Biography of Mancur Olson is Now Online
Olson’s major insight in the second half of the book was about how Stalin managed to be a stationary bandit in the Soviet Union while still confiscating a huge amount of the wealth. By nationalizing land and virtually all forms of capital, Stalin took for the state a large part of the wealth created. He also kept wages artificially low for a given position and set of skills, while having a fairly low marginal tax rate. The wealth effect of this policy was that because people were poorer than otherwise, they demanded less leisure, which is, after all, a normal good, and thus worked more. The substitution effect of having low rather than high marginal tax rates was that people also worked more. But over the long run, Olson pointed out, managers, bureaucrats, and workers “shared control . . . over the state enterprises that were the principal source of tax receipts.” By the late 1980s, “virtually no resources were passed on to the Soviet government.” The most important factor behind the collapse of communism, Olson concluded, “was that the communist governments were broke.”
Communism, moreover, gave entrepreneurs very little incentive to replace or reallocate capital. So when communism ended, what was left of the capital stock was a very low-value carcass. Olson cited a 1991 study by George Akerlof, et al., that found that “only 8 percent of the East German workers [in East German conglomerates] were producing goods whose value in international markets covered even the variable costs” of production. Olson also noted that because East Germany’s economy was thought to be the most successful of the European communist economies, the Soviet Union was probably even in worse shape. The low value of the capital stock, argued Olson, helped explain why managers and workers in large state enterprises resisted privatization: “their enterprises could not be viable in a competitive marketplace and would not be maintained in a rational economy.”
This is from the newly published biography of Mancur Olson in David R. Henderson, ed. The Concise Encyclopedia of Economics. I enjoyed reading The Logic of Collective Action after over 50 years and reading for the first time the whole of The Rise and Decline of Nations and his last book, Power and Prosperity. The discussion above is of Power and Prosperity.
Read the whole thing and notice the discussion of Avinash Dixit’s too-narrow reading of The Logic of Collective Action and the mention of William H. Hutt’s work on South Africa.
Thanks to Tyler Cowen for reminding me to include the discussion of Sweden.