Mancur Olson Research Paper

State University, Oxford University, and Harvard University. The greatest fraction of his career he spent as an economics professor at the University of Maryland, but before this he undertook teaching assignments at the US Air Force Academy, Princeton University, and service in the US Department of Health Education and Welfare. Influential in professional associations, he had been president of the US Southern Economic Association, US Eastern Economic Association, Public Choice Society, and VicePresident of the American Economic Association. He was a Fellow of the American Academy of Arts and Sciences, an Honorary Fellow of University College, Oxford, and recipient of many other honors and awards. At the time of his death he was principal investigator and director of a US Government sponsored development aid research project with offices in 30 countries, and an ambitious agenda to bring the benefits of his life’s work to the design and reform of the institutions of governance throughout the developing and former communist countries of the world.

2. Antecedents To Public Collective Choice

One of the founders of ‘Public or Collective Choice’ as a subdiscipline and movement within economics, Olson devoted his intellectual life to the analysis of collective action. Early, as a student, he intuited that the then standard paradigm as to how people interacted economically with each other was seriously incomplete. In the traditional model it was argued explicitly or implicitly that economic interaction while widespread and diverse, was normally mediated by prices and markets between otherwise isolated and independent agents. The first founding principle of ‘Public Choice’ and a concern which permeates Olson’s entire life work is recognition that people exchange, produce, consume, and share many goods, in many environments which are not at all mediated by markets and prices, yet the behavior and analysis thereof is unquestionably ‘economic.’ Typically, in these environments people belong to identifiable groups and their interaction partakes of their group identity in a manner not conveyed by Adam Smith’s butcher or baker. This raises to paramount importance questions of how people and organizations who belong to a group do and should act to achieve their goals.

2.1 Oligopoly

Central to the Public Choice nexus is how the size of a group influences the behavior of its individual members and thus aggregate outcome. Other features of group membership such as homogeneity or diversity are also important but size was the first aspect to which Olson attended. With respect to industrial behavior, the question of how small numbers of firms would behave had occupied economists’ attention for a generation by the time Olson became a student. Still earlier the pricing, output, employment, and other profit maximizing behaviors of a single, monopolistic, firm had been analyzed successfully as had those of a market consisting of a large number of atomistic competitive firms (Marshall 1890). And by the time Olson arrived at Harvard in 1957, for the case of small numbers of firms in an industry, theories of oligopoly interaction (Cournot 1897, Robinson 1933, Chamberlin 1933) had emerged which demonstrated that in pursuing rational profit maximization for themselves individual suppliers would fail to achieve maximum profits for their industry—their group—as a whole. The reason for this is a lack of coordination: oligopolists fail to anticipate and include in their decision calculus the effects their narrow profit making decisions have on the profits of other firms. In fact it would be individually irrational for any single firm to include such external benefits in its decision calculus since the individual firm could gain more by free riding off the efforts of other firms. A similar coordination failure motivated the fast developing field of Game Theory that provided a rigorous framework for analysis of oligopolistic behavior. Actually Olson’s mentor at Harvard (E. Chamberlin) had been one of the leaders in the development of oligopoly in the form of ‘monopolistic competition.’ Here individual firms in an industry resemble monopolists in that they recognize their supply decisions will influence the price they can obtain. At the same time their industry is competitive because the price actually charged by any one firm influences the price-supply opportunities of every other firm.

2.2 Public Goods

Parallel with economists’ study of producer oligopoly, discoveries preceding Olson showed that provision of some types of goods to consumers could lead to similar failures of coordination (Samuelson 1954). ‘Public Goods’ or ‘Collective Goods’ are such that once available to any member of a specified group, the same quantity and quality is equally available to every other member at no extra cost: this is because such goods are not used up when enjoyed and if available to any consumer cannot be excluded from any other group member. Early examples included the lighthouse beacon which warns all ships (nonexcludable), and whose utilization by one ship in no way reduces its availability to other ships (nonrival). More contemporary examples include protection of pollution free environments, provision of national defense, preservation of natural species, establishment of political freedoms, provision of property right guarantees by an impartial and universal police judiciary, and maintenance of government by rule law. Broadly speaking these all should be understood to be economic ‘goods,’ and all display the property that their enjoyment by one person in no way diminishes their availability to others to enjoy. But if every member of a group enjoys a good irrespective of who supplies it, no one acting voluntarily will provide the good—at least no one will provide a sufficient amount of it. Instead all will have an interest in seeing others pay the supply costs while they enjoy the benefit so produced without making any cost contribution themselves. Every individual, that is, has good reason to free ride—in whole or in part—on the provisions of others. One, therefore, should anticipate that for the provision of such public goods, free markets based on individual rationality will fail. This means that the amount or quality of collective good provision to follow from individual rational behavior will fall short of what the aggregate of individuals in a group desire. In short, notwithstanding the fact that a group is nothing more than the collection of individuals who belong to it, individual rationality, even assuming it to be universal, will not secure the rational group outcome.

