In my opinion the Wall Street article seems to contradict Olsons .docx

In my opinion the Wall Street article seems to contradict
Olson's statement about lobbying. According to Olson the
groups that have access to selective incentives are more likely
to act in order to obtain collective goods, the smaller the group
the grater the chance to engage in taking action. Meanwhile the
collective good is predicted to be greater since the group is
smaller. So the logic is the greater the group the smaller the
likelihood of the group to take collective action. However,
according to the Wall Street article, unionized workers have
increased their influential power on politics over the last seven
years! Situation that contradicts Olson, (in my opinion)
unionized workers rely on little incentive to take collective
action however the collective good (if obtained) can be of great
benefit for the group. it is also true that unions
have increased their political spending while the amount of
members have decreased considerably. The number of unionized
workers is smaller compared to numbers from 25 years ago
however, the number of unionized workers is still a
considerable great number.
I believe that union workers are sometimes willing to work as
campaign workers because of a combination of factors:
· Trivial costs compared to perceived rewards;
· The psychological effects of working in a group toward a
common goal;

· The innate political drive of many union leaders
(workers may see political prowess as a way to move up the
union ladder).
Prima facie, this would support Olson’s argument that labor
unions would not exist if the sole benefit of joining them was
the common benefits they provide. If the only benefit to union
workers’ political efforts were the results those political
campaigns bring union workers, there would in fact be no
intrinsic motivation for the workers.
The reality is however, that there are other benefits to a union
worker’s political activity beyond the benefits reaped from a
successful campaign, and this could be a possible reason why
workers continue to be involved, despite the fact that the gains
of the union are virtually universal.
THE RISE AND DECLINE OF MANCUR OLSON’S VIEW OF
THE RISE AND DECLINE OF NATIONS
J. Barkley Rosser, Jr.
Department of Economics
MSC 0204
James Madison University
Harrisonburg, VA 22807 USA
tel: 540-568-3212
Email: [email protected]
February, 2007
JEL Codes: B31, H00, N00, P00
Keywords: collective action, encompassing organizations, rent

seeking, transition economies
Abstract:
The evolution of Mancur Olson’s views of his book, The Rise
and Decline of Nations (1982), the middle of his three main
books, is examined. It expands and extends to history and the
world arguments presented in his The Logic of Collective
Action (1965). While he never abandons the idea that the
accumulation of interest groups in a democratic society may
lead to its economic stagnation, how this comes about and can
be overcome changes somewhat by the time of his final book,
Power and Prosperity (2000), which focuses on the problems of
the transition economies and proper political governance. A
sign of the greater complexity of his later views emerges in his
analysis of the U.S. South, presented in his presidential address
to the Southern Economic Association (1983).
Acknowledgements: The author wishes to thank Roger R.
Betancourt and Thomas C. Schelling for providing either useful
comments or materials, and Dennis Coates and Jac C.
Heckelman for careful editing of earlier drafts of this paper.
None is responsible for any remaining errors or
misinterpretations.
1. Introduction
While Mancur Lloyd Olson, Jr.’s first main book,
The Logic of Collective Action (1965), has been cited more and
can be viewed as more fundamentally innovative at the
theoretical level, its successor, The Rise and Decline of Nations
(1982) [henceforth, RADON] has been more widely translated
and is arguably the magnum opus of his career, the grand
application of his earlier ideas to the world and history at large.
The earlier work laid out the problems that groups have in
their collective goals as they become larger, with a greater

disjuncture between the interests of the individual and of the
collective group arising. In the final chapter of this work he
suggested that his argument could lead to an overturning of the
“orthodox” theory of pressure groups that saw them as a
positive force for democracy and efficiency (Luce, 1924;
Commons, 1950). Special interest groups representing small
numbers of firms in oligopolistic industries could support
monopolistic or protectionist legislation. Such legislation could
damage the broader economy, especially groups unable to
organize themselves that would then have to “suffer in silence.”
While he rarely used the term, this argument can be seen as
foreshadowing the later theory of rent seeking, and in his later
works he more openly recognized the affinity of his ideas with
the public choice school of thought.
Although he added a number of arguments, two crucial
innovations appear in RADON that underlie its central thesis.
One is the distinction between distributional coalitions, which
are seen as leading to outcomes inimical to economic growth,
and encompassing coalitions, which are seen as potentially
aiding economic growth in a society. Because of their greater
size, the latter are seen as having trouble organizing themselves
and achieving influence, although they may have a better chance
of doing so in a smaller and more homogeneous society such as
Sweden.
His other innovation is the argument that over time a stable
democracy will tend to accumulate more and more distributional
coalitions whose political power will accumulate, thus gradually
impeding the economic growth of the society. This becomes the
key to his most famous argument in RADON. He especially
focused on the post-World War II performance of Germany and
Japan as compared with the United Kingdom, arguing that the
defeat of Germany and Japan in the war had led to the
overthrow of the power of narrow special interest groups that

