Power and Prosperity, by Mancur Olson
New Light on Socialism
Mises Review 6, No. 2 (Summer 2000)
POWER AND PROSPERITY: OUTGROWING COMMUNIST AND CAPITALIST DICTATORSHIPS
Basic Books, 2000, xxviix + 233 pgs.
Mancur Olson's new book resolves for me a major mystery. As all readers of The Mises Review know, socialism is an unworkable system. Mises conclusively demonstrated that a centrally planned economy cannot calculate rationally; and the collapse of communism in 1989-1991 enabled even the invincibly ignorant, such as Robert Heilbroner, to grasp Mises's point.
But if socialism cannot calculate, why did it take so long to collapse? Part of the answer is easy to understand. The Soviets had the help of the capitalist market in setting their prices; they did not abolish free enterprise altogether; and they received vast sums in aid from the West. Indeed, Anthony Sutton has made a strong case that much "Soviet" industry was directly imported from abroad.
Nevertheless, a question remains. Whatever external aid it may have received, the Soviet socialist economy was manifestly inefficient. And yet, under Stalin the Soviets built up a substantial industrial base. Further, they raised and supplied an army that, albeit with a great deal of lend-lease aid from the United States, held off and then defeated the German Army during World War II. How did the Soviets achieve such feats, when one might reasonably have thought that they could at best limp along for a few years?
Olson has given us much of the answer: Stalin developed an ingenious system of wages and taxation, which turned the bulk of the Soviet population into hard working slave laborers. In essence, everyone had to work for a subsistence wage, during his or her primary hours of labor. Everything that one produced above subsistence went to the state, for "investment" as it saw fit. Much of this investment, of course, took place in armaments.
So far, though, we have mere garden variety tyranny. Stalin's master-stroke was to allow, with unparalleled generosity, workers to labor overtime and keep most of what they earned for themselves. The chance to earn even small increases over basic subsistence set the skilled avidly to work.
As Mr. Olson explains the point: "All that is needed is to set the base or inframarginal wage of the jobs that require more ability at almost the same levels as those of unskilled workers. A far higher implicit tax rate is put on the more able people in the more productive roles. Only the tiniest premiums, if any, are needed to provide an incentive for the more able people to accept the jobs that require higher ability, because the system of placing little or no tax on marginal or `bonus' income means that the more productive are able to keep most of their higher output for extra work" (p. 120).
Stalin had other "brutal and cunning innovations" (p. 129) as well: those interested in details must consult the book. Combined with the tax exploitation scheme just explained, the military and industrial prowess of Soviet Russia becomes much less mysterious.
But of course the calculation argument tells us that the Soviet system was eventually doomed. Olson does not appear aware of the Misesian version of the argument: his own account of Soviet decline stresses difficulties in gathering information and bureaucratic inefficiencies and corruption. His points are valid so far as they go, but Austrians cannot help thinking that Mr. Olson has here missed the central point.
Paradoxically, though, our author's avoidance of Austrian economics in one respect enhances the value of his contribution. He often arrives at Austrian, or near-Austrian insights through his own arguments: in doing so, he casts unexpected light on standard points.
All Austrians, and most non-Austrians, for example, realize the futility of price control. Prices set below the market rate will result in shortages; minimum prices, by contrast, generate surpluses. In the most familiar instance of the latter phenomenon, minimum wage rates cause unemployment.
So far, so familiar. Olson points out that because price controls prevent people from making the exchanges they desire, an incentive toward corruption arises. Under a maximum price, it will "be the case that there can be a mutually advantageous trade-one with both a buyer and a seller gaining-at a price that is higher than the controlled price and lower than the market clearing price. Both parties gain by violating the law and . . . neither has an incentive to report the offense. Essentially all of the private-sector incentive is to undermine the law. Of course, the same thing holds true if the government sets a price above market clearing levels" (p. 106).
If some people wish to violate the law, room is created for bribery, so long as the prospective gains from trade are substantial enough. "When caught in violation of the rule, those on both sides of the market have the same incentive to persuade or bribe the officials not to enforce the law. Sooner or later, the government becomes corrupt and ineffective" (p. 107).
Mr. Olson here offers a very useful, and so far as I am aware original, supplement to the Austrian analysis of interventionism. And this is not the only area in which Olson, going his own way, arrives at views of great value to Austrians.
One of the most interesting of these is Olson's assault on a key tenet of the Chicago luminaries George Stigler and Gary Becker. Actors on the market aim to benefit themselves: all and only those exchanges tend to be made that both parties find beneficial. The Chicagoites perversely apply this point to government. Will not government programs also be the most efficient possible?
The complex logic by which Becker justifies his roseate view of government is best left to those interested in such things. Our author readily locates the fallacy in the "whatever is, is optimal" school. His way of putting the point sounds as if it had come from Murray Rothbard. "When we drop the assumption that all interactions are voluntary, the implication that social outcomes are necessarily efficient disappears. The party with power gains from threatening to use or using the power . . . the thief need not care whether a fence would pay him as much for what he is taking as it is worth to the victim . . . Similarly, there is nothing that ensures that a government will necessarily confiscate the property of its subjects only when the government can use this property more efficiently than its previous owners could" (p. 61).
Here precisely is Rothbard's central criticism of the Public Choice School. Governmental action cannot be equated to the enforcement of voluntary contracts: those who think otherwise, such as James Buchanan, foolishly take the myth of the social compact literally. Both the Public Choice School and Becker and Company fail to grasp that force is the essence of the state.
Mr. Olson shies away from libertarianism: the very mention of laissez-faire makes him recoil. What of public goods? Is not governmental action to produce them necessary? I do not propose to analyze Olson's case here: rather I shall confine myself to one simple observation. Suppose that Olson is entirely right: the free market cannot generate an optimal supply of public goods. (Sound Rothbardian that I am, I of course reject the entire line of reasoning that leads to this conclusion.) Given the coercive essence of the state, so much stressed by Olson himself, is it not the path of wisdom to abandon altogether tinkering with the market in order to arrive at a chimerical optimal provision of public goods?
But I prefer not to stress Olson's deviation from Austrian orthodoxy. Rather, much more significant is that he meets Austrians most of the way on the most vital contemporary economic issue. He fully recognizes that the key to prosperity lies in secure individual property rights. Except for "on-the-spot" trades, exchanges cannot take place unless individuals have clear and enforceable titles to property. Why make a bargain that involves future performance if you cannot rely on the other party to honor a contract?
Olson parts company with those in the Rothbardian tradition in thinking that governmental action is needed to secure this key to prosperity. (Once again, a "public good" is involved.) But is it not remarkable how far this eminent political economist travels with Rothbard?
Cite This Article
Gordon, David. "New Light on Socialism." Review of Power and Prosperity, by Mancur Olson. The Mises Review 6, No. 2 (Summer 2000).