Mancur Olson and structural economic change

Review of International Political Economy 16:2 May 2009: 202–230

Mancur Olson and structural economic change: Vested interests and the industrial rise and fall of the great powers Espen Moe School of Policy Studies, Kwansei Gakuin University, Sanda, Japan

ABSTRACT The article examines Mancur Olson’s claim that the rise and decline of nations is intrinsically intertwined with the build-up of vested interests in the economy. I contend that Olson must be supplemented with Joseph Schumpeter for a theoretical framework that enables us to examine processes of long-term structural economic change. The specific focus is on technological progress and industrial growth, with a view to analyzing why certain nations have been better able to rise to industrial leadership, and staying there, than others. The framework yields one theoretical proposition, which receives broad empirical support: In order to rise to industrial leadership, states must prevent vested interests from blocking structural change. States that are unable to do this will get locked into yesterday’s technologies and industries, and will effectively have consigned themselves to long-term stagnation and decline. The empirical support is derived from the second part of the article, where paired comparisons between Britain, France, Germany, the US and Japan for five core industries during five periods of industrial leadership, from the Industrial Revolution until today, provide a qualitative test of the theory.

KEYWORDS Structural change; vested interests; Mancur Olson; Schumpeterian economics; core industries; long-term economic growth and development.

Mancur Olson’s vested interest argument is by now a familiar one. In his (1982) The Rise and Decline of Nations he argues that within the state, over time, vested interests will build up, leading to the silting up of rigidities in the economy. This in turn dooms the country to long-term stagnation and decline. Stability means stagnation. Instead, what may be needed is a Review of International Political Economy C 2009 Taylor & Francis ISSN 0969-2290 print/ISSN 1466-4526 online http://www.informaworld.com DOI: 10.1080/09692290802408865

MOE: MANCUR OLSON AND STRUCTURAL ECONOMIC CHANGE

kind of shock to the system, rooting out the existing vested interests and providing the country with a fresh start, free of its old rigidities. History provides us with numerous examples of once proud and mighty civilizations that have crumbled into obscurity. More recently, Olson emphasizes the drawn-out relative decline of Britain and the stagflation of the West in the 1970s, and the dramatic rise of the two biggest World War II losers – Germany and Japan – who could start afresh, whereas Britain lived with peace and stability for so long that the economy grew stale. This article takes a closer look at Olson’s argument. First, I suggest that the argument is not complete until it has been complemented with Joseph Schumpeter, whose focus is on structural economic change brought on by technological progress, manifesting itself through periodic ‘waves of creative destruction’. Vested interests gaining economic and political power makes it ever harder for the state to pursue policies of structural economic change. As a core industry experiences economic growth, it also becomes politically influential, using this influence to block policies that go against its interests. Only states that are able to prevent vested interests from becoming powerful enough to block structural change can have hopes of achieving long-term industrial and economic success. Second, I examine the historical record, seeking to provide a qualitative test of Olson’s argument. Mancur Olson’s analysis was heavily focused on the postwar world. But for the argument to hold, more systematic evidence from several time periods is needed. Following the theory section, empirical evidence from five core industries – cotton textiles, iron, chemicals, car manufacturing, and industries drawing on information and communication technologies (ICTs) – over five time periods, in five leading industrial nations, provides a qualitative test and general support for the overall argument. THE THEORETICAL FRAMEWORK: OLSON AND SCHUMPETER Mancur Olson is a natural vantage point for a theory about vested interests and long-term growth and development. The Rise and Decline of Nations starts with the observation that we have been mystified many times both by obscure civilizations rising to greatness and by the collapse of seemingly invincible ones. More recently, the twentieth century exhibits a number of examples of relative decline as well as puzzlingly rapid postwar growth. Olson’s argument will be elaborated upon later in this section. For now, it is more important to focus on a few of his implications. Among these Olson mentions: (2) ‘Stable societies with unchanged boundaries tend to accumulate more collusions and organizations for collective action over time’; (4) ‘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’; (7) ‘Distributional coalitions slow down a 203

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society’s capacity to adopt new technologies and to reallocate resources in response to changing conditions, and thereby reduce the rate of economic growth’. For short, the accumulation of vested interest coalitions accumulate over time, leading to rigidities in the economy, an inability to adapt to new circumstances, for practical purposes removing economic decisionmaking powers from the legal authorities, and to long-term stagnation and decline; (9) ‘The accumulation of distributional coalitions increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution’ (Olson, 1982: 74). Implication number (7) feeds directly into Schumpeter and Schumpeterian growth,1 that is, growth based on technological innovation, knowledge, and human capital.2 The Schumpeterian economy is cyclical, always in flux, and characterized by shocks and disequilibria rather than a steady walk towards economic equilibrium. Schumpeter adopted the Russian economist Kondratieff’s view of the world economy as going through successive waves of industrial revolutions of empirically 50–60 years each. While this is far too deterministic a view of the economy (including for Schumpeter), there is more than just a rough consensus that through most historical epochs, certain core industries and technologies have been particularly important for a country’s growth and prosperity.3 The Schumpeterian view of growth and development is a view of economics that privileges certain economic activities over others. Countries that have mastered the core technology of a particular historical era, and have been successful in setting up industries employing this technology, are the ones that have forged ahead, grown in power, stature and economic strength. Certain industrial sectors are more growth-inducive than others, typically sectors that require advanced technologies and/or specialized human knowledge. Hence, the greatest profits are made in new industries or in industries that adopt new methods or technologies.4 Schumpeter views the economy as characterized by long-term economic cycles, driven by the growth of one or a few leading industries. When these industries saturate, the world economy drifts into a structural depression that can ultimately only be resolved when (or if) new growth industries (based on breakthrough technologies) provide the world economy with a new industrial engine. In Schumpeter’s (1934, 1942: 81) own terminology: the world economy goes through ‘waves of creative destruction’. Depression leads to the destruction of old firms and industries, but also to the creation of new ones. For a country to be economically successful in the long run, both creation and destruction must be allowed to occur. When the core industries of the past no longer yield the profits and investment opportunities they once did, the country needs to move on. Seeking to prevent the phase of destruction only leads to the silting up of economic rigidities and long-term stagnation. 204