impeded growth whereas in the UK such groups reached a peak
of power that was responsible for the relatively weak
performance of the British economy. He emphasized that this
was not a sudden development, but that after leading the world
in economic growth during the Industrial Revolution during the
“long eighteenth century” (1688-1834), Britain began to fall
behind in the mid-19th century compared to such rising powers
as Germany and the United States, this deceleration and relative
decline only worsening in the aftermath of World War II. While
he discussed a variety of other examples, this was the book’s
central inspiring case.
Of course, even as RADON was being published, the UK
began to undergo a substantial political and economic
transformation during the period of rule by Margaret Thatcher
that triggered a global movement to privatization and
marketization, even though Britain was not invaded and did not
experience a violently revolutionary upheaval. Thus his central
example undercut his argument about the inevitability of
stagnation in a stable democracy. The power of special interest
groups could be broken, and a stagnant economy could regain
growth and dynamism through peaceful democratic means.
While Olson largely avoided discussing the case of Thatcher’s
Britain in his later work, it is quite likely that its example
helped move him toward expressing strongly pro-democracy
positions in the final pages of his last book, Power and
Prosperity.
If Britain was the primary inspiration, the example that
provided the data for the econometric support of his argument
in RADON came from comparing the states of the United
States. Pulling the states of the Confederacy aside, he found a
strong negative relationship between how long a state had been
in the Union and its rate of economic growth. He identified this
also with the presence of older industries in the older states
along with some evidence of more entrenched and numerous

special interest groups. He also briefly discussed the special
case of the Confederate states, a discussion expanded in his
presidential address to the Southern Economic Association
(1983). He would attempt to fit the South into his framework,
but it involved other factors such as transportation and social
peculiarities that complicated the main line of his argument.
However, it must be recognized that while he presented his
main argument forcefully in most of RADON, he recognized in
certain places (pp. 15, 87) that “monocausal” theories of history
and economics are inadequate, thus opening the door to this
later adumbration.
In his final book, two themes emerge as paramount, one
theoretical, one political-historical. The theoretical was the
debate with a main rival to his grand historical theory, the new
institutionalist perspective of Douglass C. North (1981, 1990)
with its emphasis upon a Coasean analysis of transactions costs
as determining the quality of economic institutions and hence
economic outcomes. The other was the attempt to apply his
ideas to the problems of the transition economies after the fall
of the Soviet Union, a project that he had been specifically
involved in since 1991. While he continued to defend his main
thesis from RADON his focus shifted somewhat to the
discussion of appropriate governing and institutional structures
in the transition economies and developing economies more
broadly, with a recognition of the importance of North’s
emphasis on protecting property rights and the ability to enforce
contracts.
In the Preface to his final book he posed the question of why
some countries are rich and some are poor and found the answer
in the quality of institutions. In the final pages of the book he
argued that the underpinning of quality institutions would be
democratically founded individual liberties and also the absence
of predation by either the private or public sectors, a market-
augmenting government. Thus, if in RADON he would

highlight the potential for democracies to lead to economic
stagnation, in his final work he would affirm their fundamental
importance in guaranteeing long-term economic growth.
2. From TheLogic to RADON
Martin C. McGuire (1998) argues that The Logic of Collective
Action was not initially appreciated when it appeared, indeed,
that it almost did not appear as Olson’s final major professor
and the editor of the Harvard series, Thomas Schelling, initially
rejected it as a thesis until after it was substantially revised, a
rejection so severe that Olson was preparing a completely
different possible thesis topic as an alternative until it was
accepted.
McGuire argues that what eventually made The Logic into a
classic were the extensive footnotes with their discussion of the
many variations and possible extensions and cases involved
beyond the basic argument. These possible extensions and
cases would inspire a substantial cottage industry of research in
working them out more formally over the next several decades,
with all of this effort ultimately referring back to the
foundational work by Olson. Thus the book only emerged over
time as the classic that it now clearly is.
Some of this development of ideas was carried out by Olson
himself, at times with coauthors. One of the more important
such extensions involved his famous paper with Richard
Zeckhauser (1966), “An Economic Theory of Alliances,” and
their later (1970) “The Efficient Production of External
Economies.” The earlier paper particularly took off from some
brief remarks in The Logic (p. 36) regarding how in the NATO
alliance it seemed that a disproportionate share of the cost
burden was borne by the larger countries. This observation was
part of the general argument that as groups expand in size it
becomes harder for them to provide an optimal level of the

collective good. In the 1966 paper Olson and Zeckhauser posed
the famous formulation of the “exploitation of the great by the
small” that can occur within a closed group that provides itself
a pure public good by voluntary contribution, which made this
paper Olson’s first to attract widespread attention within the
economics profession. This result would be refined by later
economists (Warr, 1983; Bergstrom, Blume, and Varian, 1986;
Andreoni, 1988) to show that if preferences are identical within
the group, there will be a definite cutoff in income below which
a member will contribute nothing.
Recognition that externalities and the degree of collectivity
varies in extent led Olson (1969a) to publish his “The Principle
of Fiscal Equivalence: The Division of Responsibilities among
Different Levels of Government,” in effect a theory of fiscal
federalism. The argument is that the appropriate level of
government to supply a particular kind of collective good is that
which comes closest to encompassing the extent of its
collectivity or the externalities associated with it. While this
now seems an intuitively obvious result that would seem to be
almost a truism, it had not been previously articulated in
precisely that form.
During this period his focus on externalities got Olson involved
in his one major foray into government when, as an Assistant
Deputy Secretary for the then Health, Education, and Welfare
(HEW) Department, he wrote a report (1969b) about how
various social indicators should be constructed to measure
quality of life beyond merely measuring real per capita income.
This idea has become entrenched in the Quality of Life indexes
now regularly constructed for the United Nations and other
bodies.

