The Power of Interest Groups

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities,
by Mancur Olson,
New Haven and London, Yale University Press.

Olson is after a simple but compelling analysis of economic success and failure.  He claims to provide a new perspective on this sixty-four dollar question.  According to Olson, the key factor ignored by existing economics is the way interest groups organise and operate.  His essential thesis can be summarised in two central contentions:

• economic growth is stunted by disproportionately powerful interest groups, and
• long periods of political and social stability breed disproportionately powerful interest groups.

Two complementary conclusions follow from this.  The first is that rapid economic growth will occur in societies where a free and stable legal order has been newly established and where there has been no time or opportunity for sectional interest groups to organise and entrench themselves.  The second conclusion is that economic growth will decline over time in such societies because sustained stability will allow sectional interest groups to stake out special claims and thus reduce overall economic efficiency.

As examples of the first conclusion, Olson cites the rapid growth of postwar Japan and West Germany, of the founding nations of the Common Market, and of Korea, Taiwan, Hong Kong and Singapore.  As examples of the second conclusion, he cites the recent slow growth of Britain, the decline of per capita incomes in Australia and New Zealand relative to Western Europe, and the stagnation of China and' India prior to European intervention.

Stability is both an enemy and a friend of economic growth.  The high costs of stability do not constitute an argument for revolution, because the costs of instability are even higher.  Without stability, resources are diverted away from long-term investment, and capital may fly to more stable environments.

Olson makes a number of wider claims.  On the economic front, he claims to offer an effective analysis not only of involuntary unemployment, depressions and stagflation, but also of "the pattern of the development of the macro-economic problem over time".  On the social and political front, he claims his approach does far better than any other theory "in explaining the British class structure, the Indian caste system, and the timing and character of the stronger forms of racial discrimination in South Africa".

Olson argues his case with a real sense of mission.  He presents it not as a new point of departure, but an extension of existing economics.  The implicit foundation on which the whole case rests is that genuinely open and competitive markets are the necessary and sufficient condition of rapid economic growth.  The real problem is how to create such markets -- and more important, how to keep them open and competitive over time.

Olson regards the laissez-faire solution to this problem as inadequate ideology.  On that view, "markets will solve the problem if the government only leaves them alone".  Olson's rebuttal is that "there often will not be competitive markets even if the government does not intervene", because "the government is by no means the onIy source of coercion or social pressure in society".  This is of course the point at which organised interest groups enter the picture.

He argues that existing macro-economic theory is "like Hamlet without the Prince of Denmark".  It overlooks the effects of special interest groups, which are, as Olson seeks to demonstrate, the very factors that give rise to unemployment and fluctuations in the level of real output.

Accordingly, Olson would like to see the focus of economic research move beyond the debate about Keynes.  He believes the new focus should be concerned with how maximum levels of employment and output can be achieved, and open and competitive economies preserved in societies that are politically and socially stable.

THE LOGIC

Olson himself regards the logical basis of his theory as the most important part of the book.  Chapter Two, entitled "The Logic", shows how and why some interest groups are able to achieve disproportionate amounts of power and influence.  The lynchpin of Olson's thesis is that different interest groups have unequal capacities to pursue their interests.

This inequality is reflected in the paradoxical fact that many interest groups fail to act in support of their interests.  Olson cites the frequently supine behaviour of "consumers who agree that they pay higher prices for a product because of some objectionable monopoly or tariff".

Why don't group members act to further their group's interest?  The short answer is that it does not pay any of the individuals concerned to take the trouble.  As Olson puts it, "Since any gain goes to everyone in the group, those who contribute nothing to the effort will get just as much as those who make a contribution.  It pays to let George do it, but George has little or no incentive to do anything in the group interest either".

The upshot is twofold.  First, groups which can provide "selective incentives" to members who act in the group interest gain a comparative advantage over other groups.  Selective incentives restrict the benefit of a collective good to those group members who have contributed to it, give extra benefits to contributors, or penalise non-contributors.  Examples are closed shop arrangements, group air fares, and sending unco-operative colleagues to Coventry.

The second upshot is that other things being equal, small groups have a comparative advantage over large groups.  This is because a benefit gained for a small group is shared among fewer individuals.  The effort involved in doing something for the group is therefore more worthwhile for an individual member.

Olson considers the policy implications of his theory only briefly.  The obvious remedy for the problems he has identified would be to "repeal all special-interest legislation or regulation and at the same time apply rigorous anti-trust laws to every type of cartel or collusion that used its power to obtain prices or wages above competitive levels".  But he does not see this happening.

He emphasises three policy implications.  The first is that "the best macro-economic policy is a good micro-economic policy" -- by which he means that nothing can put an economy right if it is not open and competitive.

The second is that anti-inflationary policies must be applied in a steady and gradual way over time.  A sharp contraction may work if the key interest groups are able to adjust their responses quickly.  But one implication of Olson's logic is that these groups are slow decision-makers.

The third implication is that tax and subsidy schemes would make an important contribution to reducing unemployment if combined with good monetary and fiscal policies.

Olson would agree that a great deal more research and evidence is needed before his thesis can be fully assessed.  The major question in evaluating this book, however, is not so much whether Olson has a point.  The question is rather how much weight should be attached to it.  Olson's central contribution is to highlight a factor which must be addressed in the policy prescriptions of those who advocate free and competitive markets.