Book reviews

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

Mancur Olson

Basic Books, New York, 2000, xxvii + 233 pp., $28/Can$42.50 (cloth).

The late Mancur Olson summed up his life's work in this short but remarkably insightful book. He applies insights drawn from his past work to the vanishing communist world, to the transition from communism to capitalism, and to the poverty of developing countries.

Olson's first insight is that individuals who hold power have an all-encompassing interest in the prosperity of the economy. In an apt metaphor, he describes a "stationary bandit" as better than a "roving bandit." A roving bandit takes everything from his victims; a stationary bandit has an interest in his victims' continuing prosperity and so takes less than 100 percent. By the same token, an unstable autocracy will loot more than a stable autocracy, because the latter has a longer horizon and thus a greater stake in future prosperity. Olson cites empirical work on developing countries that seems to support the hypothesis that long-lived autocracies perform better than short-lived ones. He devotes a fair amount of space to Joseph Stalin, one of history's most notorious stationary bandits. Stalin seized the entire Soviet economy but offset disincentives to future wealth creation by engaging in state-led investment. Olson goes into interesting detail about Stalin's brutally efficient system, which combined state terror with production incentives and helps the reader understand how Stalinist communism endured as long as it did.

But, Olson says, even in a stable autocracy, prosperity is not necessarily ensured for the long term because all autocrats die and create succession crises. Autocrats also have an unfortunate habit of trying to expand their revenues by preying on their neighbors. Democracies almost never go to war with each other-as has been noted many times-and are less likely to expropriate investments or break contracts. Most important, democracies that handle succession in a legal and stable manner create a stronger foundation for future prosperity. Olson points out that virtually all the richest countries are democracies with legal, stable succession processes.

Olson draws on earlier work on the logic of collective action to explain both the collapse of the Soviet Union and the difficult transition of its constituent states to market economies. His now famous insight is that centrally planned economies suffered from the same "sclerosis" as the industrial countries. That is, over time, interest groups organized and diverted resources into their own hands out of the productive economy. In the former Soviet Union, for example, state enterprise managers colluded both with their superiors and with other managers to divert resources into their own pockets. The scale of corruption became so great that the center eventually ran out of resources and the economy imploded.

What about the difficult transition to market economies? Olson draws an interesting contrast between the collapse of fascism (in Germany and Japan after World War II) and that of communism. When fascism collapsed, the victorious Allies swept away all the old collective interest groups and imposed constitutional democracy. In contrast, the collective interest groups of state enterprise managers did not vanish when communism collapsed. These groups have either slowed privatization or retained control of the "privatized" enterprises and continue to divert productive resources to themselves.

If there is a problem with Olson's book, it is that his insights are somewhat contradictory. Stable, long-established democracies have a more lasting interest in future prosperity and thus promote prosperity. Long-term stability, however, leads to interest group sclerosis and is harmful to prosperity. The reader is left with some doubts about the future of the world's stable democracies. Olson offers one ray of hope-that, as the public becomes more knowledgeable, special interest groups will lose their ability to subvert the interests of the larger society. But for his untimely death, I am sure Mancur Olson would have answered this and many other questions for those of...