July 10, 2002
In Memory of Mancur Olson
Today, for some reason, I find myself wanting to talk to my late friend Mancur Olson, the University of Maryland economist best known for his mid-1960s book The Logic of Collective Action. His death was a great loss to all of us, as he was one of the keenest and most creative politico-economic analysts working for the Long-Term Planning Department of the Human Race.
Ah. I know why I am thinking about him. It's because I just reread Brink Lindsey book, and he uses a number of Olson's insights as springboards for his own arguments. Here is one example:
Posted by DeLong at July 10, 2002 06:14 PM
"[Mancur] Olson argued persuasively that underdevelopment reflects,not the absence of markets generally, but rather the absence of particular types of markets--namely, "socially contrived" or "property-rights-intensive" markets that arise and flower only with the help of appropriate, government-provided legal institutions... Those essential government activities that undergird a liberal market order are, by and large, so routine and uncontroversial that they do not figure in the ongoing debate over the role of government. In that context, economic liberals are always seen demanding less government intervention, and so develops the misconception that 'the less government, the better' is the sum and substance of their position. But the situation is altogether different for roughly five billion of the earth's six billion people.... it is the underdevelopment of legal institutions that is especially debilitating. In a continuum from bad to worse--from corrupt officials and inadequate courts, to laws so dysfunctional that many or most people are chased into the informal sector, to the arbitrary confiscations of kleptocratic misrule, to the chaos of Hobbesian anarchy--the poorer countries are all plagued by the insufficient protection of property and contract rights. Under these conditions, most economic activity is confined to what Olson called "spontaneous" or "self-enforcing" markets--markets based on personal relationships or face-to-face contact. But those markets, however resilient and durable, cannot produce the division of labor upon which affluence depends..." Brink Lindsey (2002), Against the Dead Hand (New York: John Wiley), pp. 175-176.
I was privileged to have Mancur for micro and public choice at UMd. He was one of the kindest, most generous, intellectually energetic persons I've ever met. He always thought macro theory was unsuccessful because there was so little consensus on it, whereas econometrics was insignificant because its results never convinced anybody. But his use of micro theory -- seldom with the benefit of equations -- was prolific. He was also an excellent, endlessly engrossing teacher.
One vivid memory I have was when I organized an "Economists for Glendenning" event about eight years ago. (That would be Parris Glendenning, currently finishing his second generally successful term as governor of Maryland.) Mancur showed up with some idea of what he would say that was not quite right. I briefed him for a minute or two, and he turned around a delivered a letter-perfect endorsement speech, down to each comma, that would have taken me 30 minutes and a keyboard to get exactly right.
I recall, for reasons you could imagine, one lecture he gave once about the "surprising" success of the Swedish economy. This was before their subsequent decline. His view was that the absence of restrictions on trade and markets in general more than compensated for the size of their tax/transfer system.
In essence, most markes would be characterized to some degree as "markets for lemons", unless strong institutional mechanisms are put in place and enforced one way or an other. Defining these optimal ins
Markets are to some degree just a perspective on the working of human relationships. Attempts by economists to model family relationships and decisions and the political process illustrate this. I don't think that even Gary Becker would argue that there aren't other ways to look at family decisions than economic ones.
Back to quintecential markets, I wonder what is the relative importance in those markets of institutionalized punishment mechanisms vs. a tradition / norm of excellence or honesty (most likely supported by some form of investment). I guess my point is that you can't regulate every thing in every possible state of the world.
The recent accounting scandals have revealed the weakness of this approach, as embodied in the GAAP. If behind the letter, there is no expectations that books need to reflect some underlying "truth" about the economic profitability of a business, we are back to the lesser type of markets...
And I don't thing beating cheaters harder is going to make the difference. 5 years was already a long time to spend in prison when you're accustomed to ride around in a full-option Z3, and get sushis and champain delivered to your ***** suite. (A Z3 probably sounds cheap to the CFOs and CEOs I have in mind. And sushis are passe.)
What we need is a financial culture that has higher expectations is terms of honesty. Enforcement mechanisms are only a part of the solution.
A very timely quote, indeed.
P.S. The first paragraph of my comment should end as:
Defining these optimal ins... titutional arrangements is not always as obvious as is apparent to the bold-minded, however.
Hernando de Soto's _The Mystery of Capital_ is an outstanding look at how a lack of institutions hurts the poor and prevents economic development. Actual property deeds with government enforcement could do wonders in many countries.
In today's FT comment & analysis section, Sanford Weill, chairman and CEO of Citigroup, reminded us of how concern over corporate disclosure during the Great Depression led to the creation of the SEC...