How Rich Countries Die

This is a brief overview of a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson at Philip Greenspun's Weblog. The full book review is fairly lengthy but well worth the read. Indeed the original book itself may have been better titled as "the Decline and Fall of Nations" as there seems little in it that is uplifting in the current situation, except perhaps a warning that many countries are going down a slippery slope towards permanently unproductive economies.

The main thesis is that Olson wants to separate productive and non-productive parts of the economy; something that traditional macroeconomics ignores. He sees government spending as largely unproductive. It does keep people employed but it is just a recycling of money taken from taxpayers and redistributed to activities that by their very nature do not yield a profit and hence do not contribute to economic growth and wealth.

The second attack is against the increased influence of special interest groups within developed economies. Olson sees both corporate lobbying and powerful trade unions as contributing to the decline of a nation's prosperity as they both seek to put their own interests above that of the nation. Surely, seeking a balance is what governments are there for, and yet once the lobbying becomes so ingrained it is almost impossible to find a politician untarnished by either corporate or worker support. The downward spiral of inefficiency and unproductiveness thereby continues as bigger and bigger government is need to monitor often conflicting market rules and regulations.

The book was written back in 1982 and Olson's thesis is that standard macroeconomic theory is basically useless in describing developed economies. Agreements between governments, companies and workers can work in rebuilding a country, as happened in Italy, Germany and Japan, but eventually such arrangements become negative in that they but the brakes on much needed changes demanded by new market conditions and new technologies. Just look at the US auto industry - both corporations and unions want to keep their cozy market and demand government bailouts rather than adapting to market changes ten years ago.

How does all this help an individual today? Well, the message is that if you wish to prosper then look for a new industry and a developing country. The mobility and flexibility of an economy unhampered by decades of nepotism may even be more important than the actual industry sector. Be flexible and mobile and smart!

One slightly depressing side issue is that Olson believes that people moaning about their political establishment should just ignore it and concentrate on earning more money. The special interest groups have significantly more funding than any individual, or even groups of individuals, and that the time wasted in seeking political solutions is better spent seeking personal economic solutions. Voting for change is an illusion - vote with your feet.