3. The Voluntary Provision Model And Olson’s Logic Of Collective Action

The initial reaction of economics to this understanding was to conclude that instead of individual action, society must rely on government power to enforce individual contribution via coercive taxation expenditure. Olson’s first insights came from taking the next step: because government itself is subject to the quandary which the free rider problem creates, and may not produce an optimum outcome, it cannot be assumed that government will ordinarily close the gap between individual and group rationality. Olson, therefore, asked what to expect of individual voluntary behavior in the absence of governmental or coercive intervention. Such is the topic of The Logic of Collective Action (1965), Olson’s Ph.D. thesis and first great contribution. Once the question was thus posed, it became clear that the range of circumstances where collective action obtained was far more vast, complex, and rich than the early oligopoly paradigm might lead one to expect. Moreover, contrary to simplistic theory sometimes arrangements arise (in the form of intragroup monitoring or selective extra rewards to those who do not free ride) which allow the free rider failure to be reduced and possibly altogether circumvented. Olson’s discovery and elaboration of the ‘voluntary provision’ model of public goods changed, in fact redefined, the topic for economists; it introduced public goods to other social sciences, especially political science and sociology and elevated it to a unifying principle throughout the social sciences. The result was an explosion of research into the structure of voluntary provision, and into the myriad of applications of the model, ranging from strictly economic to anthropological, legal, sociological, and political, from labor union behavior, to allocations within families, voluntary philanthropic giving for a group or social goal, and from public interest lobbying, special private interest favor seeking, and professional associations to the behavior of nations as they formed alliances.

In all of these instances Olson discerned three factors paramount in explaining the degree of success a group has in providing itself with a collective good without government coercion: these were (a) the size of the group, (b) the heterogeneity of its members, (c) and the ability of the group to offer selective incentives to individual members to induce contribution to the collective good. In fact the international alliance example served as the first instance of voluntary provision which could be verified empirically. Olson and Zeckhauser (1966) analyzed successfully the allocative behavior of the NATO Alliance as it provided its constituent members deterrence against attack and defense should attack materialize. The OlsonZeckhauser analysis confirmed empirically prediction from Olson’s theory, namely that when the membership of a group is heterogeneous, the large and/or rich members will voluntarily contribute disproportionately large shares of the total public good—an effect Olson’s had named ‘exploitation of the great by the small.’ Thus crucially, Olson and Zeckhauser demonstrated that Olson’s insights into the applicability of economic structure to political phenomena could be formulated into rigorous logic and empirically tested against reality. Later extensions of the voluntary provision model have lead to surprising insights (Bergstrom et al. 1984) into equilibrium outcomes when individuals in a group interact but do not coordinate these interactions. These include demonstrations that, up to a point, in equilibrium a group’s total voluntary provision of a public good is insensitive to the distribution of wealth among its members, and beyond this point actually increases with greater inequality in the distribution of wealth. And Olson’s voluntary provision model continues to be the paradigm for numerous behavioral patterns, from cooperation among countries in regulating the international economy to controlling pollution, to the economics of charitable giving.

4. Public Choice, Political Economy, And Olson’s Rise And Decline Of Nations

From the first principle of ‘Public Choice’ mentioned above, it follows that the extra market behavior of the individuals who make up governments is itself governed by individual search for individual satisfaction. Always committed to individual rationality embodied in calculated decision, in the middle stages of his career Olson’s elaboration of the public choice theme develops several corollaries to this proposition.