As part of this project Olson also became concerned with the
problem of negative externalities and how rapid economic
growth could be socially destabilizing because of these
problems. He would express these ideas in several publications
(1969c, 1977).
However, he apparently prepared a more or less book length
exposition of these ideas as an extension of his HEW report that
has never been published. He discussed it at some length in a
footnote in RADON (pp. 249-250) in which he noted the
possibility that economic growth may not always be a good
thing, just the opposite of what he was assuming throughout the
rest of that particular work. In this footnote he provided the
title “Beyond the Measuring Rod of Money” for this never-to-
be-published work and said of it (1982, p. 249), “this is a book I
very nearly decided to publish in the 1970s, but I decided this
subject was so vast that it needed years of additional thought – I
hope to finish revising it soon after this book is published.”
But this did not come to pass.
3. The Main Argument
McGuire (1998, p. 256) claims that one day over lunch in the
mid-1970s while at the University of Maryland (Olson’s home
base from the late 1960s to his death), Olson argued that the
extremes of laissez-faire and a command socialist economy
would avoid rent-seeking, while a mixed economy would be
subject to it. He was sharply challenged on this claim, which
led him to formulate an idea that essentially goes against his
earlier argument about larger groups being unable to obtain
collective goods: the encompassing organization. The
distinction between this kind of group, whose interests coincide
with the broader social collective interest, and the narrower
distributional coalition, the special interest, rent-seeking groups
that slow down economic growth, became the key to his
argument in his 1982 Rise and Decline of Nations [RADON].
In the first chapter of this book he posed the basic data on the

post-World War II performance of the major nations,
highlighting particularly the relatively poor performance of the
UK as compared with (West) Germany, Japan, and even France.
In the second chapter he largely reiterated his basic arguments
from The Logic of Collective Action. In the crucial third
chapter, “The Implications,” he introduced his distinction
between encompassing and distributional organizations and
worked through how they affected his earlier arguments.
Drawing on a variety of historical examples, he summarized his
argument with a set of general implications that he then listed at
the end of the chapter after discussing them individually. They
constitute the central core of RADON, and they are as follows
(1982, p. 74).
1. There will be no countries that attain symmetrical
organization of all groups with a common interest and thereby
attain optimal outcomes through comprehensive bargaining.
2. Stable societies with unchanged boundaries tend to
accumulate more collusions and organizations for collective
action over time.
3. Members of “small” groups have disproportionate
organizational power for collective action, and this
disproportion diminishes but does not disappear over time in
stable societies.
4. On balance, special-interest organizations and collusions
reduce efficiency and aggregate income in the societies in
which they operate and make political life more divisive.
5. Encompassing organizations have some incentive to make the
society in which they operate more prosperous, and an incentive
to redistribute income to their members with as little excess
burden as possible, and to cease such redistribution unless the
amount redistributed is substantial in relation to the social cost

of the redistribution.
6. Distributional coalitions make decisions more slowly than the
individuals and firms of which they are comprised, tend to have
crowded agendas and bargaining tables, and more often fix
prices than quantities.
7. Distributional coalitions slow down a society’s capacity to
adopt new technologies and to reallocate resources in response
to changing conditions, and thereby reduce the rate of economic
growth.
8. Distributional coalitions, once big enough to succeed, are
exclusive, and seek to limit the diversity of incomes and values
of their membership.
9. The accumulation of distributional coalitions increases the
complexity of regulation, the role of government, and the
complexity of understandings, and changes the direction of
social evolution.
The final piece of his thesis was to add that stable democracies
without defeat, revolution, or some other substantial internal
upheaval tend to accumulate more and more of these
distributional coalitions over time. This then explains the
stagnation of long-stable democracies such as post-World War
II Britain as compared to the just-defeated Germany and Japan.
4. Further Applications of the Argument
In the remaining four chapters of RADON Olson applies this
basic argument to a variety of cases in different parts of the
world and at different periods of time. The fourth chapter,
“Developed Democracies since World War II,” presents his
main cases, the contrast of booming (West) Germany and Japan
with stagnant Great Britain. This is the revenge of the defeated
nations, liberated from their rent-seeking distributional

coalitions. France is also included as part of the booming
group, and it certainly exceeded both the UK and the United
States in GDP growth rate in the decades immediately following
the war, although it is somewhat more problematic in terms of
the story that Olson tells.
Olson also explains the apparently anomalous good
performance of Sweden as due to its special interest groups
being of the encompassing nature, with its labor and
management groups negotiating at the national level to achieve
a stable macroeconomy.
The chapter concludes with an econometric analysis of the
United States, showing that older states are growing more
slowly than newer states, correcting for other variables, with a
brief discussion of the special circumstances of the American
South.
The fifth chapter, “Jurisdictional Integration and Foreign
Trade,” focuses on how Britain became the center of the
industrial revolution, arguing that it was the first nation in
Europe to achieve jurisdictional integration and a unified
national market after the Glorious Revolution of 1688 stabilized
the nation, following the upheavals of the Civil War of the mid-
17th century. This jurisdictional integration undercut the power
of the local distributional coalitions that held back the nation
and continued to operate in such rivals as France. Much as in
his discussion of the U.S., Olson argues that the industrial
revolution arose in previously smaller cities, such as
Manchester and Liverpool, which displaced some earlier large
cities such as Norwich and York (p. 123). Australia and New
Zealand are posed as negative cases like the later Britain, stable
democracies that became constrained by excessive tariffs,
clearly exhibiting the power of strong distributional coalitions.
The chapter ends by warning that if the coalitions are strong
enough they can overcome even the advantages of free trade,
with the UK as the example. The cartelizations and excessive

