How Rich Countries Die

Thursday, September 15th, 2011

Philip Greenspun reviews Mancur Olson’s The Rise and Decline of Nations, which he believes should be titled How Rich Countries Die:

Olson showed back in 1982 that modern macroeconomic theory was basically worthless in developed stable countries. Macroeconomics posits a free market in which wages and prices adjust dynamically. That applies to an ever-smaller sector of the U.S. economy. We have a rapidly growing governnment that directly or indirectly employs more than one third of our workers, many of whom are unionized. We have a health care system that consumes 16 percent of GDP and is staffed with doctors who restrict entry into the profession via their licensing cartel. The financial services sector is about 10 percent of the economy and they now tap into taxpayer money to keep their bonuses flowing in bad times. The automotive industry kept itself profitable over the years by successfully lobbying for import tariffs. When the profits turned to losses, they successfully lobbied to have taxpayers pick up those losses. A university-trained macroeconomist might be able to predict what will happen to babysitters in a depression, but not the price of cereal, the wage of a manufacturing worker, or the fate of those Americans who collect most of our national income (e.g., Wall Street, medical doctors, government workers).

A cashflow approach is much more effective for figuring out where we’re headed. Money flows out to the folks on Wall Street who bankrupted their firms, to schoolteachers who’ve failed to teach their students, to government workers who feel that simply showing up to work is a heroic achievement, to executives and union workers in America’s oldest and least competitive industries. If times are tough and money is tight, that means almost nothing is left over for productive investment. What would have been a short recession will turn into a long depression and decades of higher taxes and slow growth to pay for all of the cash ladled out. Special interest groups will continue to gain in power.


  1. Jonathan Rauch’s 1992 article Demosclerosis, which draws heavily from Olsen’s work, remains an outstanding explanation of the phenomenon, as does the book based on the article.

  2. Aretae says:

    Great book.

    Aretae Summary: It ain’t democracy that’s the problem. All known stable societies have done the same thing.

    The problem is the growth of areas where innovation is prohibited, either legally (patents, licensing, heavy regulation) or effectively (government or monopoly enterprises where the values of innovation are all negative).

    Of course, 99% of that seems to me to be solvable via an abolition of government. (Olsen doesn’t agree.) But all known systems of government trend that way, it seems.

  3. Johnny Abacus says:

    “It ain’t democracy that’s the problem. All known stable societies have done the same thing.”

    I would rephrase this as “All known societies are unstable.”

  4. Buckethead says:

    The question, then, is for how long? What’s the half life for different societal types?

  5. Isegoria says:

    If we look back at the life-spans of empires, they appear to follow an exponential, or memory-less, distribution, suggesting some small chance of things going terribly awry each year (and then spiraling out of control), rather than insults and injuries accumulating over the years before hitting some threshold.

  6. Isegoria says:

    Olson’s point, that Aretae was reiterating, isn’t simply that all societies are unstable but that they follow a particular pattern of dynamic growth, followed by increasing parasitism, and then outright collapse.

  7. Isegoria says:

    Saying something is solvable through the abolition of government is turning a difficult but potentially tractable problem into a totally intractable one.

  8. Madera Verde says:

    If both things are true (that you refer to at 1:03 and 1:08) then some things occur to me to explain the apparent contradiction:

    1. Societies and empires are decoupled.
    2. Societies renew themselves.
    3. Parasitism is reined in when it creates a danger of societal collapse.
  9. Alrenous says:

    Abolition of government might actually be easy — more specifically, separation of security and state.

    All states have relied on political myths and a perception of legitimacy or at least inevitability.

    Break the perception of legitimacy for all kinds of states simultaneously, show even a single counter-example of inevitability — Iceland, the Apache — and they are doomed. No revolution necessary.

    This ["memory-less" life-span distribution] implies that all predictions of USG collapse are false. The end may be becoming more likely due to “moral decay” and such, but the end is not itself predictable.

    Especially as stability is decreasing, it is impractical to discriminate between normal decay and catastrophic decay.

  10. Baduin says:

    The problem with that book is that it is completely wrong.

    Macroeconomic theory does not explain what happens in the free market, because its mathematics are faulty.

    USA does not suffer from low corporate profits — corporate profits are high.

    US corporate profits reached their highest level in history, while new home sales fell to their lowest pace ever, according to data released this week by the federal government.

    At the same time, the wages and incomes of the working class have steadily fallen.

    There is no problem with lack of money for investments. Money is free and abundant; what is lacking are investment possibilities.

    In short: this book is a piece of propaganda which was used to cause current economic crisis.

    The problems he noticed were quite real: but they were inefficient half-measures used to balance the real fundamental problems: ie the decline in the incomes of the consumers and the crisis of overproduction.

    He noticed that a man with a broken leg in a cast cannot run, and decided that it is the cast which is stopping him. Therefore, the cast was taken off, the man run a few meters and the leg broke again.

  11. Isegoria says:

    Societies and empires are certainly linked but far from perfectly coupled. When Rome fell, Italian society suffered — both population and standard of living dropped — but it didn’t disappear. It reverted to a simpler, feudal model, with less trade across long distances and thus less specialization and lower incomes.

    The key point, I suspect, is that societies don’t come into being with a certain amount of societal strength that gets withered away over time, but they can get stronger or weaker from year to year, and sometimes the more inefficient forms of parasitism get replaced with more efficient forms, even if the parasites are rarely removed outright.

  12. Isegoria says:

    Destabilizing the current regime isn’t the intractable part. Maintaining the ensuing power vacuum is the intractable part. And a roving bandit is worse than a stationary bandit.

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