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...moreBoth 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. (less)
This book explains the importance of property rights to the success of capitalist systems. In order for a society to use its assets to their fullest p...moreThis book explains the importance of property rights to the success of capitalist systems. In order for a society to use its assets to their fullest potential, it needs a legal system that transforms wealth into "living capital." "Living capital" can be leveraged to create further wealth: for example, in the U.S. most new enterprises are funded by mortgages on the entrepreneur’s home. But in a society that does not clearly define and protect ownership, such strategies are impossible. This explains why market-type economies have brought enormous wealth to Western countries, but have failed to do so in most of Latin America, Africa, and the former Soviet block. The poor in those regions lack access to formal property systems. Regulations and red tape stop them from legally owning their land or starting a business. Consequently, huge “informal sectors” have developed in these countries – markets and neighborhoods buzzing with extra-legal activity. This activity will not lead to large-scale growth and development, however, because the size of markets are limited to the networks where individuals can develop trust and reciprocity, and because extra-legal businesses need to keep a low profile, preventing them from realizing economies of scale. The poor are left frustrated by the growing economic disparity between themselves and the fortunate few who live inside the “bell jar” of formal property rights, where capital creates wealth. This narrative, De Soto claims, describes struggling economies around the world, from Morocco to Peru. He repeatedly rejects the idea that economic performance is determined primarily by cultural factors. Experience shows that capitalism can succeed in diverse cultures, and the phenomena of failing capitalism are the same in countries with no common cultural heritage. Instead of turning to sociological details – such as colonization or religious philosophy – De Soto attributes poverty and the growth of the informal sector to a universal human characteristic: rational, maximizing behavior. The solution to failing capitalism and the growth of the informal sector, therefore, is the same throughout the third world. Governments need to lift the bell jar by creating coherent and inclusive property systems. It is a transformation that took place in the West only a few centuries ago, and Hernando De Soto spends some time in The Mystery of Capital describing how the United States’ property system developed. However, property rights are not an alien concept which third world governments must force on unwilling citizens. Informal sectors already try to clarify and protect ownership. Recreating property law involves adopting and integrating the laws and customs that the informal sector has already developed. The most intriguing concept in The Mystery of Capital is capital’s metaphysical nature. Although we may associate capital with money, capital is not something that we perceive with our senses. Rather, capital has to do with the potential value of an asset, and is something that we perceive with our minds. Property law is the symbolic system that unleashes economic growth. De Soto’s prose becomes near-mystical when he writes about capital’s transcendent nature, and he compares property systems to other symbolic systems that have empowered humans over the course of history, from musical notation to computer software. It is by our ability to create and manipulate symbolic systems that we can “soar into the future.” (less)
An academic mystery and an admirable attempt at packaging economic arguments into a work of fiction. The book includes a nice passage on dutch auction...moreAn academic mystery and an admirable attempt at packaging economic arguments into a work of fiction. The book includes a nice passage on dutch auctions.(less)
If you can comprehend Veblen's sesquipedalian style and get past his alienating lack of common moral sensibilities, you may enjoy this introduction to...moreIf you can comprehend Veblen's sesquipedalian style and get past his alienating lack of common moral sensibilities, you may enjoy this introduction to an American economist who (unlike many economists)recognized that man "is not simply a bundle of desires...but rather a coherent structure of propensities and habits which seeks realization and expression in an unfolding activity."(less)
I remember that what struck me most about this book was Friedman's faith in human beings - not that they would be altruistic or well-behaved, but that...moreI remember that what struck me most about this book was Friedman's faith in human beings - not that they would be altruistic or well-behaved, but that they know what makes them happy.(less)