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March 17, 2009

How Rich Countries Die

Phillip Greenspun has [a long review](http://blogs.law.harvard.edu/philg/2009/03/16/how-rich-countries-die/) of [The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities](http://www.amazon.com/exec/obidos/ASIN/0300030797/theseastinsti-20), written by Mancur Olson in 1982. As you can see from this review excerpt, Olson’s model is quite relevant to seasteading. In fact, this appears to be the clearest indictment of democracy, with data and analysis on how the accretion of special interest groups hinders economic development:

[](http://www.amazon.com/exec/obidos/ASIN/0300030797/theseastinsti-20)

> Chapter 2 summarizes Olson’s groundbreaking work on how interest groups work to reduce a society’s efficiency and GDP. Some of this work seems obvious in retrospect and indeed Adam Smith noted that businessmen rarely met without conspiring against the public interest. There are a handful of automobile producers and millions of automobile consumers. It makes sense for an automobile company, acting individually, to lobby Congress for tariffs. The company will reap 20-40 percent of the benefits of the tariff. It doesn’t make sense for an individual consumer, however, to lobby Congress. It will cost him millions of dollars to lobby against Congress and preventing the tariff will save him only a few thousand dollars on his next car purchase. The economy suffers because some resources that would have been put to productive use are instead hanging around Washington and because cars are more expensive than they should be.

> Labor unions are a drag on the economy, but a labor union that represents all of the workers in a company will be less of a drag than a union that represents only a small percentage of workers in each of hundreds of companies. The single-company labor union will have some interest in keeping its host company alive by not bleeding it too much. A union that represents only 10 percent of a company’s workers will recognize that it can drive up compensation to double or triple the market-clearing wage without, by itself, killing the host company.

> …

> Olson would not be surprised by the current auto industry bailout: “Special-interest groups also slow growth by reducing the rate at which resources are reallocated from one activity or industry to another in response to new technologies or conditions. One obvious way in which they do so is lobbying for bail-outs of failing firms, thereby delaying or preventing the shift of resources to areas where they would have a greater productivity.”

> Special interest groups create complexity, by getting special rules established for their benefit, and thrive on complexity. If a tax or tariff code were only three pages long, an average citizen would be able to spot the sweetheart deals. If a code runs to 1000 pages, however, nobody will ever understand all of it.

> …

> Olson asks why the U.S., given its stable government and lack of invasions, hasn’t done very poorly. The first answer is that the U.S. has done poorly, growing slower than France, Germany, and Japan. The second answer is that the U.S. is not uniform. Some parts are relatively recently settled (the West) and/or relatively recently recovered from the Civil War (the South). It turns out that these are precisely the regions of the U.S. that have enjoyed the fastest rates of growth: “the longer a state has been settled and the longer the time it has had to accumulate special interest groups, the slower its rate of growth.”

> Chapter 5 looks at medieval guilds and foreign trade. Olson finds that the countries with the lowest tariffs had the highest growth rates. The countries with the fewest restrictions on immigrant labor had the highest rates of growth in per-capita income.

Greenspun draws the following lessons from the book:

> What practical advice can an individual citizen draw from this book? On the surface, it would seem to be a useful investment guide. Short New York and California; go long on Alaska and Hawaii. Invest in countries that have recently gone through a revolution or are recovering from an invasion (Cuba? Iraq?). One problem with the latter strategy is that instability itself makes it tough for an investor to make money. Only in hindsight do we know that World War II was the last war to rage through France and Germany during the 20th Century or that Red China’s conversion to running dog capitalism would last for decades.

> …

> One thing an individual can do is choose where to live and in which industry to work. The logical conclusion from reading this book is to prefer a new state to an old state, a newly stable state to a long-stable state, and a new industry to an old one. The worst thing that a young person could do, for example, would be to move to Michigan to work for G.M.’s automobile division. The second best thing would be to move to Alaska or an up-and-coming foreign country and work to extract some new kind of energy. The very smartest choice would be to move to Washington, D.C. and work as a lobbyist for a decaying industry that is bleeding the U.S. economy and taxpayer…

Note how this supports the dynamic geography idea of the importance of government resets (bloodless revolutions). These resets are like the annual drydock maintenance of a ship – they serve to clean off the special interest barnacles encrusted on the state’s hull. On the ocean, we can have eternally new states at a far lower cost than on land, because our cities will be voluntary, temporary assemblages. Olson’s work suggests this will lead to significantly higher long-term growth.