union power of the British coalitions show up in the sectors not
competing in international trade.
The sixth chapter, “Inequality, Discrimination and
Development,” moves to history and the less developed world,
blaming stagnation in pre-Communist China on the entrenched
power of strong guilds (Morse, 1909) and the stagnation of
India on its caste system, despite the highly laissez-faire system
that the British maintained there during the Raj (Ansley, 1952).
He also argues that guilds were problems in ancient
Mesopotamia. Following the provocative analysis of Hutt
(1964), Olson blamed the problems of South Africa on the
distributional coalitions set up by fearful white workers.
The final chapter, “Stagflation, Unemployment, and Business
Cycles,” moves to macroeconomic problems in the United
States during the troubled period of the 1970s when most of the
book was written. He focuses on sources of price and wage
rigidities, which he sees as poorly explained by both
Keynesians and monetarists, as well as by the rational
expectations school, and which he sees as leading to a bad
natural rate of unemployment. Unsurprisingly he emphasizes
the power of both unions and cartelized industries. This leads
him to advocate essentially Post Keynesian incomes policies in
which tax incentives are provided for cost-side restraints on
wages and prices (Olson, 1979), although it must be noted that
these have not been seriously attempted anywhere.
In any case, as already noted, the success of RADON would
lead to numerous honors and appointments for Mancur Olson.
Besides the presidencies of the Southern Economic Association
and the Public Choice Society, he would be named president of
the Eastern Economic Association and Vice President of the
American Economic Association, as well as membership in the

American Academy of Arts and Sciences and an Honorary
Fellowship of University College at Oxford University. While
The Logic of Collective Action may have been Olson’s
ultimately most innovative and influential work, The Rise and
Decline of Nations was the work that made him most widely
famous, and it was awarded the Gladys M. Kammerer Award for
the best book of 1983 by the American Political Science
Association.
5. Mancur Olson on the American South
If France was a somewhat problematic case for Olson in
RADON, the American South was also. In his presidential
address to the Southern Economic Association (Olson, 1983) he
expanded upon his brief remarks in the book regarding the
South. Given Olson’s general argument was that defeat led to
economic growth as entrenched groups were overthrown or
undercut, the question arises as to why the South did not grow
after its stunning defeat in the American Civil War.
Furthermore, the question arises as to why it then later took off
into dramatic growth after World War II. The answers do not
fundamentally undercut his main thesis in RADON, but they do
suggest that things can be more complicated and nuanced than
his usual story, with the South demonstrating that indeed
economic growth is often a “multi-causal” matter.
For one thing, the events after the Civil War do not clearly
contradict his main line, as he notes an initial emergence of
industrial development after the war that would then get cut off,
notably a 64% increase in manufacturing establishments
between 1860 and 1870 (Wright, 1982). In explaining the
industrial stagnation after this period, Olson followed an earlier
president of the Southern Economic Association, William H.
Nicholls, whose 1960 work Southern Tradition and Regional
Progress emphasized the roles of “agrarian values, a rigid

social structure, an undemocratic political structure, conformity
of thought and behavior, and an irresponsible neglect of public
education” (Olson, 1983, p. 925). This pattern emerged after
the end of the Reconstruction in 1876, although it did so only
gradually as the “Jim Crow” system spread from town to town
throughout the South, not becoming fully entrenched until after
the beginning of the 20th century (Woodward, 1974). In effect,
the previously dominant distributional coalitions reasserted
themselves and restrained industrial development, which was
seen as a threat to the traditional southern social order of white
supremacy and racial segregation.
This social order would spectacularly break down with the civil
rights movement of the 1960s, which got going initially in the
1950s and would coincide with the emergence of regionally
rapid economic growth relative to the rest of the U.S.,
especially the previously predominant Northeast. While Olson
does see this collapse of the previous ruling distributional
coalitions as important, he ends up arguing that this was
probably less important than two other factors: lack of unions
and improved transportation.
Ironically, the former probably reflected the influence of the
previously existing political and social order, which tended to
suppress the development of unions.
Olson would argue that in the end “World War II was more
important for the South than the Civil War” (ibid. p. 929). The
reason was that this was the period of most rapid unionization
in the rest of the nation, especially the established industrial
zones of the Northeast and Midwest, the older sections of the
country that would come to stagnate after the war compared
with the newer states in the West and the newly revived ones in
the South. Thus, after the war the South stood as the location
of low wages and northern industries, especially textile ones,

would migrate southwards, and the southern industrial boom
would be on.
Finally, Olson also emphasizes a factor that has nothing to do
with distributional coalitions or their power, transportation
costs. Olson draws on Barger (1951) to argue that before the
20th century railroad costs were too high to justify northern
manufacturers taking advantage of the low wages in the South
(although the wage differential was not as great as it would be
after unionization took hold later in the North). However, costs
of railroads steadily declined over the first half of the 20th
century, undoing this disadvantage. The emergence of
alternative modes of transport, the automobile and the airplane,
and ultimately the construction of the interstate highway
system, would eventually alter this situation such that the South
would no longer suffer a transportation cost disadvantage and
thus could take advantage of its lower wage rates to attract
industrial development. So, Olson sees other factors at work
besides his distributional coalitions, although of course it is the
emergence of these coalitions in the form of unions in the North
that is partly responsible.
Olson concludes his discussion by forecasting that “the South
will fall again,” (ibid., p. 932) as it becomes like the rest of the
U.S. and begins to accumulate its own set of distributional
coalitions, “the same level of cartelization as the Northeast and
the older Middle West.” He goes so far as to say that it will
“even fall out of sight,” as it loses its distinctiveness along with
its “old evils and the old romance.” It will become “one with
the nation as a whole,” although this is less certain from today’s
perspective. Thus, Olson is largely able to fit the American
South into the framework of RADON, even if he has to
introduce some additional elements in order to do so.