Finding its roots in Schumpeter, the neo-Schumpeterian economic school refers to a set of theories that pay particular attention to the role of, and relationship between, technology and institutions in the process of economic growth, with Schumpeter’s disequilibrium dynamics a main contribution. Radical innovations disrupt existing economic structures and force new institutional setups and routines on the economy (Freeman and Soete, 1999: 329; Nelson, 1995: 76; Verspagen, 2001: 5). At the core of most explanations is the intertwining of the techno-economic and the socioinstitutional (e.g. Dosi (1982), Freeman and Perez (1988), Freeman and Soete (1999), Gilpin (1996)). Technologies and institutions change over time. What drives growth in one era is most likely not equally important in the next. New technologies and industries have different requirements – be it in terms of knowledge and education, capital requirements, linkages between academia, government and industry, patenting systems, and so forth – and the degree to which these are met is what is crucial with respect to structural economic change and long-term growth and development. This implies an understanding of economics, technology and institutions as part of the same framework. In order to achieve long-term growth a country requires a set of institutions compatible with and supportive of the new technologies in order to be able to make good use of them. Institutions well suited for an earlier paradigm may be completely inappropriate for the new one (Freeman and Perez, 1988: 50; Gilpin, 1996; Nelson, 1995: 80). a society can become locked into economic practices and institutions that in the past were congruent with successful innovation but which are no longer congruent in the changed circumstances. Powerful vested interests resist change, and it is very difficult to convince a society that what has worked so well in the past may not work in an unknown future. Thus, a national system of political economy that was most ‘fit’ and efficient in one era of technology and market demand is very likely to be ‘unfit’ in a succeeding age of new technologies and new demands. (Gilpin, 1996: 413) If we accept the Schumpeterian worldview, what is left for Mancur Olson to explain? Schumpeter’s framework predicts that boom will follow bust, but not in which country it will happen. It accounts for the fact that there will be a structural economic shift in the world economy, but not whether future industrial success will remain with the previously successful countries or shift to somewhere else. One might assume that the lead country within one set of technologies and industries would naturally be the one with the greatest chance of succeeding within the next breakthrough technology (and subsequent industries). However, it has often been the case that a country that has done well within one set of technologies and industries, has not been equally successful when the next industrial revolution has come along. 205


Hence, Mancur Olson provides the mechanism by which Schumpeter’s long-term structural shocks, macrotrends, and creative destruction occur. Structural economic change is a thorny process, and routinely meets with resistance from vested interest groups that feel threatened. New knowledge and technology displace existing skills and reduce rents. Technological change harms those that have specific assets tied in with the old technology. Through history, opposition against new technology has been widespread, and it has taken on a variety of forms. Potential losers from new technology have routinely set up obstacles in order to obstruct innovation (Mokyr, 1990, 1998: 51): Outright physical resistance against new technology, laws and regulations restricting the implementation of new technologies (guilds, unions, lobby groups, state monopolies), lobby groups that have managed to shield themselves through protection and favorable treatment, like tariffs and subsidies, etc. Hence, new promising industries may for all practical purposes find themselves blocked by old and established industries using their power to sway policy-decisions in their favor. However, beyond implication number (7) Olson does not focus specifically on technology. His understanding of the economy is not cyclical, and his focus is on the overall economy, not on specific technologies or industries. Olson’s argument instead has to do with interest groups and vested interests. As an industry grows to become economically prosperous, it normally also acquires political influence through lobby groups and politicians speaking on its behalf. As it becomes organized, it becomes capable of speaking with a strong, unified voice. Too much institutional stability leads to institutional rigidity. Societies that have had to start over again, reforming their institutions and breaking up old monopolies of power and economic vested interests, are the ones that have been economically prosperous. Stability on the other hand, has led to a silting up of vested interests, to stasis, sclerosis and to an inability to alter the status quo. Economic policy becomes trivial as it is controlled by vested interest, unwilling and uninterested in change. The result is a country that gradually drifts into economic obscurity as it loses its ability to change and adapt (Olson, 2000). However, this is a theory that despite its long-term pretensions is static rather than dynamic, not saying anything about the underlying dynamic driving the world economy. This can easily be changed if we mix in Schumpeter, and the dynamic or cyclical Schumpeterian worldview. Hence, Olson’s argument can be applied to technological change, as a dynamic rather than a static argument. The Schumpeterian world is in a constant state of flux. Hence, the first mover here is not institutional stability or rigidity, but technological change (or its absence). Technologies come and go, and industries and vested interest groups come and go with them. Rigidities silt up here as well – because of vested interests rising from 206


the implementation of new technologies. Technologies mature, becoming commonplace and obsolete, giving way to newer technologies and newer industries. When technological change is allowed to take place, Olson’s silting up of institutional rigidities will not occur. When the process of creative destruction is blocked, it will. The Schumpeterian dynamic puts a different twist to the Olsonian argument and provides a role for the state somewhat akin to a balancing act.5 It needs to prevent technological progress from creating the forces that will eventually destroy it. This means preventing vested interests from taking control over economic policy-making. It allows for a state to promote and protect new technologies and new industries while young and vulnerable, both against foreign competition and against old industrial vested interests. Neither Schumpeter nor Olson would have argued like this; they preferred for the state to stay out of the economic sphere. More in their spirit, the argument also recognizes that if promotion and protection is allowed to persist, we are back in some kind of Olsonian trap where vested interests have again been allowed to usurp economic and political influence. Towards the end of a technology or an industry’s product cycle, it is important not to support it, as it will impede upon structural change and harm the chances of future success in new industries. Aid then harms the economy and channels resources away from new and promising industries. The state must prevent industries from eventually becoming so powerful that a few decades down the line, they themselves constitute the dominant vested interest – and the political and economic influence – blocking further structural economic change. With Schumpeter, the state must see to it that both the ‘creative’ and the ‘destructive’ part of creative destruction are allowed to take place. Hence, economic success does not necessarily breed renewed success, but potential failure. If a country invests heavily in one set of industries based on one set of core technologies, these investments cannot necessarily be translated into new industries based on new technologies. And the bigger the difference between the old and the new industries, the bigger the chance that the economically and industrially dominant power of the past will not be the dominant power of the future. Because technological change has been the main engine of industrial growth, the key to great power success lies in the promotion of new industries based on such technologies.6 The industries singled out for analysis in this article are industries that have been instrumental in the rise of some countries and in the demise of others. It should, however, be noted that the previous argument does not say anything about whether an active state is a good thing or not. Neither does it conclusively state that a strong state is better than a weak state (for a discussion of such arguments, see, for instance, Epstein (2000), Mokyr (1990), North and Weingast (1989)). And it does not make any suggestions as to 207


