Explaining the rain: The Rise and Decline of Nations after 25 years

Southern Economic Journal, July, 2007 by Jac C. Heckelman

1. Introduction

Mancur Olson's (1982) The Rise and Decline of Nations was hailed as an instant classic in several circles but was met with its fair share of critics. To date, there are over 1800 citations of Rise and Decline listed in the Social Science Citation Index. The citation count continues to be strong, ranging from 50 to 100 in any given year since its publication (Figure 1). As detailed by Whaples (2003), while Rise and Decline ranks second in citations only to Alfred Chandler's The Visible Hand among all books in economic history, at the same time it has received a decidedly mixed reaction from economic historians, both in initial reviews and in current retrospection. McLean (2000) asserts the common wisdom among public choice scholars that, despite being an economist, Olson was probably more revered within political science. Yet despite this (or perhaps because of it), Olson has also been attacked as just another economist wrongly applying economic theory to political science (Green and Shapiro 1994).

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Although a wide variety of related concepts can be found throughout the book, most attention has been paid to Olson's concept of "institutional sclerosis," in which it is hypothesized that special interest groups will accumulate over time in stable societies and eventually reduce the economic efficiency of the economy in which they operate. An outline of the basic development of this theory is presented in the next section.

The main purpose of the paper, however, is to consider the body of evidence testing for institutional sclerosis. This is done in two parts: first by examining previous cross-sectional regressions explaining variation in growth rates and then by discussing the large-scale descriptive accounts others have made regarding the experience of various nations. As with any theory that has undergone a multitude of tests, support for institutional sclerosis is not universal. On the whole, however, it has been well received and appears to be equally supported by both cross-sectional econometric tests and descriptive case studies of individual nations. The interdisciplinary nature of Olson's work is made clear by the almost equal appearance of these tests in both economics and political science journals and by scholars on both sides of the Atlantic. No systematic bias in favor or opposition to Olson's theory is found to have arisen in any of these camps.

2. From The Logic to Rise and Decline

Mancur Olson's research covered a variety of topics, but he will always be most closely connected to interest group formation and their macroeconomic consequences. Olson's focus on interest groups can be traced back to his dissertation at Harvard, later published as The Logic of Collective Action (1965). (1) In Logic, Olson's primary concern was the provision of goods or services that provide benefits to multiple individuals, even those who do not participate in their provision. Olson argued that collective provision of such goods or services confronts the same difficulties as do cartels. Individuals will take advantage of inexcludable benefits by declining to participate in the provision of these goods and services, thereby acquiring the benefit without incurring the cost. According to Olson, individual incentives will tend to work against the formation of groups whose purpose is to provide these public goods. Olson notes that in this context, the free market would underprovide public-type goods. He emphasized, however, that the extent of this free-riding behavior would be a function of group size. Small groups would be more likely to form than would large groups because free riding is easier to monitor in smaller groups.

Larger groups are expected to have trouble attracting membership and would need to rely on a system of selective incentives. Such groups would need to also simultaneously offer special excludable private goods, such as low-cost insurance, to act as an enticing carrot, while social pressures, such as ostracism or physical harm, would represent a threatening stick. However, if a single member could obtain a benefit that would exceed the total cost, he or she may provide the good while others free ride on its nonexcludability. Olson referred to this phenomenon as "exploitation of the great by the small." In game-theoretic terms, complete free riding is the Nash equilibrium to a prisoners' dilemma game, but exploitation of the great by the small is akin to the equilibrium in a game of chicken, where even the exploited is better off, although in a personal second-best situation (Mueller 2003, chap. 2).

The analysis stemming from Logic suggests that narrow special interests will be more prevalent than larger groups, which suffer from free-riding problems. In The Rise and Decline of Nations (Rise and Decline hereafter), Olson set out to develop the macroeconomic consequences of the interests facing such groups. In particular, he argued that past research on the sources of growth were lacking since they did not answer the fundamental question as to the primary establishment of growth prospects; rather, "they trace the water in the river to the streams and lakes from which it comes, but they do not explain the rain" (Olson 1982, p. 4). Olson set out to explain the rain that created the environment for growth and the avenues in which growth was blocked by these same forces.