6. The Collapse of Communism and the Road to Power and
Prosperity
Mancur Olson would never openly abandon the framework he
established in RADON, but his later career involved moving
further and further away from its arguments, with more
emphasis on political factors. The central triggering event
would be the collapse of Soviet-bloc communism between 1989
and 1991, with Olson becoming involved in the study of this
event and the transition processes in its aftermath, initially with
his colleague at the University of Maryland, Peter Murrell
(Murrell and Olson, 1991) and on his own, especially after he
established the project on Institutional Reform and the Informal
Sector (IRIS), which would become involved in a variety of
projects around the world.
While some of his later work focused specifically on the
problems of transition (Olson, 1995b) most of it attempted to
develop a broader political economic approach to problems of
economic growth and development, even if much of the analysis
was driven by the problems of the economies in transition
(Olson, 1991, 1993, 1996; McGuire and Olson, 1996), with all
of this culminating in his final (and posthumously published)
book in 2000, Power and Prosperity. It can also be argued that
in these later works he endeavored to deal with and incorporate
to some extent rival ideas coming from the new institutionalists,
especially North (1981, 1990), with much of his argumentation
focusing on cases involving encompassing organizations
dominating political systems rather than the rent-seeking,
distributional coalitions of RADON.
It was contemplating Stalin’s Soviet Union in the aftermath of
its final collapse that led Olson to develop his idea of the
autocratic ruler as a stationary bandit. Olson considered a
primitive pre-state world dominated by “roving bandits” who
would engage in widespread predation. However, if a bandit

became stationary somewhere, he would begin to act like one of
Olson’s virtuous “encompassing organizations” from RADON,
recognizing that he needed to have those around prosper to
some extent if there would be anything for him to steal from
them (Olson, 1993). His interests would increasingly coincide
with theirs, at least to some extent, and out of such a process,
states would emerge. Stalin was thus the ultimate stationary
bandit.
Now the great problem for Olson and his existing framework of
analysis was to explain how it was that after the defeat of
fascism there had been this outburst of economic growth in
West Germany and Japan, whereas in the aftermath of the defeat
of communism (which was an internal collapse rather than an
externally imposed military defeat, of course) there was this
massive collapse of economic output in most countries, even if
it was not as great as officially measured due to the rise of
underground economies in much of the former Soviet bloc.
Attempting to maintain continuity with his arguments from
RADON he argued that during the communist years powerful
distributional coalitions had arisen in the state-owned industries
in particular, with an important sign of this phenomenon being
the emergence of the soft budget constraint in the more market-
oriented of these economies (Kornai, 1992, Chap. 24). These
groups were not necessarily overthrown after the fall of
communism, but rather asserted themselves in corrupt
privatizations and the rise of the underground economy. They
began to participate in private predation, whereas previously
they had participated in public sector predation.
Ironically this suggested that slower privatizations might be
preferred to more rapid ones, as the latter were more likely to
simply hand over the previously state-owned assets to their
existing managers and interest groups, with resulting
corruption, as in Russia. Gradual privatizations, as in Poland,

Hungary, and China, were more likely to result in restructurings
and new management with less corruption and greater efficiency
(Havrylyshyn and McGettigan, 2000). In addition Olson would
argue that for China in particular, the Maoist Cultural
Revolution destroyed the old elites and coalitions, thereby
laying the foundation for more rapid growth later (Olson, 2000,
pp. 166-167), even though communism remains in political
control there.
Olson’s meditations upon failed governments led to his effort to
debate the new institutionalists (Dixit and Olson, 1998; Olson,
2000, Chaps. 3 and 4), labeling them “Panglossians” and
“utopians.” He noted that the foundation for their approach was
the transactions cost approach of Coase (1937) and his related
Coase Theorem (1960), which argued that in the absence of
transactions costs and with well-defined property rights people
would engage in efficient voluntary exchanges. This argument
would be extended to politics as well as economics, resulting in
arguments that democratic outcomes must reflect such efficient
exchanges as inefficient political outcomes would be driven out
of the system (Becker, 1983; Wittman, 1989).
Olson saw two key problems with this approach. One was a
return to his argument from The Logic of Collective Action that
in large groups there will be a disjuncture between the
individual’s interest and the group’s interest, leading to
prisoner’s dilemma problems and the breakdown of successful
collective action, even in the absence of transactions costs.
The other was his more pessimistic observation regarding
governments, that they can undermine the well-defined property
rights necessary for the operation of the Coasean utopias. “Bad
things often happen, even to rational people” (Olson, 2000, p.
58), and “There is no way of explaining the extreme poverty of
many nations without taking account of the extent to which they