which are the groups that constitute the most important vested interests in a country or where they are located. At this stage of theorizing, these must remain empirical questions. The strong state that assertively backs the wrong horse has as little chance of succeeding as the weak state that finds itself so penetrated by vested interests that no autonomous economic policymaking is possible. The following case studies exhibit clear examples of both extremes. They also exhibit examples of cases where the state itself (or at least forces deeply entrenched in the state apparatus) constituted as big of a break on structural change as industrial interests clamoring for protection (France, twice). And they exhibit examples where success has occurred, not as a consequence of the state demonstrating autonomy and distance to vested industrial interests, but on the contrary, listening to the needs of certain specific interests deemed to represent the most prosperous industries of the future, altering the institutional framework so as to benefit these interests, be it with respect to education, tariffs or patenting systems (Germany). Finally, vested interests should not be perceived of as some kind of unmitigated evil. During periods of structural economic stability, going with the existing vested interests may be beneficial for the country, as the overlap between their interests and the interests of society at large will probably be quite significant (as probably in the case of Japan). However, during times of structural economic change, sticking with the same old vested interests jeopardizes your future as a country as the continued channeling of resources into the existing vested interests will hamper the economy’s ability to undergo necessary structural changes. METHODOLOGY The previous section suggests that vested interests are crucial with respect to understanding why technological, industrial and overall economic leadership does not necessarily translate into future leadership, in the process suggesting why a country’s rise to international leadership and hegemony has often led to its subsequent fall. Hence, the expectation is that those countries that have risen to industrial leadership are countries with either weak vested interests from the outset, or countries with a state that successfully managed to curb the power of its vested interests. Equally, the countries that fell from leadership (or failed to rise) should be countries with strong vested interests, able to force their preferences on the political leadership. The theory does not suggest vested interests as the only relevant variable with respect to growth and development. It clearly is not. A full theoretical framework would contain more variables, but space constraints make it impossible to present a more exhaustive framework in a singular article. The literature does, however, suggest that this is one of the 208


classical political science arguments, and one that is deserving of closer scrutiny. Vested interests are difficult to operationalize. The variable is not easily quantifiable, and separate indicators may not provide a valid representation. Part of the problem also stems from the fact that the quality of data (in particular quantitative data) deteriorates dramatically when going far back in time. Applying overdue rigor to data of only modest reliability and validity can only lead one astray. This is a problem both when comparing countries going back a quarter of a century and when making comparisons between countries and industries for different time periods. Hence, this article takes a qualitative approach. I have sought to identify the major political issues pertaining to economic policymaking, but I am not a priori identifying particular vested interests (even if certain vested interests by default are more crucial than others, like economic interests). In particular; have political elites been receptive to the needs of new and vulnerable industries, or have these been at the mercy of policies designed to protect the interests of older and more established industries? For each time period, I have identified the major economically and industrially related political issues, relevant vested interest groups, and to what extent they were successful in influencing government policies. Hence, industrial lobby groups figure prominently, whether lobbying for or against protection, for change in the education curriculum, patenting system, etc. The variable is deductively derived from theory, but there will always be a multitude of vested interests, and we cannot a priori derive which interest will be the most important for each time period. This can only be established inductively, through a thorough examination of the historical record. The same goes for the actual influence of these vested interests and to what extent they contributed to cementing or altering the economic structure of the country in question. No large-scale data can tell us whether or not vested interests actually mattered in any large array of cases. For this, we have to do the actual case work. Therefore, ultimately I have had to make overall assessments of vested interests based on my reading of the literature. While the assessments are all mine, I have done my best to shy away from controversy, relying on data and interpretations that the overwhelming majority of scholars in the field should agree with. I look at a total of nine cases for five different time periods and industries, combining the comparative and the historical method. With one exception, I juxtapose one positive and one negative case for each time period and industry, employing Mill’s (1904: 253) Method of Indirect Difference. However, employing the comparative method without complementing it with the historical method for all practical purposes leaves us with a set of correlations without a large enough sample size to make valid inferences. Hence, the contribution of the historical method is crucial – historically tracing the micro mechanisms specified by the macro variables in 209


the theoretical framework and thus creating the foundation for drawing causal inferences about the correlations discovered through the comparative method. For a far more extensive and thorough treatment, methodologically, theoretically and empirically, I refer the reader to Moe (2004, 2007). For each time period and industry, the juxtaposition of two by two cases yields a design that is overdetermined. Hence, general inferences should be drawn from the empirical section as a whole (rather than from each time period), where a total of nine cases rule such problems out.7 The time periods and industries are late-eighteenth- to early-nineteenth-century cotton textiles, early- to mid-nineteenth-century iron, late-nineteenth- to earlytwentieth-century chemical industry, early- to mid-twentieth-century automobile industry, and finally, late-twentieth-century ICT-based service industries. For each time period and industry, I compare the lead economy for that period against another great power that fared distinctly worse. Hence, for cotton textiles and iron, I juxtapose British success and French relative failure. For chemicals, German success and British misery, and for ICTs US success and Japanese failure. The one exception is the car industry, where I only look at the US, for reasons that will become clear later. The design ensures variation on the dependent variable, for each time period and for the cases as a whole, making it easier to draw reliable inferences. This cannot be a conclusive test, both because the variables are somewhat loosely defined and because space constraints severely limit the amount of empirical material included. Still, the values on the dependent variable are systematically matched by the values on the independent variable and supported by the historical narrative. The article thus provides strong support for a set of propositions8 that put a different twist to Olson’s argument and basic logic, for what essentially is an Olsonian– Schumpeterian version of the theory (although obviously in conjunction with a number of omitted variables). VESTED INTERESTS AND LONG-TERM ECONOMIC GROWTH AND DEVELOPMENT Cotton textiles No industry is more closely associated with the Industrial Revolution than cotton textiles, going back to inventions pioneered in Britain from the 1760s – the spinning jenny (1764), the water frame (1769), and the mule (1779). While not the watershed in economic history it has often been portrayed as, the cotton textile industry grew extremely rapidly. Productivity increased to such an extent that by the end of the century, a mule would produce 200–300 times more than a traditional spinning wheel (Brose, 1998: 36; Landes, 1969: 85; Mokyr, 1999: 21). Cotton textiles accounted for 40% of British exports. While roughly equal to France prior 210


