Monday, January 23, 2012

Review of The Rise and Decline of Nations by Mancur Olson

In his book “The Rise and Decline of Nations,” Mancur Olson suggests a theory for why the Great Depression was so long lasting. (And why the current depression has been, too.)

He thinks of the economy as having "fixed price" and "flexprice" sectors. The fixed price sector has monopoly or oligopoly prices set by either government, union, or collusive/cartel combinations. Fixed price also applies to raw materials with prices set by world markets. As with any collusive scheme, the cartel members in the fixed price sector benefit from abnormal profit while society suffers from below-equilibrium output. The flexprice sector is where prices are set by the free market, i.e. industries and sectors that are not just a racket being perpetrated.

Macroeconomic discussions usually posit a free market with prices that adjust dynamically according to demand. But during deflationary episodes, the fixed prices in collusive sectors do not adjust downward and consequently become absurdly high, resulting in falling demand and then falling production.

This explains why we see a clamor for inflation, because it brings the market price closer to the fixed price in the collusive sectors.

The health care sector is a cartel. The financial services sector uses taxpayer money to maintain their bonuses when they embarrass themselves. Most importantly: the amount of capital that is being raked off by these interest groups is going to end up leaving less for investing in productive enterprise.


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