are misgoverned” (ibid., p. 59). In his famous essay, “Big Bills
Left on the Sidewalk: Why Some Nations are Rich, and Others
are Poor,” (1996) he would call for economic advisers of
developing nations to “wise up,” to get the structure of
incentives and the institutions “right,” so that the bills sitting
on the sidewalk will get picked up.
In Power and Prosperity, a government that had the incentives
and the institutions right would be a market-augmenting
government.
Such a government would be founded upon democracy, which
prevents an autocratic state from engaging in predation, thereby
maintaining a balance of power, just as the leaders of the
Glorious Revolution sought such balance in the British
parliament from each other (even as such balances might lead to
RADON-style stagnation in the longer run).
But such a government would have enough authority that it can
enforce property rights and contracts. “There is no private
property without government,” Olson would declare on one of
the final pages of his final book (Olson, 2000, p. 196).
However, along with an absence of public predation, there must
be an absence of private predation, the cartelizations that he
denounced so vigorously in RADON.
It is perhaps the final irony of Mancur Olson’s intellectual
career that at its endpoint he would embrace a position that
described an optimal state as being one of middle-of-the-road
balance between laissez-faire and autocracy. The irony is that
this is exactly the opposite of the argument that he made in the
mid-1970s that set him off on the road to write RADON, the
argument that there would be no rent-seeking in either pure
laissez-faire or pure command socialism.
7. Conclusions
Throughout his intellectual career, Mancur Olson was concerned

with the problem of how groups decide to do things and when
those decisions will be socially optimal or not. In his early
masterpiece, The Logic of Collective Action he laid out the
general problem and how it is harder for larger groups to
achieve optimality or align their interests with those of the
members of the group. He argued that small groups could
exercise power in a democratic society in the form of rent-
seeking special interests that could undermine social efficiency,
in contrast with earlier ideas about politics.
On the way to writing his most widely famous book, The Rise
and Decline of Nations, Olson developed the idea of
encompassing organizations whose interests may correspond
broadly with those of society at large. However, he argued that
over time, stable democracies would tend to accumulate the
other kinds of groups, the rent-seeking distributional coalitions
that would engage in cartelization and protectionism that would
distort incentives and impede technological and organizational
progress, and thus hinder economic growth. He would use this
powerful argument to explain a wide variety of historical
outcomes, even as the argument would have problems with
certain cases.
In his later years, culminating in his final book, Power and
Prosperity, he would move more directly to a consideration of
how governments come to power and rule, motivated by his
concern for the problems of the post-socialist transition
economies and the failure of the prediction that they would
boom just as the defeated fascist economies had after World
War II. While many of his arguments from his earlier works
carried over, he developed newer ideas and emphasized his
debate with the new institutionalists. In short, he emphasized
that the new institutionalists could not explain the bad outcomes
that one observes in the world, with its poor and poorly
governed nations, how it is that “bad things happen, even to
rational people.” While in the Rise and Decline of Nations he

had emphasized the problems that can arise in stable, long-
lasting democracies, at the end of his career he emphasized the
virtues of democracies that can defend property rights and
protect people from the predations of both an overly powerful
private sector and an autocratic state.
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� Prior to The Logic of Collective Action, Olson published the
largely unknown The Economics of Wartime Shortage (1963a),
which reflected his experience serving in the United States Air
Force after returning from studying in the Philosophy, Politics,

and Economics program at Oxford and before he completed his
economics dissertation at Harvard.
� In the Foreword to Power and Prosperity (2000, p. xvi),
which appeared after Olson had died, Charles Cadwell reports
that while Logic was more cited, it was only translated into 9
languages whereas RADON was translated into 12 languages.
The Logic was originally Olson’s Ph.D. thesis at Harvard, first
overseen by Edward H. Chamberlin. After Chamberlin’s death
in 1962, it was overseen by Thomas C. Schelling, who arranged
for its publication in the Harvard Economic Studies series.
McGuire (1998, p. 257) argues that it was RADON that “vaulted
Olson to academic celebrity.”
� While he tended to avoid citing much of their work later, in
the Logic Olson heavily cited Buchanan and Tullock’s The
Calculus of Consent (1960) with evident approbation. While
this work of Olson’s is often viewed as a founding text of
public choice theory, its core argument derived from more
traditional public finance theory, the theory of voluntary
exchange of Erik Lindahl as analyzed by Musgrave (1939), who
brought it to Olson’s attention. He would eventually serve as
President of the Public Choice Society.

� It is only in the Notes to the Foreword by Cadwell to Power
and Prosperity that there is a reference to the Thatcherite
experience in Britain. Cadwell cites Rauch (1994) as noting
Thatcher’s Great Britain as the only clear example of “reform
without crisis,” although Olson cited Rauch’s work elsewhere in
this book.
� Both in private communication and in his Foreword to
Heckelman and Coates (2003), Schelling reports that his main
input was to encourage Olson to reduce the level of technicality
of his presentation in order to make it accessible to political
scientists, sociologists, anthropologists, and legal scholars.
� It can be argued that this was a precise and logical
implication of the long-argued principle of “subsidiarity,” that a
higher level organization should not do what a lower level one
can do, a point noted privately by Roger R. Betancourt.
� He foreshadowed these arguments in one of his few
publications prior to The Logic (Olson, 1963b).