to the French Revolution, by the end of the Napoleonic Wars, British raw cotton consumption was four times that of France (Hudson, 1992: 183; Modelski and Thompson, 1996: 99). In Britain, vested interests were only a minor problem. Guilds had not been a problem since the Glorious Revolution, and rent-seeking was merely a nuisance. The role of Parliament made lobbying slow and cumbersome, with relatively open and public negotiations working as a clear check on the influence of pressure groups and leading to strong resentment against favoritism. Hence, Parliament could not easily be manipulated by vested interests seeking monopoly rights (Mokyr, 1990; Morgan, 1999: 46; Root, 1991: 338). While British ruling elites can hardly be credited with pursuing any conscious industrial policy as a consequence of this relative autonomy, what is conspicuous is how political outcomes still persistently went against old, vested interests and in favor of the up and coming cotton textile industry. Concerned with the seventeenth-century import of calicoes from India, the dominant wool industry had been instrumental in pushing for a prohibition on the import of Indian cloth and calicoes. However, the resulting 1721 Calico Act, which closed the market to Asian textiles, contained important loopholes, effectively creating market niches for Celtic linens and English fustians. The wool industry lobbied heavily against this, but was rejected as the 1736 Manchester Act made it clear that linen yarn and cotton wool were not unlawful. The decision was all about politics, not economics. Concerns over riots in the Celtic fringes of the kingdom had made Parliament support the Scottish and Irish linen industry. The subsequent growth in linens created a loophole for domestic cotton manufacture, whereby cotton textile manufacturers located in Britain (as opposed to in India) for all practical purposes was given protection and favorable regulations by the state, sheltered by the very same Calico Act that had originally been intended to shut it out (Landes, 1969: 82; Moe, 2007; O’Brien et al., 1991). Yet, while unintended, the end result was a British state that favored the growth of the rising cotton textile industry by resisting lobbying from the very powerful interests of woolens and silks. In Britain, as in France, there was at times considerable resistance against the rise of the cotton industry. However, it is worth noticing that these vested interests were emphatically suppressed. Riots were violently clamped down by soldiers, resulting in a series of hangings and deportations. Tampering with bridges and mines was made a capital offense. Petitions to ban new technology were consistently rejected by Parliament. Labor organizations were illegal if perceived as threatening the advance of technology, and ancient statutes and regulations were removed (Colley, 1992; Freeman and Louça˜ , 2001: 178; Mokyr, 1990, 2002; Morgan, 1999: 46). In France, vested interests were a far bigger problem. Even though during the seventeenth century, Colbert and Richelieu had tried to 211


encourage French cotton manufacture, the French state in 1701 ended up imposing a total ban on the sale, wear or use of printed cloth (O’Brien et al., 1991: 418). Guilds had weakened substantially since the 1750s, but a network of craft guilds and small producers supported by local authorities in general still opposed technological innovation and would often be strong enough to resist labor-saving inventions. In some cases, guilds and merchants would make alliances in order to regulate trade and protect their monopolies. In textiles, manufacturing would often have to move into the countryside where wages were low and regulations non-existent. Yet, noblemen would often ally with local authorities in the countryside to go against the central government by supporting crafts guilds and small producers. The guilds were formally abolished in 1791, but as late as during Napoleon’s reign illicit unions would continue to fight against the introduction of new machinery, with small entrepreneurs allying with workers to keep larger and technologically more efficient entrepreneurs out (Bossenga, 1988: 694; Fairchilds, 1988: 690; Mokyr, 2000: 79, 2002: 264, 269; Sibalis, 1988: 726). Rent-seeking was a far greater problem than in Britain. With the King not facing up to any parliament, secrecy shrouded the wheeling and dealing of pressure groups and government, away from the public sphere. Commercial and industrial profits were redistributed towards preferred clients. Royal patronage was a more likely route to industrial success than being an entrepreneur. Hence, the battle for the King’s ear was crucial. French economic policy was a cobweb of favoritism and vested interests fighting to maintain and expand their privileges (Bossenga, 1988: 696; Mokyr, 1990: 59, 2002: 264, 270; Root, 1991). The state lacked the autonomy to do anything about this. Attempts at introducing a property tax and abolishing the guilds created large-scale tension, with clergy, nobility, magistrates, craftsmen, merchants and urban people all uniting against it. In 1776, Louis XVI had to back down, and reverse the attempted reforms. Reform affected the privileged classes enough to arouse their resistance, but not the bourgeoisie to such an extent that they could be drawn upon for support (Furet, 1995: 26; Schama, 1989: 85; Wright, 1995: 36). Hence, whereas the British state clamped down on resistance against new machinery, the French state had neither the ability nor the willingness to do the same. While the King sought reform, vested interests were deeply entrenched in the French ruling elites, with a number of powerful societal interests having a major stake in preserving the status quo, playing a far more prominent and disruptive role than in Britain. Iron The second major early Industrial Revolution industry was iron, with many of the technological breakthroughs deriving from the same time 212


