Mancur Olson and structural economic change: Vested interests and the industrial rise and fall of the great powers

ABSTRACT

The article examines Mancur Olson's claim that the rise and decline of nations is intrinsically intertwined with the build-up of vested interests in the economy. I contend that Olson must be supplemented with Joseph Schumpeter for a theoretical framework that enables us to examine processes of long-term structural economic change. The specific focus is on technological progress and industrial growth, with a view to analyzing why certain nations have been better able to rise to industrial leadership, and staying there, than others. The framework yields one theoretical proposition, which receives broad empirical support: In order to rise to industrial leadership, states must prevent vested interests from blocking structural change. States that are unable to do this will get locked into yesterday's technologies and industries, and will effectively have consigned themselves to long-term stagnation and decline. The empirical support is derived from the second part of the article, where paired comparisons between Britain, France, Germany, the US and Japan for five core industries during five periods of industrial leadership, from the Industrial Revolution until today, provide a qualitative test of the theory.

KEYWORDS:

• Structural change
• vested interests
• Mancur Olson
• Schumpeterian economics
• core industries
• long-term economic growth and development

Notes

1. This means that there are several kinds of growth. Mokyr (1990) produces the following typology: (1) Investment-led, or Solovian growth (after Robert Solow) – economic growth takes place when capital accumulates more rapidly than the growth of the labor force, leading to higher output per capita through increased productivity; (2) Smithian growth, based on commercial expansion (or gains from trade) – a more specialized division of labor leads to productivity growth; and (3) Growth based on scale or size effects.

2. Without downgrading the importance of other types of growth, there are several reasons to focus on Schumpeterian growth. Traditional neoclassical theories can only account for a modest amount of long-term growth. Abramovitz's (1956) and Solow's (1956) early attempts at growth theories only illustrate the inability to provide a satisfactory explanation. Their models could only explain 10–20%, with a residual of 80–90%. This approach has since been refined, yielding far better results (e.g. Mankiw et al., 1992), but has met with criticism (Dinopoulos and Thompson, 1999: 137; Grossman and Helpman, 1994: 28). Economic analyses in any case routinely attribute such significant portions of overall growth to technological progress that Schumpeterian growth is important enough to justify an exclusive focus on this (Kim and Lau, 1994; Moe, 2007).

3. A number of scholars identify the same core industries. Freeman and Perez (1988: 50) single out five ‘technoeconomic paradigms’, of 50–60 years each, from the Industrial Revolution on towards today, based on cotton textiles, iron, steel, electric industry (including chemicals), oil and consumer durables, and computers and microelectronics. Similar industries can be found with Bairoch (1982), Gilpin (1987), Hobsbawm (1969), Landes (1998), Modelski and Thompson (1996), Rostow (1978).

4. This feeds into Schumpeter's reasoning about how monopoly positions might be more conducive to technological progress than perfect market competition.

5. Definitions of the state have tended to focus on two separate issues. First, to what extent does the state have the necessary political autonomy to implement policy? The question has normally been raised within a temporally static framework, with the state considered an exogenous variable. Second, congruity: how do institutional structures change in response to changes domestically or abroad? This is a question that has normally been answered within a temporally dynamic framework, with the state as an intervening variable (Krasner, 1984: 224). Here, I end up somewhere in-between. First, I draw on static approaches. I suggest a role for the state that has to do exactly with the implementation of government policies. The extent to which the state has the necessary autonomy to carry out policy is crucial. The state is an independent actor as in the statist model. This corresponds to the Olsonian part of the framework. But second, there is a dynamic focus, corresponding to the mix of Schumpeter and Olson. Unlike statists, I am concerned with processes of change. To what extent is the state able to affect these processes, and to what extent is it able to adapt to them? In this context, the state becomes an intervening variable, in a framework that is temporally dynamic. This is a framework in which institutional change is abrupt, and where stasis is the norm for long periods of time, but where crisis gives rise to sudden change and to efforts to meet challenges (Krasner, 1984: 234) presented by new breakthrough technologies. Krasner (1984: 224) suggests four different conceptualizations of the state: (1) The state as government: ‘the collective set of personnel who occupy positions of decisional authority in the polity’; (2) The state as ‘public bureaucracy or administrative apparatus as a coherent totality and as an institutionalized order’; (3) The state as a ruling class; and (4) The state as normative order. While I do refer to the state as ruling elites, the ruling class, and as political elites, there is nothing Marxist to this, as opposed to (3) above. Rather, the definition of the state employed here falls closer to (2). The state is an administrative apparatus and a legal order. Also drawing on (1), the most important actor within this apparatus is the government. However, the state is more than just the government, and while being the most important actor, by no means the only actor. A country's political elites encompass more than just the government, hence terms like ‘political elites’ rather than just government.