� It is true that Germany defeated France and occupied it to
some extent during the war. But it is also true that much of it
was ruled by a local puppet, the Vichy regime, that did not
upend or disrupt most groups in society, although the more
overtly left-wing ones were suppressed, only to emerge after the
war stronger than before it (Levy, 1999). Olson argues rather
unconvincingly that this defeat combined with long internal
conflicts led to the outcome in France, which is certainly a
substantial variation on his main argument, given that France
was marked by substantial continuity of institutions through the
war. Arguably the groups were kept under control during the
immediate postwar period by a combination of indicative central
planning and the influence of the emerging European Economic
Community (now European Union), with such strongly
centralizing leaders as Charles de Gaulle (Estrin and Holmes,
1983; Chanter and Jenkins, 1996).
� Olson (1990, 1995a) would later express frustration and
disillusionment with Sweden and the “Teutonic” nations more
generally, arguing that their previously “encompassing”
organizations “devolved” into mere distributional coalitions that
impeded innovation and growth, with the ending of the national

level wage bargaining in Sweden in 1986 the crucial sign of this
problem.
� Olson vigorously rejected another widely claimed factor, the
invention and spread of air conditioning, noting that hot
weather did not restrain the rise of ancient civilizations.
� Olson also notes that this period coincided with efforts by
local communities in the South to subsidize industrial
development as well (Cobb, 1982), arguing that they realized
the Jim Crow system was coming to an end, so that they needed
to industrialize, although the earliest of these efforts dating to
the Great Depression in the 1930s would seem to predate such
clear perceptions.
�Whereas many identify the informal economy as a problem for
governments (Schneider and Enste, 2002), Olson was more
inspired by the work of de Soto (1989) to see it as a potential
source of economic growth if it can be legalized and brought
within an established system of enforceable contracts and
property rights.

� Rosser, Rosser, and Ahmed (2000, 2003) establish a strong
correlation between increasing inequality in some transition
countries, such as Russia, and the rise of the underground
economy. Such an argument is consistent with the arguments of
McGuire and Olson (1996) about redistribution, social capital,
and stable democracies that respect contracts and private
property. Clague, Keefer, Knack, and Olson (1999) would label
such underground markets as “irrepressible.” Other markets
would require state support to function and would generate
contract-intensive money.
� It can be argued that China is another case that does not fit
very well in Olson’s theories, especially in its ability to
continue to grow rapidly despite its lack of democracy, reported
widespread corruption with lack of enforcement of contracts and
property rights in recent years (Wong and Ding, 2002). But,
Olson focused more on the nations of the former Soviet bloc,
and he is hardly alone in not being able to fully explain what is
happening in China.
� Ironically these arguments amounted to a revival of the older
arguments of Luce (1924) and Commons (1950) that Olson had

argued against in his first book.
� This phrase would serve as the title for one of the volumes
published in Olson’s honor after his death (Azfar and Cadwell,
2003).
� For discussion of the relationship between Northian and
Olsonian views regarding the Glorious Revolution, see Mokyr
and Nye (2007). The crucial role of civil liberties in the
institutions underlying growth has been further studied by
Acemoglu and Johnson (2005), with BenYishay and Betancourt
(2006) further unbundling this argument to focus on the role of
personal autonomy and individual rights.
� Djankov, Glaeser, La Porta, Lopez-de-Silanes, and Shleifer
(2003) would pursue such an argued tradeoff between the costs
of private predation and public predation to pose the
institutional possibilities frontier that suggested total social
transactions costs would be minimized with some intermediate
form of government. Rosser and Rosser (2007) provide a
critique of details of this argument.

1. After reading chapters one and two, Rational Ignorance is
when the cost of gathering information is higher relative to the
benefit of that information. Why would a voter bother to
become informed about voting if his vote has a small chance of
being decisive? it opens the door to government failure and for
interest groups and politicians to take over and be dominant.
2. Olsen believed that the US has a graduated income tax but
allow numerous loopholes so that wealthy taxpayers often pay
little tax because of because of inconsistencies in modern
democracies. Also a lack of understanding of the collective
good. The existence and power of lobbyists due to uninformed
citizens. Bargaining among organized groups will not achieve a
rational or efficient economy, certain people and smaller groups
will be left out.
3. Smaller countries will be more likely to be more successful at
collective action and have better coordinated labor movements
than large countries because large groups will not act in their
group interest. Smaller groups are able to organize easily and
will provide collective goods and services for their members.

They will have a greater likelihood of engaging in collective
action than the larger ones.
1) Olson explains that "rational ignorance" is the result of a
situation in which the gain of an individual by putting some
level of effort into accomplishing a task, is relatively small
compare to such effort. Due to the fact that the individual would
gain a minimal benefit from it, it would not provide a sufficient
incentive to accomplish the task, resulting in "rational
ignorance" by not taking action.
2) according to Olson the laws and regulation of income tax, are
far less known by tax payers. However, the smaller group of tax
payers that can gain great benefit by knowing such regulations
have a selective incentive and understand the advantage of
knowing the system. They are not rational ignorants.
3) Olson explains that when a group benefiting from collective
action is small enough, the benefit ratio of collective action is

favorable enough. The greater the country, the less favorable
the ratio of collective action will be.
1. Rational ignorance generally defined occurs when the cost of
acquiring information is greater that the benefits to be derived
from the information. Olson drives this point by discussing the
newsworthiness of information. He speaks about the public that
requires news that will capture their attention and information
that may be ignored by "picturesque protests and unruly
demonstrations". The importance of what is going on around us
depends on the reasons we intend on obtaining this information.
For example, "... events that unfold in a suspenseful way or sex
scandals among public figures are fully covered by the media,
whereas the complexities of economic policy or quantitative
analyses of public problems receive only minimal attention."
(Olsen) This also suggests that events that attract media
attention (colorful events) would tend to overshadow other

