Alexander Tabarrok. Consider the economic growth rates of the major democracies post World War II, say 1945-1980. Which countries had the best growth.

Alexander Tabarrok

Consider the economic growth rates of the major democracies post World War II, say 1945-1980. Which countries had the best growth rates and most robust economies?

Germany and Japan! i.e. the losers of WW II! France and Italy did well also. Clear slow growers were United States and Great Britain! Great Britain called the old man of Europe.

Why?▪ Catch up?▪ British Disease? ▪ Japanese industriousness and

willingness to sacrifice?

Graph from David Kern

Olson draws on implications 2, 4, 7,2. Stable societies with unchanged boundaries tend to

accumulate more collusions and organizations for collective action over time.

3. On balance, special-interest organizations and collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.

4. Distributional coalitions slow down a society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, thereby reducing the rate of economic growth.

to arrive at a further implication: Countries where distributional coalitions have been

“emasculated or abolished by totalitarian government or foreign occupation should grow relatively quickly after a free and stable legal order is established.”

After assuming dictatorial powers in 1933 Hitler moved to eliminate all competing sources of power. Thus, he abolished the labor unions (and made strikes illegal), he abolished all political parties other than the Nazis, he suppressed churches, clubs (other than those he controlled such as the Hitler Youth), state governments and any independent sources of power.

When the war was over the allies destroyed the industrial cartels that had supported Hitler and they took control of the military. i.e. they dismantled the military-industrial complex.

Thus Germany after WWII had very few organized special interest groups.

Great Britain had a long history of stability and thus a long time for special interest groups to arise. In Great Britain every trade had its own union, the doctors were organized, the lawyers were organized, the trades were organized, land holders were organized, there was an extensive class system (note on classes and cartels, French Revolution, and Napoleon) etc. etc.

A survey of associations in 1971 showed that:▪ 51% of associations in Great Britain were formed prior to 1939 but only▪ 37% in France,▪ 24% in West Germany and▪ 19% in Japan.

Murrell compared the growth rate of young, y, and old, o, industries in Great Britain and West Germany (correcting for differences in average growth rates) he reasoned that if Olson were correct the growth rate of young industries should be relatively higher. Why?

New industries in both countries have few interest groups gumming things up and therefore should grow quickly in both countries but old industries in GB should have lots of interest groups but not in WG therefore the new should grow relatively faster than old in GB not WG.

i.ie Murrell tested whetherGyUKGoUK

GAvgUK

GyWGGoWG

GAvgWG

West Germany had another advantage relative to Great Britain. In the post WW-II era the Germans, with allied encouragement, set up a new structure for unions.

In Great Britain unions were (and are) organized along trade lines so there is a metal worker’s union, a carpenter’s union, an electrician’s union and so forth. This means that every union is a special interest group with respect to any particular firm. i.e. if the carpenter’s union goes on strike it bears only a fraction of the cost of shutting the firm down.

In Germany unions were set up so that all the workers of a given firm belonged to the same union. Moreover, the unions were federalized so that the same union represented firms at many companies and in total the Federation of German Trade Unions (Deutscher Gewerkschaftsbund or DGB) represents in one way or another most workers.

Sweden and Norway two other countries that have a long history of stability but that have grown well post WWII also have encompassing unions, practically all union members belong to 1 labor organizations.

One can see the difference this makes. In Sweden the unions oppose tarrifs! Why? Encompassing organizations take into account the interests of the winners as

well as the losers. Hence in Sweden the unions instead of tarrifs prefer subsidies to increase labor mobility, retraining rather than subsidies to firms, and are highly tolerant of market forces.

What states have been the fastest growing since the mid 1960s? The South.

The South was destroyed in the Civil War was taken over during Reconstruction and then again to a less degree by the Federal government in the 1960s. Since that time the growth rate has been higher in the South than in the rest of the country.

More generally, Olson shows that older states have grown more slowly. Older states also have more special interest groups, as measured by union organization per capita.

Older cities have also grown more slowly – also consistent with the rise of the industrial revolution – a topic for next class.

Free Trade whether between countries or when created by the creation of a county often leads to large increases in income. Comparative advantage!

Careful measures of the potential efficiency gains from comparative advantage, however, suggest that the gains from comparative advantage can only explain part of the increases in income with free trade.

Olson argues that with a large free trade area the old special interest coalitions fell apart and had to be reestablished.