Olson: The Rise and Deline of Nations

Olson, M., 1982. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, Yale University Press.

The author begins by arguing that there has been a consistent historical pattern of previously insignificant groups becoming more significant, and previously powerful and mighty groups falling to the way side. Olson does not want to write broad based histories of these accounts, but simply wants to provide a theoretical framework for helping understand how these shifts in history could occur. He claims that some of the underlying trends of these power shifts are poorly understood.

In the same way that the rise and fall of many civilizations has not been adequately explained, many large economic events have also had inadequate explanations. For example, the rise of the common European market in 1957 and the subsequent growth of Italy, France, West Germany and Benelux vis-à-vis other nations that one would have expected to grow more quickly (the UK, US, for example) provides a case of an economic phenomena that has not been adequately explained. Additionally, general economic phenomena have not been fully given accord by some of the major economic schools of thought. For example, while Keynes presents a good macro-level account of unemployment, it lacks on the micro level. Neo-classical/rationalist models, on the other hand, claim that all unemployment is voluntary. Olsen attempts to put forward a theory that provides an adequate account of unemployment while still using rational maximizing individuals.

Another question put forth to explore: “Why are some modern societies to some degree ungovernable? That is, Why has it seemed that governments in some countries did not govern or control their societies as well as they had in the past?” (8).

Olson warns against ad hoc explanations for economic phenomena, though some of it may be right. It tends to be not-falsifiable, and hindsight tends to be such that conclusions can be drawn that would have been specious with foresight. Theories must be evaluated on the degree and precision of their explanations.

Ch. 2:

This chapter begins by exploring the differences between the actions of large groups and the actions of small groups. “The paradox, then, is that (in the absence of special arrangements or circumstances to which we shall turn later) large groups, at least if they are composed of rational individuals, will not act in their group interest” (18).

In a footnote, Olsen claims, “Rational need not imply self-interested. The argument in the text can hold even where there is altruistic behavior, although, if particular types of altruistic behavior are strong enough it will not hold” (19).

Incentives can be either negative or positive, and small groups experience these more acutely than large groups. Homogenous groups are more easy to organize. Large groups can experience many who remain rationally ignorant. “In particular, when the costs of individual contributions to collective action are very small, the individual has little incentive to investigate whether or not to make a contribution or even to exercise initiation. If the individual knows the costs of a contribution to collective action in the interest of a group of which he is a part are trivially small, he may rationally not take the trouble to consider whether the gains are smaller still” (28).

“…the larger the number of individuals or firms that would benefit from a collective good, the smaller the share of the gains from action in the group interest that will accrue to the individual or firm that undertakes the action. Thus, in the absence of selective incentives, the incentive for group action diminishes as group size increases, so that large groups are less able to act in their common interest than small ones” (31).

“The argument in this chapter predicts that those groups that have access to selective incentives will be more likely to act collectively to obtain collective goods than those that do not, and that smaller groups will have a greater likelihood of engaging in collective action than larger ones” (34).