important events, minimizing its public reach.
2. The United States has a graduated income tax but also allows
numerous loopholes so that wealthy taxpayers often pay little
tax - according to Olson - because the details of tax laws are
widely unknown and often times reflects the interest of the
small number of individuals who are organized and more
prosperous tax payers. An example Olson used to describe this
explanation was the medical physicians. He says that although
the need for government funded insurance (Medicare and
Medicaid) had become the focus for low or middle income
individuals, there had been a neglect to realize that the result
would be large increases in the income got prosperous
physicians and other providers of medical care. "The loopholes
are more often tilted toward a minority of more prosperous
taxpayers." (Olson)
3. Smaller countries might be more likely to be more successful
at collective action and have better coordinated labor
movements than large countries because the larger the number
of individuals that would benefit from a collective good, the
smaller the share of gains from action in the group interest that
will accrue to the party that undertakes the action. Olson goes
on to say, "Thus, in the absence of selective incentives the
incentive for group action diminishes as group size increases, so
that large groups are less able to act in their common interest
than small ones." (Olson)

Rational Ignorance refers to situations in which it doesn't

make economic sense for a citizen to invest the time and energy
to become informed about an issue. Some economists believe
people are "rationally ignorant" when it comes to voting. For
example, it takes a tremendous amount of time to fully research
every issue, and each candidate's platform before deciding
whom to vote for. However, it doesn't make much economic
sense in terms of opportunity cost to invest hours into this
research when your vote only represents one out of the 100
million that will be cast. Since your vote will have such a small
impact, it doesn't make much sense to spend so much time doing
research when you could be working or spending leisure time
with your family. When people realize this is the case they will
choose not to invest an inordinate amount of time in making
their decision. Thus this ignorance is believed to be "rational."
The United States has a graduated income tax but allows
numerous loopholes so that wealthy taxpayers could pay
less. Everyday citizens do not understand the complicated rules
of income tax to take advantage of it while the wealthy
taxpayers normally pay people to find the loopholes. They put
certain rules in place to encourage taxpayers to put up a
building or build a house. By lowering taxes, a wealthy
taxpayer might decide to put up a building. Doing so allows
everyday workers the opportunity to get a job and feed his
family.
Collective action is the behavior of a group working toward

a common goal. When individuals engage in collective action,
the strength of the group's resources, knowledge and efforts is
combined to reach a goal shared by all parties. In large groups
there will be a disjuncture between the individual’s interest and
the group’s interest, even in the absence of transactions costs.
After reading Chapters One and Two of Mancur Olson’s Rise
and Decline of Nations, please answer these questions:
1.What is “rational ignorance”?
a. “Rational ignorance” is a phenomenon cited by Olson that
occurs when the potential benefits of being informed about a set
of issues is outweighed by the cost of becoming informed about
said issues. For example, the amount an average student or
adjunct faculty member would benefit by understanding the
governing structure of Brooklyn College is so minimal as to
make it not worth the time it takes to understand that structure.
These students and adjunct faculty would be considered
“rationally ignorant.”
2.What is Olson’s explanation for why the United States has a
graduated income tax but also allows numerous loopholes so
that wealthy taxpayers often pay little tax?

a. Because of the “rational ignorance” of the general
electorate (at least as far as the minutiae of tax policy),
American tax policies are often skewed in a way that benefits a
disproportionately small group of people (usually special
interests that are far more knowledgeable about the issues). The
American graduated income tax reflects the progressive
tendencies of public opinion and political leaders (at least in the
broad sense), but the existing loopholes are the result of the
influence of the smaller, informed groups.
3.Why might smaller countries be more likely to be more
successful at collective action and have better coordinated labor
movements than large countries?
a. Olson contends that smaller countries would be more
successful with collective action as smaller groups tend to have
a higher per capita benefit than larger groups (i.e. the larger the
group, the less each individual member is likely to benefit).
Smaller countries would also likely have better coordinated
labor movement, Olson submits, because it is easier to create
homogeneity (and by extension, to generate consensus) in a
smaller country than in a larger one.

1.What is “rational ignorance”?
Rational ignorance is the choice of an individual not to educate
him or herself about a particular subject matter. In Olson’s
description he uses the behavior of a typical citizen in relation
to voting. It is generally believed that a typical voter does not
study the issues or candidates involved, because their individual
vote will not alter the outcome of the election anyway. I've
experienced this in the public sector. Individuals felt that

researching the unions listed on the ballot was a waste of time.
They believed their vote wouldn’t make a difference in the
overall outcome. Which in this case, it may have.
2.What is Olson’s explanation for why the United States has a
graduated income tax but also allows numerous loopholes so
that wealthy taxpayers often pay little tax?
Olson continues to note that modern democracies display
inconsistent behaviors. Most developed democracies have
adopted a progressive tax structure. The imbalance of this
structure is widely known, but it is the tax laws that the
majority fail to familiarize themselves with. The majority of
people will be familiar with the controversy of certain issues,
but never have an in depth insight. The smaller, organized, and
more prosperous groups are the ones that pull the strings.
3. Why might smaller countries be more likely to be more
successful at collective action and have better coordinated labor
movements than large countries?
Smaller groups have a much more concentrated effect on each
others choices. This will encourage bargaining to reach an
agreement that has mutual benefits. The larger the group the
smaller the share of gains. It is also mentioned that selective
incentives inspire groups to act collectively in order to obtain a
collective good. Smaller groups will normally act in the interest
of each other and are more likely to act in collective action. It is
much more difficult for a larger group to organize and engaged

in collective action with selctive incentives.

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