Economics Distinguished Lecture 0 m tiovemment Big Bills Left on the Sidewalk: Why Some Nations are Rich, and Others Poor
Mancur Olson, Jr.
here is one metaphor that not only illuminates the idea behind many complex and seemingly disparate articles, but also helps to explain why many nations have remainedpoor while others have become rich. This metaphor grows out of debates about the “efficient markets hypothesis” that all pertinent publicly available information is taken into account in existing stock market prices, so that an investor can do as well by investing in randomly chosen stocks as by drawing on expert judgment. It is embodied in the familiar old joke about the assistant professor who,when walking with a full professor, reaches down for the $100 bill he sees on the sidewalk. But he is held back by his senior colleague, who points out that if the $100 bill were real, it would have been picked up already. This story epitomizes many articles showing that the optimization of the participants in the market typically eliminates opportunities for supranormai returns: big bills aren’toften dropped on the sidewalk, and if they are, they are picked up very quickly. Many developments in economics in the last quarter century rest on the idea that any gains that can be obtained are in fact picked up. Though primitive early versions of Keynesian macroeconomics promised huge gains from activist fiscal and monetary policies, macroeconomics in the last quarter century has more often thannot argued that rational individual behavior eliminates the problems that activist policies were supposed to solve. If a disequilibrium wage is creating involuntary unemployment, that would mean that workers had time to sell that was worth less to them than to prospective employers, so a mutuallv advantageous employment I
u Mancur Okon, Jr., is Distinguished University Professor of Economics andfincipal Investigator of the Center for Institutional Rt$brrn and the Infbmal Sector (IRIS) at the University of Maryland, College Parft, Mar$mtd.
contract eliminates the involuntary unemployment. The market ensures that involuntarilv unemployed labor is not left pacing the sidewalks. Similarly, profit-maximizing firms have an incentive to enterexceptionally profitable industries, which reduces the social losses from monopoly power. Accordingly, a body of empirical research finds that the losses from monopoly in U.S. industry are slight: Harberger triangles are small. In the same spirit, many economists find that the social losses from protectionism and other inefficient govemment policies are only a minuscule percentage of the GDP. Theliterature growing out of the Cease theorem similarlv I suggests that even when there are externalities, bargaining among those involved can generate socially efficient outcomes. As long as transactions costs are not too high, voluntary bargaining internalizes externalities, so there is a Pareto-efficient outcome whatever the initial distribution of legal rights among the parties. Again, this is theidea that bargainers leave no monev on the table. Some of the more recent literature on Coaseian bargains emphasizes that transactions costs use up real resources and that the value of these resources must be taken into account in defining the Pareto frontier. It follows that, if the bargaining costs of internalizing an externality exceed the resulting gains, things should be left alone. The factthat rational mrties won’t leave money on the table automatically insures that laissez faire generates Pareto efficiency. More recently, Gary Becker (1983, 1985) has emphasized that government programs with deadweight losses must be at a political disadvantage. Some economists have gone on to treat governments as institutions that reduce transactions costs, and they have applied the Cease theorem...