The deeper causes of Britain’s economic stagnation
26 April 2012
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Mancur Olson is best known for his 1965 book, The Logic of Collective Action, in which he explained why small, concentrated interest groups are more likely to influence policy than large, dispersed groups. Olson’s work, together with that of other public choice theorists, exposed the mechanisms by which interest groups obtain special privileges from government, enabling them to extract ‘rent’ from the wider population. For example, a domestic industry might lobby politicians to introduce import tariffs or environmental regulations to shut out foreign competition. In The Rise and Decline of Nations (1982), Olson contended that over time, concentrated interest groups – facing little public resistance – would come to dominate more and more sectors of the economy, stifling competition and innovation, misallocating resources, crowding out entrepreneurial activity and thereby bringing economic stagnation.
In the recent debate over Britain’s poor economic performance, there has been relatively little discussion of the underlying causes. Olson’s analysis provides a compelling explanation for many of the long-term structural problems now afflicting the UK economy. Much economic activity is now artificial in the sense that it is not the result of voluntary exchange but rather the consequence of state-granted privileges resulting in part from ‘rent-seeking’ behaviour by special interests.
Whole swathes of the nominally private sector are sustained by government regulation rather than consumer choice. Across the professions, occupational licensing restricts entry and raises fees, while at the same time, regulations create artificial markets for professional expertise. Complex tax rules create work for accountants and tax lawyers, for example. Vast industries such as renewable energy and waste recycling have been brought into being by combinations of regulation and subsidies. And major sectors of the economy are now heavily dependent on special privileges granted by the state at the expense of the wider population. Agriculture, energy and public transport are three obvious examples, but a strong case could also be made for numerous sectors including banking (bailouts, QE, etc.), pharmaceuticals (licensing etc.) and vehicle manufacturing (non-tariff barriers etc.). In this context, the success or failure of businesses is frequently dependent on political favours rather than satisfying customers’ preferences. Given such incentives, devoting resources to rent-seeking behaviour is entirely rational, even if it is at the expense of consumers and taxpayers and the health of the wider economy.
Clearly cutting public spending is an important part of reducing the pernicious influence of special interests. It will tend to reduce the share of the ‘private’ sector reliant on government subsidies. But there is little sign that the coalition understands the economic importance of dismantling the web of regulatory privileges enjoyed by concentrated interest groups. Indeed, several government policies have actually increased opportunities for rent-seeking. Olson was generally pessimistic about the prospects for fundamental reform in stable Western societies. Only extreme events such as wars and revolutions were likely to break the hold of powerful interest groups over policy and restore economic dynamism (arguably West Germany after World War 2 is an example of this). Yet the success of Margaret Thatcher in tackling the unions suggests that it can be done. A similar strategy against ‘middle-class’ professions would be a good starting point.
In the recent debate over Britain’s poor economic performance, there has been relatively little discussion of the underlying causes. Olson’s analysis provides a compelling explanation for many of the long-term structural problems now afflicting the UK economy. Much economic activity is now artificial in the sense that it is not the result of voluntary exchange but rather the consequence of state-granted privileges resulting in part from ‘rent-seeking’ behaviour by special interests.
Whole swathes of the nominally private sector are sustained by government regulation rather than consumer choice. Across the professions, occupational licensing restricts entry and raises fees, while at the same time, regulations create artificial markets for professional expertise. Complex tax rules create work for accountants and tax lawyers, for example. Vast industries such as renewable energy and waste recycling have been brought into being by combinations of regulation and subsidies. And major sectors of the economy are now heavily dependent on special privileges granted by the state at the expense of the wider population. Agriculture, energy and public transport are three obvious examples, but a strong case could also be made for numerous sectors including banking (bailouts, QE, etc.), pharmaceuticals (licensing etc.) and vehicle manufacturing (non-tariff barriers etc.). In this context, the success or failure of businesses is frequently dependent on political favours rather than satisfying customers’ preferences. Given such incentives, devoting resources to rent-seeking behaviour is entirely rational, even if it is at the expense of consumers and taxpayers and the health of the wider economy.
Clearly cutting public spending is an important part of reducing the pernicious influence of special interests. It will tend to reduce the share of the ‘private’ sector reliant on government subsidies. But there is little sign that the coalition understands the economic importance of dismantling the web of regulatory privileges enjoyed by concentrated interest groups. Indeed, several government policies have actually increased opportunities for rent-seeking. Olson was generally pessimistic about the prospects for fundamental reform in stable Western societies. Only extreme events such as wars and revolutions were likely to break the hold of powerful interest groups over policy and restore economic dynamism (arguably West Germany after World War 2 is an example of this). Yet the success of Margaret Thatcher in tackling the unions suggests that it can be done. A similar strategy against ‘middle-class’ professions would be a good starting point.
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More pernicious still are the vast numbers of ‘middle class’ public sector employees, who present the biggest special interest group of all. Most worryingly, they also have, in the higher echelons of the civil service, the powers to emasculate any serious attempts to solve the ‘special interest’ problem. While the private sector spends its own resources (wastefully) on rent-seeking, the public sector spends taxpayers money doing likewise. A couple of centuries ago prosecutions for malfeasance (or misfeasance) in public office were commonplace. The tax burden was light (income tax was abolished in 1816). Perhaps, if a cheap recreation of this system could be constructed, including all those employees whose income is derived from taxation, crucially involving the confiscation of pensions, then a more equitable balance might be struck between the subject and the state, for the betterment of all of us.
@Richard Naisby – You’re absolutely right about public sector employees. In the last few months it has been telling that senior officials have frequently been able to protect their own positions while cutting politically sensitive ‘frontline’ services. There is also strong evidence that public sector workers are more likely to vote for the more statist political parties. In the above article I wanted to explain that state-dependent special interests pervade the whole economy, not just what is defined as the public sector.
I am sorry but this is really absurd. The public and private sectors are two sides of the same coin, and one does not exist without the other. What on earth would make you think Mr. Wellings that any regime would move against its core supporters? I simply do not understand how people like you expect the “public sector” (made up of human beings, of course) to act like saints while the leave the “private sector” (made up also of human beings, sometimes the very same ones) to then magically make everything work, because even though you expect them to act in a calculating self-interested manner, they somehow also will always supposedly follow the rules, even when it denies them a possible advantage…
And what makes a union worse than a corporation, both of which are merely constructs created to serve the interests of a group of people?
The deeper cause of Britain’s “stagnation” is a decline in the ability of people to work collectively towards anything but a selfish purpose. Maybe if you touted the ideas in Adam Smith’s “The Theory of Moral Sentiments” as much as you do what he said in “The Wealth of Nations” you might be able to make a less internally conflicting point.
@Anonymous – I’m not really sure I understand your comment. One of the key contentions of public choice theory is that public sector officials do not act like saints and are in many ways just as self-interested as actors in the private sector. Moreover, increased collectivism is clearly not the solution to Britain’s stagnation. Firstly, there is the problem of who decides on the collective goals when individuals have different preferences. Secondly, collectives suffer from the economic calculation problem when attempting to define and then meet these goals by collective means. Finally, human nature is such that individuals within collectives will act in their own interest and redistribute collective resources towards themselves. This is evident in the history of collective organisations.