period as that of cotton textiles – the coke-fueled iron blast furnace (1709), potting and stamping (1760s), puddling and rolling (1783). Nineteenthcentury improvements were more incremental, with Neilson’s hot blast (1828) the most important. Still, it was not until after the Napoleonic wars that iron became the driver of the economy (Greasley and Oxley, 2000: 109, 114). Also, from the 1830s iron became ever more important through its linkages with coal, steam power and the railroads. This provided Western economies with a crucial mid-nineteenth-century boost. The British iron industry stood head and shoulders above the rest. By 1850, Britain produced half the world’s iron and two-thirds of the coal. France never came close, bogged down by a multitude of powerful vested interests. In Britain, the end of the Napoleonic wars created a powerful vested interest in agriculture, strongly represented in Parliament by landholding Tories. During the wars, Britain cultivated large areas of land in order to feed a population shut out from Continental grain by Napoleon’s Continental System. But now that it had been cultivated, a vested interest instantly sprung to keep this marginal land farmed at a profit even if no longer possible without protection. Hence, in 1815 Corn Laws were imposed in order to protect landed interests against foreign imports. This was a classic case of landed vs. manufacturing interests. Landed interests were controlling the state and the Corn Laws blocked structural change by for all practical purposes putting a steep tax on workers and manufacturers,9 and by channeling major resources away from productive and into non-productive sectors. In as capital-intensive an industry as iron, this was important. Cotton textiles were running out of steam, but vested interests were preventing new industries from taking over. Iron was growing too fast for an economy where government policies had placed artificial restrictions on the expansion of markets, in particular foreign markets. The 1837–42 economic crisis hit iron (and coal) especially hard. To free-traders, this was a crisis of underconsumption and of artificial trade barriers, thus connected to the Corn Laws. It was not resolved until the 1840s, when the Tory cabinet of Prime Minister Robert Peel went against its own vested interest, reducing and abolishing customs duties, culminating with the 1846 Corn Law repeal. A Parliament to 80% consisting of MPs belonging to the landowning aristocracy voted against their own landed interests (Bairoch, 1993: 21; Lloyd-Jones, 1990; Schonhardt-Bailey, 1991: 547).10 The battle between canals and railroads was another area in which vested interests were defeated. France ended up with an expensive compromise, whereby canals and railroads would double up and be built next to each other. Right from the start Britain came down on the side of railroads. In 1824–25 the shareholders of the three Liverpool–Manchester canals, the landowners of the area, and even the Archbishop of York involved themselves for canals and against railroads. In what Harris (1997: 686) labels ‘a straightforward confrontation between long-established 213


vested interests and newcomers’, and at a time when ‘railway mania’ had yet to overwhelm British investors, a government decidedly ambivalent towards industry (Lord Liverpool’s Tory cabinet) came down on the side of the novel and unproved technology of railroads, against the testimony of a wealth of experts brought in by the canal supporters (Freeman and Louça˜ , 2001: 194; Harris, 1997: 685). Early-nineteenth-century France was characterized by a string of weak governments. Hence, French governments were no force for change, and vested interests were largely allowed to run free. Tariffs were secured for a number of industries, and while in the short term this probably saved the French iron industry from being swamped by British competition, it also allowed a host of inefficient iron works to survive. A government commission stated outright that lower tariffs would unjustly harm those who had entered into business with the expectation that tariffs would be upheld. In other words, tariffs should be understood solely in terms of protecting the existing industrial structure (Landes, 1969: 201, 216; Trebilcock, 1981: 170; Wright, 1995: 146). Some tariffs had distinctly contradictory consequences. France was highly dependent on importing coal for fuel (crucial for both steam power and iron forges). Yet, in response to pressure from domestic coalminers (bolstered by the conservative and powerful mining bureaucracy, the Corps des Mines), tariff restrictions were placed on coal imports. Thus, a tax on coal was imposed by maybe the European power most desperately in need of such fuel (Trebilcock, 1981: 187), worsening the situation for iron miners depending on coal for fuel.11 One of France’s problems was geographical. Unlike in Britain, iron and coal were not located in close proximity to each other. But no French government tried to work around this. Instead, by caving in to vested interests, like coal, they made it worse. The railroad bureaucracy immensely added to this. Hence, one of the reasons why governments were too weak to deal with vested interests was that on many occasions, they were located deep inside the state apparatus. With respect to railroad construction (and as above, coal mining) the state in many ways was the biggest break on its own efforts and ability to restructure the economy. With iron and coal located far away from each other, a railroad network would have gone a long way towards a solution. But because of the power and influence of the railroad bureaucracy (the Corps des Ponts et Chaussées), railroad construction was centralized, complemented by expensive canals (which should rapidly have been becoming a thing of the past), held to such high standards that construction was far slower and costlier than anywhere else, and determined by political rather than economic and industrial concerns, hence regularly bypassing the most important industrial areas. Instead of a decentralized network, France ended up with a hub and spokes system, where all roads led to Paris. Reform was consistently thwarted. Also, because the French iron industry had problems producing high-quality iron, 214


the heavy taxes imposed on imported iron contributed to making railroad construction – which among other things depended on imported iron rails from Britain – excessively expensive (Caron, 1998: 278, 284; Wright, 1995: 148). Consequently, France was extremely slow to produce an infrastructure network benefiting industry, as in linking iron and coal (Mitchell, 1997: 21; Smith, 1990: 661–75; Trebilcock, 1981: 144, 151, 169). This would not change until president Louis-Napoleon in an 1851 coup d’etat installed himself as Emperor Napoleon III, railroads being a pet project of his. Crucial financial reforms would also have to wait until then (Smith, 1990; Trebilcock, 1981: 150, 169, 184). Only during Napoleon III’s reign did France have a leader with both the ability (largely due to the coup d’etat) and the willingness to go against powerful vested interests, to a large extent deeply entrenched in the state itself. As with cotton textiles, vested interests played a far more persistent and disruptive role than in Britain. Chemicals The late nineteenth century saw a host of new industries, significantly more knowledge-intensive than before. The chemical industry became of great importance to late-nineteenth- and early-twentieth-century growth. This is the industry that best signals the waning of Britain as a dominant power, and the rise of Germany. In 1850, Britain had the largest chemical industry in the world, and in 1856 the first synthetic dye (signaling the start of the modern chemical industry) was invented in Britain. Yet, almost all subsequent inventions were German. By the end of the century, the German share of the synthetic dye market was 85–90%. In Britain, vested interests had now become a problem, preventing reform in at least three crucial areas. In education, aristocratic interests failed to grasp the importance of educating the lower classes. First, they could not see why it mattered (during previous waves of industrialization it had not). Second, they were afraid of the consequences of awakening the masses – education could potentially lead to revolution. Third, it would cost a fortune. Also, there was no strong pressure for education reform from the industry (Evans, 1983: 324; Hobsbawm, 1962: 30; Hoppen, 1998: 597; Lindert, 2003: 330). Religion further complicated things. Both Anglicans and Nonconformists were largely Liberals, and the Liberal Party thus had to satisfy two very divergent religious interests in order to push reform through. Hence, any reform bill had to be cautious. When a bill was finally passed, it managed to provoke both (Hoppen, 1998: 598; Lindert, 2003: 330; Pugh, 1999: 101). The second area was patent legislation. The chemical industry presented other challenges than traditional manufacturing industries, namely the importance of distinguishing between product and process. The British system, 215


