From Infancy to Senility and Back

I would prefer to construct a tower, an arch, or even a gargoyle on a great cathedral that will last for ages than to take credit for single-handedly constructing a shack that will be blown away by the next change in the winds of intellectual fashion.

Despite a sprinkling of such disclaimers, Mancur Olson, an economist at the University of Maryland, wants to build a cathedral of universal ideas that will explain why countries decline economically. His problem is simple. None of the countries that have been world economic leaders has managed to stay ahead forever. Why?

The problem differs dramatically if you believe that economic growth is the natural state of mankind and something has to occur to prevent it, or if you believe that economic stagnation is the natural state of mankind and positive forces have to arise to break that stagnation. From Olson’s perspective, growth is the natural outcome of a competitive economy and something has to happen to screw it up, whether it takes the form of unions, cartels, tariffs, or selfish pressure groups, to name only a few. Economies that really are competitive cannot “not grow.” The natural tendency would be for a nation once ahead, for whatever reason, to stay ahead forever. Since nations don’t stay ahead forever, the cathedral builder must then look for the systematic forces “silting up the channels of economic progress.”

From the contrasting point of view one would try to explain why the social and technological forces that once led to economic growth no longer do so. The railroads, for example, created a great improvement in transportation and a host of new opportunities for growth, but these opportunities were eventually exhausted.

This is not Olson’s approach. For him, the proposition that competitive markets always produce economic growth is evidently central, and he keeps his attention fixed on competition; but he leaves the proposition itself unexamined, assuming that it has been demostrated by the discipline of economics. Yet I know of no such demonstration.

Market economies can be mathematically shown to be efficient in distributing goods and services—“Pareto optimal” in the jargon. In a free market no trades could be made that would make someone better off without making someone else worse off. Competitive free-market economies systematically exhaust the economic possibilities of the current known technologies, but they do not guarantee the perpetual growth of new technologies and hence permanent economic growth. In all standard economic models, including the competitive one, technology is determined by outside factors and not explained by the model itself. Market economies are naturally “efficient” but they do not naturally “grow.”

If technology quits growing, for whatever reason, all competitive free-market economies would grind to a halt regardless of whether their channels of economic progress had, or had not, silted up. To adapt Olson’s metaphor, the river of economic progress itself would have stopped and the channels would have become irrelevant. The major problem with Olson’s analysis is that he has not taken…

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