6. Conditions like well-functioning markets, property rights and infrastructure are obviously also crucial. Growth on any scale has rarely happened in countries where property rights were systematically abused. But property rights give us little leverage as a tool of analysis for present-day growth and development in the industrialized countries, for the obvious reason that most of these countries are already doing well in this area (there is no variation on the independent variable!). Hence, for these nations, we need to look beyond background variables. While acknowledging the importance of good framework conditions for industrial growth, this is not where the extra intellectual effort should be put in.

7. Autocorrelation might still be a problem. While typically associated with time series, it may also occur in units that are geographically contiguous (Hamilton, 1992: 118). Britain and France are obviously not independent cases. Britain's rise to economic stardom was accompanied by a succession of military and political successes, mainly at France's expense. Also, there has been widespread diffusion of ideas and technologies across the Channel. French inventions normally depended heavily on British technologies diffused across the Channel. With the French Revolution and the impending wars, diffusion came to a halt, and France suffered much the worse for it. However, with nine cases and only one variable, autocorrelation is not a major problem.

8. In Eckstein's (1975: 108) terminology, this is a plausibility probe. The results of the study are not conclusive, but sufficiently rooted in data to warrant more rigorous testing.

9. Corn Law repeal also had the effect of alleviating hunger and providing workers with cheap and abundant food and industry with fit and healthy workers. Regressions suggest that workers' living costs were increased by 8–14% by the Corn Laws (Lindert, 2003: 329). Other estimates indicate that in the 1830s repeal would have yielded a real wage increase of 12.3–23.3% (O'Rourke, 1994: 133).

10. Granted, two thirds of the Tories voted against their own Prime Minister. The remarkable part is not that numerous Tories voted against Peel, but that a full third voted for something that they had been massively against as recently as 1842 (Hoppen, 1998: 127; McKeown, 1989: 356; Pugh, 1999: 69).

11. The government, while encouraging modern methods of metal production, at the same time caved in to the least modernized iron makers by promoting the use of wood for iron-smelting. Further, the government's mining bureaucracy was extremely conservative and discouraging with respect to industrial activity. At Briey, later the site of one of Europe's richest iron ores, the mining bureaucracy first denied the strike's existence, then doubted whether it could be mined, discouraged industrial attempts at extraction, and finally parceled out the ore-field in undersized lots. The blame should be shared with the Écoles des Mines, which had graduates at the highest theoretical level back out because they did not have the necessary skills to solve the practical problems. Thus, one of the richest ore strikes on the entire Continent was discounted (Trebilcock, 1981: 171, 185, 196).

12. In part because it depended on imported raw materials, and did not want tariffs on these, but also because the dyestuffs industry was already competitive.

13. Although quantitative evidence suggest that the decline in raw materials prices and the adoption of the Solvay process (British firms stayed with the less efficient Leblanc process) was more important than the tariff increases (Krause and Puffert, 2000).

14. The German soda industry increased its production from 33,000 tons (1867) to 500,000 tons (1910) (Murmann and Landau, 1998: 29).

15. True, towards the late 1920s, General Motors surpassed Ford as a consequence of having a far wider line-up of cars (Brinkley, 2003). However, Ford was not surpassed by GM because GM was in possession of superior technologies, but because Ford chose not to employ these technologies. Even if the car has undergone extremely rapid change, this has seldom brought one manufacturer a decisive advantage over the others. In the car industry, you have not had to be the technological leader as long as you have been able to compete on price.

16. It is hard to find obvious countries to compare the US with. Rather than failure, the car industry is an example of both European and Japanese success, but with a later starting point than the US. But not because the US car industry was more sophisticated: On the contrary, in general, European cars were technologically more advanced. When, after World War II, Europe introduced mass-production techniques on a large scale, catch-up was immediate, and by 1960 western Europe accounted for 40% of world automobile production. Japanese growth was even more extreme (Freeman and Louçã, 2001: 279; Modelski and Thompson, 1996: 102). In the car industry, diffusion has been exceptionally rapid and monopoly profits hard to reap. Dominance has only to a limited degree had to do with technological advantage.

17. By 1929, total expenditures on roads and streets (local, state and federal) amounted to $1.4 billion a year, or a full 2% of US gross national product (Heilbroner and Singer, 1994: 128).

18. Although there is disagreement as to how much a number of these initiatives, for instance with respect to semiconductors, actually helped (Gilpin, 2000: 232).

19. The domestic service industry, which accounts for three fourths of Japanese employment, has an overall productivity of only 63% of the US (OECD, 2001: 44; Sakakibara, 2003: ix, 42).

20. The World Economic Forum (2003: 457) singles out the government's lack of success in ICT promotion as one of Japan's greatest competitive disadvantages.

21. During times of structural economic stability, the interests of the most important vested interests, and the interests of the nation as a whole, may well be more or less completely overlapping. This most likely was the case for Japan during the first three postwar decades (or even longer). However, during times of structural change, sticking with the same vested interests became a problem. During times of change it is crucial that the industries of the future are allowed to grow and prosper. (Determining which these industries are is obviously another problem).