unable to do this, conformed to the interests of old, established industries, to the detriment of chemicals. A consequence of the system was uncertainty about what a patent covered. Did it cover the rights to produce one specific color, or the rights to the process used to produce that color? Between 1861 and 1865, this led to extensive litigation as to which firms had the rights to produce what colors. During these crucial years, British firms were essentially stuck in court rather than in the laboratory (Murmann, 2003: 87; Murmann and Landau, 1998: 41). Also, high patenting fees ensured that patenting favored capital-intensive activities – like textile machinery and steam engines – over invention (Khan and Sokoloff, 1998: 294; MacLeod, 1992: 288). While the chemical industry eventually developed into a high-value, capital-intensive industry, it was not so from the outset. Finally, vested interests dominated the tariff issue. As Britain stayed with free trade, the rest of the world shifted towards protectionism. During the 1870s, British exports to Europe and the US fell. Protectionist voices rose in the 1880s, but no strong British protectionist movement existed until the early twentieth century (Bairoch, 1993: 27; Brose, 1998: 81). Tariffs were definitely preferred by the chemical industry, but unlike cotton textiles, it did not speak with any unified voice, and did not have spokesmen in Parliament. Instead, the textile industry, which wanted access to cheap and high-quality German dyes, lobbied heavily for free trade. British dyestuffs did not stand a chance. They were also countered by natural dyers and colorists, who had strong trade organizations, and used these to lobby for free trade. Finally, that the Liberal party was the dominant party, and at the same time staunchly free trade, made tariff reform politically impossible to such an extent that the Conservatives strategically shunned the issue even when in power, knowing that it would lose them the next election (Judd, 1996: 150, 187; Pugh, 1999: 115, 145). As a consequence, the inorganic alkalis sector suffered from tariffs imposed by Germany, and exports to the US came to an almost complete halt following US tariff increases on a number of inorganic chemical products. This, for all practical purposes, was old vested interests blocking new industries from rising (Chang, 2002: 38; Horstmeyer, 1998: 235; Murmann, 2003: 193). In Germany, the state was quite effectual at preventing old vested interests from blocking the chemical industry, and eagerly supported the new industry. Part of the reason was a relative lack of established vested interests. Germany had no powerful textile industry. In education, religious opposition was only modest. And because of decentralization, archconservative Junkers had little opportunity to block education spending. Instead, towards the late nineteenth century, the German state was instrumental in aiding rather than blocking the chemical industry. The government stepped in with funding, not only for education in general, but also by subsidizing laboratories as dye firms successfully lobbied the state 216


for funding for R&D facilities and the training of chemists (Keck, 1993; Murmann, 2003; Murmann and Landau, 1998). The state also gave the chemical industry the patent system that it lobbied for. No patent law originally existed; hence, German firms could poach experts, borrow and steal, freely copying British ideas for production in the domestic market while the competition abroad was heavily embroiled in costly and time-consuming litigation. The lack of entry barriers created enormous competition, and huge numbers of firms entered the market. Since Britain did offer patent protection, German firms could patent their products there, locking out the competition from the British market, without providing the same rights to British firms in Germany (Horstmeyer, 1998: 239; Murmann and Homburg, 2001: 194; Wehler, 1985: 32). Had the German patent law arrived in 1858, it is doubtful that as many German firms would have developed into such strong competitors. Fewer firms would have entered into the industry and inefficient firms would have been more likely to survive, as was the case in Britain. (Murmann, 2003: 29) The German industry got its patent law at a time when German firms were finished imitating and had started innovating. They now needed a patent law preventing other countries from doing exactly what they had done. Also, in 1877 as the patent law arrived, the lobbying of the German Chemical Society managed to secure for the industry the crucial clause of allowing process patents only, not product patents. In other words, it made it impossible to patent something along the lines of ‘the color red’ (Freeman and Soete, 1999: 90; Murmann and Homburg, 2001: 199). It even went so far as to reverse the burden of proof: If a German firm accused a foreign firm of infringing, the foreign firm would have to prove that it produced the dye using a different process (Murmann, 2003: 89). With respect to tariffs, the chemical industry also got the regulations that it lobbied for. The close relationship with the government gave the industry a powerful position with respect to influencing tariff rates. However, notable here is that the organic chemical industry was not interested.12 The organic dye industry was already competitive and had more to lose from retaliatory tariffs than it had to gain from protection. It thus managed to get an exception from the 1879 and 1882 general tariff increases. However, the inorganic alkali industry was successful in getting a much needed tariff, which, among other things, effectively shut out Britain.13 In the 1880s, imports from Britain fell to almost zero.14 It is worth noting that success was not a consequence of the government perceiving of vested interests as some kind of unmitigated evil. Rather, the German state played along with vested interests in the sense that the chemical industry was given political access and support. It was strong 217


and well-organized and able to push its collective interests. But it just so happened that these were the ‘right’ vested interests. They were not interests attached to an old and waning industry, but to a new and highly promising one requiring different institutions, industrial and technology policies in order to succeed. And this they got. Automobiles Of the five industries included here, the automobile industry is the deviant one. It had a massive impact on the world economy, providing a crucial boost at a time when old industries were stagnating. The technological breakthrough enabling the industry’s growth – mass production – had truly revolutionary effects. The 1914 introduction of the assembly line enabled Ford to reduce the manufacturing time of a Model T from 12 hours 30 minutes to 1 hour 32 minutes – a reduction of 88% (Brinkley, 2003: 153)! But is this Schumpeterian growth? The technology that revolutionized the industry was not a product technology, but a process technology. It allowed for the faster and cheaper production of cars, not for an improvement of the actual product. Success depended less on technological sophistication than on bringing relatively familiar technologies as cheaply as possible to as many as possible.15 Hence, success depended on Smithian variables – demand, access to capital, market size – rather than Schumpeterian ones. For this reason, I look only briefly at one country – the US, accounting for 70–90% of the world’s pre-World War II production (Modelski and Thompson, 1996: 102).16 The vested interest argument has some explanatory power, but not nearly as much as for the other industries. One area in which vested interests might have blocked US progress was with respect to infrastructure. For the car industry to become a genuine mass consumption industry, one thing that needed to be in place was a proper road network, repair shops, gas stations, etc. Hence, the 1920s saw the US completely transformed in terms of highways and buildings.17 While government expenditures on infrastructure seem modest by current standards (Miller, 2003: 190; Moss, 1995: 138), Leuchtenburg (1958: 184) makes the point that ‘road building gave the auto industry a larger government subsidy than railroads received in their entire history’. With respect to tariff policy, the US was dominated by labor-intensive industry, which in a high-wage country naturally leads to a pressure for high tariffs. However, the car industry is highly capital-intensive, preferring global free trade in order to maximize the size of the market rather than protecting the domestic market. This battle was not resolved in favor of capital-intensive industries until the 1930s (Ferguson, 1984: 78; Hiscox, 2002: 59). However, at this stage the US had already for two decades been the supreme leader in mass production automobile manufacture, hence the argument’s explanatory power seems 218