First, rather than being a utopian instrument to correct social inefficiencies in the provision of public goods stemming from free rider behavior, government behavior itself is riven by free-rider failures. The problem of correcting for free-rider deficits is itself in other words beset by free-rider effects, for example, who will contribute the resources, attention, and energy necessary to form environmental policy to protect the public from degradation of the atmosphere? The answer is: precisely not the general public which benefits from environmental control but instead those interest groups sufficiently well organized to exact or induce participation by their membership. This leads to a second corollary.

The concept of collective goods and free riders applied to the larger social mosaic implies a hierarchy or cascade of nested interest groups. First of all people will act in their own interests, not the interests of their group; but once they have overcome intragroup free riding successfully and harnessed their individual incentives to the group, if they ever do, then those groups will act in their own self interests, not in the interests of their larger society.

A third corollary applies these principles to redistribution, with introduction of the notion of a distributional coalition, a group which by collective or collusive action can gain an increased share of society’s wealth not by working to create a larger societal total, but by imposing external costs on others in the society. Such groups work though various instruments, many effected and enforced by the government which they influence; these include discriminatory taxes or tariffs, barriers to mobility, or to entry as well as downright corruption and theft.

It was Olson’s focus on this structure which brought the free-rider problem to the widest academic audience of sociologists, historians, and political scientists, and which showed the applicability of the idea to current world developments and practical policy. His formulation of the idea, propounded in The Rise and Decline of Nations (1982), assembles these corollaries into one grand principle: the notion that entire societies fail or succeed on the quality of their management of free riding. It is the success of interest groups in overcoming obstacles to their own collective action and the failure of any larger polity to overcome the obstacles to its collective need to leash protectionists that molds the destiny of nations. Moreover, there is an inherent tendency over time, Olson argued, for efficiency destroying and innovation strangling special interest groups to proliferate in stable societies, such as the US and UK with institutions which survived World War II more or less in tact. By contrast, those societies which experience the social upheavals typical of war or revolution—like Japan or Germany at the end of World War II—find that special interest groups and distributional coalitions are dismantled, thereby giving the society as a whole another start at constructing social and economic institutions afresh which will encompass the aggregate collective interest of all the people. The idea of social and institutional sclerosis, sometimes called ‘demosclerosis,’ was thus advanced as a crucial determinant of societal economic success. An audacious idea, but one subject to empirical verification. The idea was noticed by social scientists the world around and resonated in the popular press.

5. The Character Of Governance: Olson’s Power And Prosperity

The final focus of Olson’s energy—summarizing papers from the last decade of his life in the posthumous Power and Prosperity (2000)—was on the greatest of the free rider puzzles of all: how does government even come into existence, given the immense obstacles to collective rationality presented by individually rational free riding? Reflecting on this question, he was well aware of the immense rewards a society reaps from establishing a peaceful social order, and submitting itself to the institutions of governance. So there is no doubt that good governance is in the collective interest of a society; by investing in certain public goods governments can increase the productivity of the society dramatically, and this benefits everyone. Moreover, for groups larger than families or at most tribes, governments are the only institutions that can do this. These are public goods, such as establishment of a rule of law, institution and maintenance of property rights, provision of common defense, stable currency, contract enforcement, elements of infrastructure, and public education and health, and so on. Such investments in public goods benefit every one in the society by making its whole industrial, commercial, economic base much more productive.

Olson was also deeply aware that provision of public goods is far from the only or even major function of government. A second function is redistribution. Historically, almost all systems of government have emerged as vehicles of redistribution from the people to an autocracy, monarchy, or oligarchy. Contemporaneously, our generation has seen massive increases in government enforced redistributions within countries throughout the world. These redistributions, which play so crucial a role in the political economy of the modern state, are undertaken by governments which exact taxes from some groups and make transfers for the benefit of other groups. The beneficiaries in this process are in general the groups to whom governments are beholden, and the taxpayers those to whom they are not. Thus, (a) redistribution to favored interests and (b) allocation to enhance everyone’s productivity are the two primary economic functions of government. Public good allocation, and group discriminatory redistribution are conflicting resource use options between which any government must choose. Irrespective of its political make up this is a choice every government must make and a supremely important one for the welfare of its members.

