Olson is an economics researcher from the sub-field of "institutional economics". "Power and Prosperity" is his last book, published posthumously in the year 2000, by his friends. Most people know this book for the introduction of the catch-terms "roving bandit" and "stationary bandit".
Broadly speaking, Olson was inspired by the question "Why does not prosperity always follow a collapse of bad government?". Olson was born and spent all his life in the U.S.A., but is surprisingly perhaps better known in the former Soviet Union. Possibly because he was one of the few researchers who did not neglect Soviet type regimes when studying autocracies.
Olson is also one of the few liberal economists who do not automatically dismiss state's role in a country's economic development. He created a much less-known term "market-augmenting government", of which he was most proud of. He thus concluded that researching the structures of power is important.
As a part of this research, he examined the "succession crises" in authoritarian states and "government incentives" in democratic ones. As the simplest example, even participating in the elections requires effort on the part of the voter, which most election outcomes do not justify. (Rational ignorance.)
Therefore, the examples of reform without crises are few.
The book aims to answer the following questions:
- How do transitions to market-augmenting governments happen?
- How do implementations of reforms affect reform planning? Specifically, in what order should reforms be implemented?
- Are different market-augmenting institutions appropriate for different levels of development? (Also, does globalisation help?)
- How institutions are affected by conflict?
- Are grassroots (democratic?) initiatives helpful?
- To what extent are self-regulating institutions possible?
Remark: only recently "liberal" economists (i.e. not Marxists) started to seriously consider "political economy".
His main contribution is the study of "collective action", why it very often fails. The important terms here are "encompassing interests" and "over-encompassing interests".
One more important phrase: "Prosperity depends more on the wisdom of the population that on the freedom of the bargain."
1. TODO Body
1.1. Preface
1.1.1. Is the only hope for the Soviet Union a no-nonsense capitalist dictatorship?
References:
- Augusto Pinochet (Chile)
- Chung Hee Park, Doo-Hwan Chun (S.Korea)
- Chiang Kai-shek (Chinese Taiwan)
- Lee Kuan Yew (Singapore)
- Deng Xiaoping (Mainland China)
1.1.4. Even in the poorest Third-World countries, markets are everywhere.
(Really?)
1.2. The Logic of Power
1.2.1. The logic of the Market.
- The most important property of a good market is "choice". No company should be large enough to affect the prices on its own.
- In some markets, the steady state is to rob, and not to sell. (Because it is cheaper. This is Hobbesian anarchy.)
- In some markets, the steady state is to produce goods for the public.
- What makes those in power desire to promote the market and social cooperation?
- Theory 1: Coaseian bargain.
- All transactions are voluntary.
- Transaction costs decide transaction profits.
- Very high transaction costs prohibit transactions totally.
- Conclusion: every system is the most efficient in the current circumstances.
1.2.2. The "Criminal" Metaphor
- Humans can be different:
- Rational
- Benevolent
- Malevolent
- Stochastic
- A "Criminal" is someone who is acting out of pure power capacity, and is unconstrained by morals.
- A Criminal lives better in a rich society than in a poor society.
- Criminal activity decreases GDP.
- Therefore a rational criminal cannot steal too much, for the same reason as shearing sheep is better than slaughtering them.
- This logic does not actually prevent thieves from stealing.
This is easy:
Suppose a thief in a society of size M steals X, therefore the GDP is reduced by X. We divide X by M, \(X/M\) => this is his individual loss. His gain is X, therefore his total profit is \(X - (X/M) = X\frac{M-1}{M}\), which is very close to 1.
We can have a more complicated formula: say, a thief steals X, but society loses Y(X). Then the criminal's net gain is \( X - Y(X)/M\). Solving the equation \( X - Y(X)/M = 0 \), we get \( Y(X) \geq M\cdot X \), which is very unlikely to happen. This is basically people provoking calamities for fun, indeed, happens very seldom.
Sometimes the formula \(X/M\) is wrong, as the "criminal" participant has a larger stake in the GDP. This is the case Olson is interested in.
Definition: "Stake": what one gets or gains from GDP or loses from thievery.
- Formulas for honest work:
The "ex-criminal" works and gets a salary of X. His company gains \(α X\) in profits, and GDP increases by \( (1+α)X \), of which the "ex-criminal" also gets \((1+α)X/M \).
- The behaviour of a Mafia boss.
- A Mafia boss is different from a thief.
- A Mafia boss steals, but also kills other thieves.
- A Mafia boss therefore has an encompassing interest.
- The Mafia boss, therefore, does not have such a simple formula for his profit.
- He is typically stealing a percentage of the GDP growth per time period, and this percentage is less than 100.
- That is, he has an incentive to steal less when he is stealing from everyone.
The loss to the society is \(M*\beta \), the profit to the mafia boss is \((M-1)\beta - c\), where c is the cost of his army.
- Therefore a rational criminal cannot steal too much, for the same reason as shearing sheep is better than slaughtering them.
- The story of Feng Yu-xiang defeating White Wolf. Why are stationary bandits preferred to roving bandits? Because they have encompassing interests.
A stationary bandit actually has a higher stake than a Mafia boss, because he does not compete with the government for taxes.
He robs at a revenue-maximising rate of theft.
He robs for \(\beta \cdot GDP\), he loses after redistribution: \(\beta \cdot GDP/M\). Something is fishy here.