Why the economy becomes less dynamic with age

In April 2020, venture capitalist Marc Andreessen published a widely read article titled “It’s time to build.” Despite its supposed dynamism, the U.S. economy appears slow and rigid in the face of a once-in-a-century crisis. Masks and ventilators are in short supply, but this inability to adjust quickly is not unique to Covid-19: America has also long struggled to build housing, high-speed rail and zero-emission energy. Anderson’s critique embodies what many academics and commentators have been saying, and it has fans in the political sphere. However, there is far less consensus on how we got here. Is it cultural malaise? Broken political institutions? Too much regulation? People seem to agree that America has lost some vital dynamism, but not why.

This week, Yale University Press is republishing an old book that claims to have the answer. Mankur Olsen 1982 The rise and fall of nations is a normative explanation of how the economy becomes less flexible and dynamic with age.exist rise and fallOlson thinks The older an economy is, the more collusion and lobbying it has, and over time the accumulation of such interest groups will corrode an economy by controlling the political process and slowing everything down.Reissue is a testament to the rediscovery of Olsen’s work Experts in economics and political science who are grappling with many of the same problems Olson faces.

In his introduction to the new version, Harvard economist Edward Glazer recalls his own long journey rise and fall. Glaeser first read the book as a graduate student in 1993, then dismissed it lightly. While he finds Olson’s logic sound, the author’s focus on “stagflation” in the 1970s is not relevant to the boom in post-Reagan America. But as he studied urban economics, Olson’s ideas began to come back to his mind. Glazer’s research shows that the most dynamic and productive regions in the United States — cities like New York, Boston and San Francisco — resist building new housing. This drives up the cost of living and discourages newcomers from moving there.Opposition to new construction is stifle the development of the whole country, The book Glazer fired in grad school was meant to explain why: Maybe the US is trying to build because a large number of interest groups are getting involved in the process, slowing down decision-making and using public policy to defend its own interests at the expense of the public.

Olson is obsessed with the logic of interest groups. He believes that the main obstacle to a group of people coming together to advance the common good is the free-rider problem: each member wants the group to exist, but does not want to personally invest the time and money to start it. Without some enforcement mechanism – like mandatory dues in unions – no one would come forward because it would cost them a lot and they would only get a little. He believes that smaller groups are more likely to overcome this problem. If there are only five large tractor manufacturers, each getting one-fifth of the total proceeds from forming a tractor hall, this is usually enough to collaborate. By contrast, organizing consumers is harder because everyone can only expect a fraction of the rewards for their efforts.

Olson also believes that interest groups are motivated to try to grab more of the existing economic pie for themselves, rather than expand it.exist ups and downs, “The familiar image of cutting the social cake doesn’t really capture the essence of the situation; it might be better to think of wrestlers struggling with items in a china store,” he wrote.

Such small, homogeneous groups would organize. Large, diverse groups will be difficult to organize. Then those small organized groups would lobby to have the economic rules tilted in their favor—at the expense of everyone else. (These ideas were the focus of his early writings, The logic of collective action.)

exist rise and fall, Olson adds a more provocative premise: The longer a society is stable and prosperous, the more time special interest groups have to overcome organizational barriers. As the number of organized lobbies increases, they collectively “slow down society’s ability to adopt new technologies and reallocate resources to respond to changing conditions, thereby reducing economic growth rates.” Olson’s Re-Relevance Source Yu’s diagnosis matches Anderson’s critique that the U.S. economy is rigid and stagnant because many special interest groups have had time to form and accumulate power.

Olson believes his theory helps explain why at the time of his writing the United States and Britain were struggling while Japan and Germany were growing rapidly. World War II didn’t just end lives and destroy factories and machinery; it swept away the organized lobbies in any economy that built up over time and stifled its growth. The losers of World War II had a fresh start economically, so they were not hindered by collusion and lobbying.In the US, the theory helps explain why New York City Almost bankrupt in 1975 And the economies of Western countries are soaring. Growth occurs where interest groups have not yet had the opportunity to form.

Today, as America moves from crisis to crisis, in Productivity growth is slow, high inequality and growing political dysfunction, Olson’s critique feels urgently relevant. “Thirty years later, Olson seems prescient and I seem naive,” Glazer wrote in his introduction. “The U.S. (and much of the rich world) is developing in exactly the same way that Olson predicted. Interest groups, such as homeowners who are blocking new construction and retirees who oppose any cost-saving health care reform, have become More entrenched. Regulations to protect insiders, such as occupational licensing requirements for interior decorators and florists, have proliferated. Between the 1980s and 2010s, the formation of new businesses declined sharply.”

Olson has followers across the political spectrum.Last year, libertarian economist Alex Tabaroc used rise and fall to explain The policies of liberal American cities failed. In 2019, left-leaning political scientist Henry Farrell cited this book Explaining Elizabeth Warren’s worldview:

[W]What Elizabeth Warren is after is largely Olson’s view of how markets work: Drag, scum, and corruption breed, and in order for markets to reach their full potential, you basically need to clear them at some point.

(And swinging to the right, it’s hard to read that diagnosis without thinking of “draining the swamp.”)

But is Olson really right? As interesting as his paper is, it is methodologically and empirically flawed.

Olson was ahead of his time in the use of game theory, which simulates the strategic interactions of rational individuals.But since then, economics has become more experience and behavioraltoo — so it’s more modest to draw sweeping conclusions from rational assumptions.

For example, in 2009 political economist Eleanor Ostrom won the Nobel Prize Document how people deviate from narrow notions of rationality in order to cooperate with each other. She found that when groups could communicate and could form and assess each other’s reputations, they were able to overcome coordination challenges very similar to what Olson wrote about. It turns out that Olson’s logic about when groups are or not organized only holds true in certain circumstances.

There’s also the fact that the biggest geopolitical event of the past 40 years seems to run directly against Olson’s theory. The fall of the Soviet Union in 1991 was a shock to stability, prosperity and political boundaries, which Olsen believed would wipe out interest groups. But the result was not economic dynamism— This is the meteoric rise of one of the world’s most notorious oligarchs. Even in a severe crisis, factions are not so easily swept away, or time is not so important for forming interest groups; either way, Olson’s theory does not seem appropriate. (Olson recounts the struggles of the post-Soviet economy here.)

For these reasons, rise and fall best read Not as an accurate description of the problems facing the U.S. economy, but as a hypothesis, even a provocation.Many other good books document the corrupt power of organized interest groups — especially those who represent businesses — and how they corrupt the economy. Going back to Olson means going back to the question of how and why these groups formed in the first place. It raises the idea that, no matter how speculative, these interest groups will do more damage to the economy as it grows. If nothing else, it’s well worth a read to see one of the greatest political economists of the past 50 years trying to think about the many issues that are making headlines now.

For his part, Olson is open to the limitations of his analysis. His theory is general, but he knows it doesn’t explain everything. And he’s well aware that people don’t always follow the rules of game theory.he wrote in rise and fall The “zealots” and “zealots” are willing to organize because they don’t care about ROI. This effectively means that, in Olson’s world, the most influential actors in economic policy will be the selfish rational and the fanatical irrational. That doesn’t sound far away.

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