limited. But it is also the case that the car industry actually managed to avoid most of the tariff increases. Hence, tariffs on cars did not follow the overall pattern, and were down to 10% by 1930 (Freeman and Louça˜ , 2001: 263). Another argument has been made that since US automobile exports hardly exceeded 10% of overall US production (1929), steep European tariffs would be of minor importance. Still, since both Ford and General Motors set up their own affiliates or purchased local car manufacturers in Europe in order to circumvent local tariff regulations, tariffs must have been of some importance. Yet, overall it seems that Smithian arguments about demand, market size and access to capital have greater explanatory power than vested interests. ICTs This section must by default be somewhat speculative, as developments in the ICT sector are still very much on-going. It is a difficult sector to do justice to for other reasons too. A distinction must be made between industries manufacturing ICT equipment and the services (and industries) employing such equipment. While ICT manufacturing industries have exhibited stellar productivity growth rates, they are industries that, pulled together, are too small to have much of an impact on the overall economy. Instead, the main economic impact has come from the generic nature of these technologies, as in the application of ICTs in the services. As ICTusing services account for more than a quarter of total gross domestic product, far above average productivity growth rates in this sector has considerably impacted overall growth. This is where the US has leapt ahead (van Ark and Inklaar, 2003: 11; van Ark et al., 2003: 17; Yusuf and Evenett, 2002: 105). In terms of ICT manufacture, the US and Japan are both winners. But in terms of utilizing ICTs in the service industries, the US has been a spectacular success and Japan a laggard. Rather than being curbed by vested interests, the US ICT sector received special favors from the state. As US ICT industries were instantly competitive, no infant industry protection was necessary, even if government procurements were definitely helpful. But as Japanese competition stiffened (late 1970s onwards), the perception that US high-tech industries were being undermined by foreigners playing by different rules created widespread support for the protection of high-technology industries.18 Clinton built on this, perceiving of a role for government as supporting particular strategic industries, in particular ICTs (Gilpin, 2000: 232; Krugman, 1994: 266; Langlois and Steinmueller, 1999: 58). However, it is the utilization of ICTs, particularly in the knowledgeintensive services that accounts for the main contribution to economic growth. Hence, the primary obstacle against structural change came from vested interests resisting deregulation and liberalization in the services, in particular with respect to financial reform. It is a recurring theme of 219


the US that despite lobbying activities by interest groups, there are certain ideas that these have been unsuccessful at blocking, namely policies of deregulation and liberalization. In the late 1970s, the notion that Western economies were bogged down by rigidities and inefficiencies, with the West receding into stagnation and decline, was becoming widespread. Pressure was building in favor of deregulation, tax cuts and liberalization and against government-directed policies. The process was initiated by Jimmy Carter, but was really given impetus by the rise of the conservative movement spearheaded by Margaret Thatcher, elected British Prime Minister in 1979. Ronald Reagan latched onto her ideas a year later. Eight years of Reagan took large amounts of economic decision-making out of the hands of politicians, leaving it to the markets (Castells, 2000: 138; Johnson, 1997: 919; Krugman, 1994: 69; Micklethwait and Woolridge, 2004: 88). George Bush continued the process, and Bill Clinton, who came into power vowing to reverse 12 years of Republican policies, even extended these policies abroad, working for an open and deregulated world economy. Instead of being controlled by vested interests, the Clinton administration itself applied pressure to foreign governments. An open and integrated international economy was in the US interest for a number of reasons: technological advantage, superior managerial flexibility, the presence of US multinational firms, and US hegemony in international trade and finance. True, Clinton differed from his predecessors in his emphasis on communitarian ideas of consensus and a social safety net, but he did not seek a return to the past. In most vital respects, he carried Reagan’s legacy on (Castells, 2000: 142; Knutsen, 1999: 288; Micklethwait and Woolridge, 2004: 11, 117). Hence, political consensus among Democrats and Republicans in this area meant that deregulation and liberalization occurred earlier and faster in the US than elsewhere, in particular with respect to financial reform. It meant a US shift towards an open international economy with full mobility of capital where, in particular, two industries gained by actively applying new ICT technologies – IT and finance (Castells, 2000: 148; Rosecrance, 1999: 146). In Japan, ICTs also enjoyed special favors, specifically targeted as a future growth industry by the Ministry of International Trade and Industry (MITI). Government aid contributed to Japan catching up in the ICT industries, even if it is unclear exactly how much (Chandler, 2001). However, while Japan has been highly proficient at mass-producing high-quality ICTs, it has failed to utilize them in the services, and with respect to deregulation and liberalization, reform has met with stubborn resistance. Two notions deserve particular attention. The first is the one of an ‘iron triangle’ constituted by the Liberal Democratic Party (LDP), the bureaucracy, and vested interest groups, preventing structural reform. Since linkages between these actors are so close and cemented, the deregulation and liberalization that occurred in the US has met with extreme resistance. The 220


