A Review of Mancur Olson’s Power and Prosperity

Posted by: on Nov 30, 2012 | No Comments

Oslon bookRenowned social scientist and economist Mancur Olson is best known for his treatise called The Logic of Collective Action. But, it is another work of his that also deserves attention. In Power and Prosperity, Olson deals with the oft repeated question – why does an economic divide persist between countries? The economic effects of tyrannical, anarchic and democratic governments are contrasted and a panoramic view of the continued struggle of communist establishments as they prepare for a new capitalist order is given.

Had Power and Prosperity Seen the Light of Day

Olson was a Professor of Economics at the University of Maryland when he breathed his last at the age of 66. If his latest works were published, his ideology would have passed through the sieve of critical analysis and the book would not be so disorganization. Yet, his language is easy and he manages to cover a spectrum of topics in a short book.

The Transition from Communism to Capitalism

Power and Prosperity is an investigation into administration in the post communist world. In the era of the Cold War, socialism tottered and fragmented the erstwhile USSR and Eastern Europe in its wake. Meanwhile, the Red Dragon in the neighborhood, China, heralded its arrival as a modern capitalist society. Yet, more than ten years hence, capitalist prosperity remains a distant dream.

Former USSR is a good example of this phenomenon. Barring a few cities like St. Petersburg and Moscow, the country is in a deeper economic quagmire than it was during the reign of communism. Many supporters and propagators of socialism highlight this as a “proof” against capitalism, saying that capitalism creates greater poverty for a larger number of people. However, Olson points out that the situation has more to do with the process of ushering in a new social order and the existing system of “perverse incentive”.

Olson states that many large, state-owned enterprises intensely oppose privatization and economic reform, embracing such concepts only in conditions as will allow them to remain in power. In Power and Prosperity, Olson says, “But in many large state-owned enterprises, there is a surprising and often intense opposition to privatization and economic reform generally. More often than not, if any mass privatization takes place, it is only privatization [such as in Russia] that gives the firms mainly to the insiders and the existing management, and leaves the same managers in power as before.”

So What Went Wrong?

You cannot build a capitalist economy on the foundation of a socialistic one. The base of free markets cannot be communism, and this is exactly what went wrong in USSR.

Olson highlights that there was a general reluctance to place state-owned enterprises in private hands. Moreover, the managers, who had become myopic and rigid under the communist rule, are unlikely to fit seamlessly into a privatized entity, making the current situation worse.

An economy that is mostly made up of firms that survive on subsidies given by the government will surely be a drain on society and drag people into poverty. This is because a subsidized firm will never strive towards concepts like the optimum utilization of resources, cost control or innovation to remain on top. These firms become accustomed to government handouts and never learn to be efficient. Hence, when the government subsidies are removed and the firm is left to its own to compete in a free market, it may suffer terribly and be unable to cope.

The Prerequisites of Prosperity

So, what is needed for prosperity? In the words of Olson, “To realize all the gains from trade, then, there has to be a legal system and political order that enforces contracts, protects property rights, carries out mortgage agreements, provides for limited liability corporations, and facilitates a widely used capital market that makes the investments and loans more liquid than they would otherwise be. These arrangements must also be expected to last for some time.”

Taking the example of Nepal, where the arrangements and governments have changed almost every year, one can see the importance of stability and its link with prosperity. Olson adds that prosperity requires the availability of “a broad and secure set of individual rights”.

External Links
1. Link to Google Books – Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships
2. Link to Google Books – The Logic of Collective Action: Public Goods and the Theory of Groups

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