But how is the conflict between the two objectives reconciled? In brief, Olson argues that the redistribution that a society accepts is the price it must pay to achieve the gigantic collective benefits of peaceful governance. But a precondition for this bargain even to be struck in the first place is that free rider obstacles be overcome sufficiently for government to be enduring (Olson 1991, 1993). Governance by transient ‘roving bandits’ is inefficient; only when the roving bandit settles down to become a ‘stationary bandit,’ that is, an established monarch, can society enjoy the immense benefits of peaceful development. Assuming this much success in conquering free riding pitfalls, Olson then extrapolated a theme from earlier in his career: the idea of groups as differentiating themselves along a scale of their ‘encompassing interests.’ This is the notion that a group that reflects the interests of a large proportion of its society in its economic calculus will behave very differently from one with a narrow membership. The more encompassing group will internalize more of the cost it inflicts on society in pursuit of its distributional goals. And this provides the clue to his discovery (Olson and McGuire 1996) that the political logic of these invest–redistribute decisions will lie on a spectrum between two polar extremes. At one extreme is an idealized, consensual democracy where all redistribution issues have been settled unanimously and taxation only serves public good investment objectives. At the other extreme is perfect autocracy ruled by a dictator who taxes and spends solely to satisfy his own selfish desires. This work then shows that realistic societies can be analyzed as a mixture, in fact a weighted average, of these two polar cases. Thus, in making the choice between investment in the entire society and redistributive taxation from the powerless to the powerful, every polity behaves somewhat like a pure democracy and somewhat like a selfish dictatorship. Informed by this, logic McGuire and Olson derive the allocation and distribution rules which various governments across the spectrum will follow, showing, for example, that even a purely selfish dictator (providing he controls an enduring government) will not only transfer resources to himself; he will also invest in his economy. Why? Because investment will make the economy prosper and add even further to the tax take. Also intriguing is the proof that all societies and forms of rule are limited by an automatic governor on their incentives to tax. This contradicts the pessimistic expectations of some political moralists that extension of the democratic franchise would necessarily induce further voracious redistributive taxation, ending only in the ultimate destruction of the economy itself. It demonstrates, to the contrary, incentives to tax for every ruling group reach a point well before confiscation where redistribution voluntarily ceases.

The thrust of Olson’s thought toward the end of his life was to bring these insights to bear on the puzzling economic trajectory of the Soviet Union which seemed so economically cumbersome succeeded by Russia whose fortunes so declined after its markets were unleashed.

6. Olson’s Impact

Olson’s legacy extends broadly across the overlapping frontiers of social science and philosophy. His life was marked by numerous conferences devoted to examination of his ideas and books devoted to his insights such as Sandler (1992). His impact derives first of all from his ability to develop a simple idea so that it becomes powerfully applied across a grand subject area. An enthusiast for basic ideas, and ever the economist, he illuminated political processes using economics ideas and showed how political processes could hobble economic productivity. The result was to gain far wider acceptance of economic method and theory in the work of political scientists. Many before Olson could take for granted that if some outcome would be beneficial to all members of a group, then the group would act in concert to bring it about, thinking in terms of joint rather than individual action, without asking how the joint action would be enforced. After Olson this happened no longer. He had the rare ability to take highly abstract but ultimately simple ideas and to apply them to the reality of economic and political development. Because of his work awareness of the difficulties and paradoxes of achieving collective rationality, no longer confined to a cadre of specialists, has entered into the discourse of the largest universe of social science and philosophy.

Concrete witness to his impact is the IRIS (Institutional Reform and the Informal Sector) project. This US Agency for International Development vehicle was created to promulgate of Olson’s ideas in more than 30 countries around the globe, many struggling with the reform and adjustment process in a transition from socialism. Although he explored and exposed the difficulties of achieving socially desirable outcomes through uncoordinated individual action, he was no naive advocate of central planning or coercion. For him the operations of governments were to be subjected to the same analytic scrutiny as markets, and government failures had to be exposed just as fearlessly as market failures. Thus, it was within the practical context of practical reform of institutions that Olson’s final contributions took effect as an advocate for the idea that good governance can manage free-rider challenges and achieve prosperity in the developing world (Olson 1996). His life was marked by innovative ideas, personal energy, and an unflinching conviction that institutional reform could yield prosperity over poverty. The shift in appreciation of the links between good governance and economic success which this caused within social science is his living bequest.

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