contemplate the subject more. Olson's chapter about Stalin's economy, and especially his tax policy, was the most remarkable. It's ironic that those who criticized the bourgeois societies took exploitation to a whole new level.

[Dave · Rating 3 out of 5]

Surprisingly accessible, though there were more than a few times when I struggled to get concepts that Olson waved away as trivially simple.

The focus on communism is probably a product of its time. I would've loked to hear more about special interest groups and regulatory capture. Olson seems too optimistic about how the undoubtedly higher gains of market economies benefit the public at large.

[Irene · Rating 4 out of 5]

Extremely interesting and well-written!
It's always a pleasure for me to learn more about major historical events (in this book, the fall of the Soviet Union) from an economic perspective, since this is what I'm specialising in.
Probably a way too information-heavy book to recommend for a casual read (though it does explain the fundamentals here and quite clearly too), it's a good book to accompany your learning outside of the exams.

[Anna · Rating 1 out of 5]

This book made me want to rip my eyes out.

[Turgut · Rating 5 out of 5]

Great book.

[Aristos]

DNF. It seemed like there were interesting ideas here, but it’s written in a way that assumes your familiarity with themes from Olson’s career, so I found it difficult to follow.

[Ryo · Rating 4 out of 5]

翻译简直是摧残，微信读书的版本像盗版书（排版都是乱的还没有图表），还是要找机会重新读一遍外文原版。

「经济成功有两个必要条件：第一，存在可靠且明确界定的财产权利和公正的契约执行权利；第二，不存在任何形式的强取豪夺。」
「两个条件最有可能在稳固的、尊重权利的民主体制中得到满足，在这些民主体制中，制度的设计使得权威机构的决策最大可能地服从于广泛的利益。」

最后四章是亮点，为什么苏联式国家行不通：
「斯大林主义在很大程度上不是一种关于什么样的经济组织对社会最有利的意识形态而是一种隐性税收体制」
「斯大林所建立的攫取体制的僵硬退化使得前共产主义国家内的大型企业更擅长于内部人游说而不是从事生产。」
「苏联型社会一般并不实行累进收入税制的国民体系，也没有失业保险制度，或者许多其他在西方福利国家应用的国民安全保障网项目。」

[James Smith · Rating 3 out of 5]

Fascinating, though difficult, read. Got me imagining what an "Olsonic" analysis of the current budget/debt crisis might look like, particularly given his critique of special interests and the impossibility of "rational" collective action by small groups.

[Stephen Hull · Rating 1 out of 5]

So what do you do if you're fascinated by science but are incapable of scientific rigour, you're fascinated by math but you're crap at it and you're fascinated by philosophy but are incapable of thinking logically? Easy: become an economist!

[Jon]

Read this book for a graduate level public choice (economics) course - it was fairly theoretical and I discovered that after discussing concepts in class, I was able to better understand the book

[Norbert S · Rating 5 out of 5]

Olson's discourse about Stalin's exploitation of Soviet workers through tax and wage discrimination that ultimately led to the downfall of the system, is fascinating to read.