Olson, M., 2000, Power and Prosperity – Outgrowing Communist and Capitalist Dictatorship, New York, Basic Books, 2000, pp.xxix+233, $28.00, ISBN 0465051952.

This work of Mancur Olson, published after his death in 1998, is part of the path of research he pursued in the last period of his life, concerning the origin of public good providing and the role played by contract rights in economic development.

He especially leaned his efforts to suggest concrete solutions for the problems faced by Eastern European countries in their transition from communism to market-like economies: the activity of giving advices to policy makers, is, in fact, one of the aims of IRIS (Center on Institutional Reform and the Informal Sector), created by Olson with the support of US Agency for International Development.

In Olson’s view one of the greatest problems an economist is dealing with is the lack of an appropriate intellectual framework that “encompasses” markets and governments at the same time, and makes the economic analyst able to describe how the working and developing of market is connected with the kind of power that rules the country.

The basic inquiry that led Olson in this phase of searching was about what types of services governments have to provide in order to promote growth and what types of government provide these more consistently.

The whole book is a detailed – and in some ways, fascinating – exercise of logic, built by the author with the purpose to answer some challenging questions he points out in the preface: What is it that makes some market economies rich whereas others remain poor? Why was economic performance so much better after the defeat of fascism than after the collapse of communism? And why do the formerly communist countries suffer so much because of official corruption and organized crime?

The first step is providing the reader with the tools needed for such a logic iter.

Chapters 1 and 2 are devoted to this aim: the first one analyses the logic of power, that is, according to Olson, the “other invisible hand” that drives community and ruling power in satisfying their mutual needs; the second one remarks that democracies own an implicit attitude to stability because majorities have a more encompassing interest in the wealth of society and, accordingly, a long term view. Autocracies, instead, tend to be insecure, though they sometimes reach relevant rates of growth. So a criterion emerges that enable us to classify different types of government according to their more or less involving interest, or, using Olson words, their “stake” in society, that is minimum in case of anarchy (a situation where everyone has a narrow interest in the well-being of community) and maximum in democracies. Moreover, a time perspective is indispensable to understand if a type of government (even a democratic one) can or cannot assure law enforcement, individual and contract rights, and, consequently, stability and prosperity.

The Author tries to build the basis for a “theory of power” that, according to his analysis is needed to enlighten the connections between political institutions and economic growth. So he argues that this background cannot be found in such instruments as Coase’s theorem or in the longstanding belief that groups act in their common interest as rationally as individuals do.

Olson articulates the analysis on a microeconomic level, focusing on individual incentives to bargain, so he points out a logical flaw in the Coaseian argument that, if transaction costs were zero, rational parties would necessarily arrive at a Pareto-efficient outcome by voluntary bargain: the Author remarks that, especially when the bargain concerns public goods, groups have no incentives to deal because members keep on their rational effort to be in the subgroup that obtains the largest gain, the “coalition of free riders”.

In Chapter 5 the analysis is brought in a time perspective that helps setting the evolution of governance from its primitive forms relating to small “acephalous” groups to those more complex which came out time after time. An interesting issue is the “rational ignorance” of the average citizen that emerges whereas institutional structures become more complex and political choices more distant from him.

Then Olson illustrates how democracies have an easier way to enforce law and how a working market gives no or little incentives to corruption. He generalizes with the assertion that adopting legislation or regulation that is market contrary, a government must leave the parties with the incentive to evade the law, and promotes criminality and corruption in the ruling institutions as well.

In the remaining part of the book, the Author develops a fluent description of the Soviet-type autocracies and, according to the results previously achieved, discusses the causes of the sclerosis process that brought them to defeat.

Among these, the most important appear to be the irrational allocation of resources resulting from a system based on central planning, and its implication.

Olson asks: how could such a system work at all? The activity of planning required an huge amount of information to be obtained and processed in order to allow the center to decide which goods were needed and how much of them the productive units must supply. The Author observes that there were some competitive mechanisms that substituted the market working: but they were easily invalidated by bureaucrats supporting their own narrow interest.

By the first years of Stalinism the engine worked out quite well, and a relevant stock of capital was achieved by adopting regressive taxes on labour and transferring resources from consumption to investment; but, on the other hand, total factor productivity remained lower than in market economies and corruption began at every level of bureaucracy; so, in recent years, weakness of the system clearly appears. Informal or “shadow” sector gains a big role, keeping transition from being effective.

So Olson answers one of the questions posed in the preface, pointing out the difference between postfascism and postcommunism and explaining it with different performances in political and economic outcomes.

In the last Chapter some essential lines are resumed: the fact that markets exist everywhere but only few markets bring societies to well-being and prosperity; the importance of contract-intensive or right-intensive activities (usually named capital-intensive) in pushing growth.

A suggestion emerges quite clear: in this hard phase of transition, former communist countries need market-incrementing policies and institutional assets that assure enforcement of individual and contract rights.