second notion is that of a ‘dual economy’, which is essentially what the iron triangle has been protecting. A highly efficient and internationally competitive export-oriented manufacturing sector has coexisted with a distinctly low-productivity domestic manufacturing and service sector protected by regulations and subsidies (Grimond, 2002; OECD, 2001: 44; Sakakibara, 2003: ix, 42).19 This dual structure, including an emphasis on government-financed construction projects to a degree that defies any economic rationale and a reluctance to deregulate and liberalize banking and finance, implies that sectors which, in the US, have undergone dramatic productivity improvements, in Japan have remained largely unchanged. Vested interests have made it excessively difficult to implement anything but incremental change. Qualitative data speak of the reluctance with which ICT equipment has been employed in business, and quantitative data (van Ark and Inklaar, 2003; Yusuf and Evenett, 2002: 105) strongly suggest that ICTs have not had nearly as great an impact on growth and productivity in Japan as in the US.20 This includes the sheltering of the banking system, where loans have been handed out based on quasi-contractual relationships rather than on profit evaluations. The result has been a stunning amount of bad loans, and a level of bad debts that has stayed persistently high as the Ministry of Finance has been reluctant to implement reform. Any structural reform would be costly to banks, depositors and taxpayers, and the presence of such interests has prevented structural reform. Hence, the extent of the debts has been downplayed in order to make it politically feasible for the government to help out leading banks and customers. The service sector in particular has given rise to enormous amounts of bad loans. It is here, and especially in the regions, that we find what The Economist (2004: 81) labels ‘ “zombies” – companies that are competitively dead, but sustained by their banks, continue to walk the Earth and give healthier firms nightmares’. In the non-export sectors, regulations are responsible for low levels of productivity, but reform would have put thousands of firms out of business and hundreds of thousands out of work and is not easily implemented in a system where vested interests have the power to prevent change. Cuts in the labor force have been marginal, with no major restructuring of business (Gilpin, 2000: 281; Gordon, 2003: 327; Grimond, 2002). Weak Japanese governments have been unable to prevent an iron triangle of vested interests from controlling politics. While this may have been beneficial in the mass production era, it became a liability as the world economy changed.21 Vested interests have prevented structural change in finance, construction, retailing, wholesaling, food processing and a host of other sectors. This has harmed the economy by draining resources away from more productive sectors. And it has been harmful in the sense that, especially in finance and in retailing, Japan to a much lesser extent than the 221


US has been able to utilize ICTs for productivity improvements. Instead, it was the US that profited. The federal government provided the country with the world’s best university system, abundant funding for ICTs, and a political environment that more or less unanimously agreed that liberalization and deregulation was essential with respect to future growth. As a result, the US has profited from its ICTs in a way Japan has been unable to. CONCLUSIONS In this article I have sought to look more closely into Mancur Olson’s vested interest argument. Olson suggests that vested interests have been crucial with respect to the rise and decline of nations. He concedes that this is obviously not the only relevant variable. Explanations for complex phenomena like rise and decline will always be multicausal. In line with this, this article obviously also concedes the importance of a number of variables that for space reasons have had to be omitted. However, the vested interest variable should in itself be interesting enough to reward an article. Olson does not systematically trace his argument far back in time. The further back he goes, the more anecdotal and illustrative his evidence becomes. This is partly for the lack of a Schumpeterian understanding of the economy. Adding Schumpeter gives us a theory that should have validity at least as far back as the Industrial Revolution. Hence, for a satisfactory, yet tentative test of the argument, I have sought to analyze more systematically the argument for several time periods, not just the postwar world. Considering that the vested interest variable is not easily operationalizable and that the quality of data becomes rather more obscure the further back in time we go, a qualitative approach, singling out a number of strategically chosen case studies with respect to this one variable only, seems the more fruitful research strategy in this case. Empirical evidence from nine case studies from five different core industries in five time periods to a great extent demonstrate the utility of the theory. Due to obvious space constraints, no exhaustive account can be given of each case. And while I have tried to shy away from assessments that might be considered controversial, the assessments are all mine, derived from my reading of the literature. Only one case deviates markedly, and it does so primarily because it is a case of Smithian rather than Schumpeterian growth. The US car industry is no falsification of the theory, but rather an indication of the limits of its usefulness. This article’s focus is Schumpeterian growth. While Schumpeterian growth has become ever more important, it is still not a given that it will be the most important growth component through all time periods and industries, even if this is usually the case today. Apart from the car industry, the evidence from the other cases strongly supports the theory. In all the success stories, vested interests were either weak or forcefully countered by the state. Britain’s 222


vested interests were curbed by a state that was pro-industry. Germany’s rise to prominence was to a great extent aided by the fact that their old vested interests were weak, making it relatively easy for new industries to find political favor. In the US, a political consensus developed against labor-intensive industries, and more recently, consensus over deregulation and liberalization enabled the US to come up with institutional arrangements far more conducive to growth in the service industries than in Japan. Similarly, the countries that failed to rise to leadership were straddled with strong vested interests asserting their influence over policy-making, often over a distinctly weak state. France succumbed to vested interests continuously blocking structural change, and political elites had neither the ability nor the willingness to deal with them: In many cases the most ardent defenders of the status quo were forces within the state itself. Towards the end of the nineteenth-century, Britain could not cope with the challenges posed by the rise of radically different industries than those that had been important in the past. The status quo was actively defended by a number of interests making reform nearly impossible. In Japan, an iron triangle of vested interests has prevented reforms along the lines of deregulation and liberalization. The cases in this article are all great powers. To what extent may the results be generalized beyond these? There is no reason why it should be any less important for smaller powers to prevent vested interests from wresting control away from economic policy-making (also, the distinction between a great power and a smaller power is somewhat arbitrary). True, it is reasonable to assume that smaller powers to a lesser extent are able to achieve world industrial leadership. They cannot be expected to provide the impetus for change in the international system, technologically, economically or politically. But there is no reason why the causal mechanisms posited here should not also apply to smaller powers. And while not becoming industrial leaders, small powers can still perform well by applying core technologies to different kinds of production processes. Empirically, the core technologies have to a great extent been generic technologies, whose impact on the overall economy has depended on how many different production processes they can be applied to. Hence, smaller powers can benefit greatly even if they are not among the leaders. One important implication stems from both the theory and the empirical cases: Past success can very easily lead to future failure, but failure does not follow by necessity. While neither Mancur Olson nor Joseph Schumpeter was particularly fond of government interventions, the message that they are essentially conveying is that future success or failure to a considerable extent is in our own hands. Structural economic change is of the essence. It is up to the state to pursue policies conducive to such change, and it is up to the state to prevent vested interests from becoming powerful enough to block such change. 223


NOTES 1 This means that there are several kinds of growth. Mokyr (1990) produces the following typology: (1) Investment-led, or Solovian growth (after Robert Solow) – economic growth takes place when capital accumulates more rapidly than the growth of the labor force, leading to higher output per capita through increased productivity; (2) Smithian growth, based on commercial expansion (or gains from trade) – a more specialized division of labor leads to productivity growth; and (3) Growth based on scale or size effects. 2 Without downgrading the importance of other types of growth, there are several reasons to focus on Schumpeterian growth. Traditional neoclassical theories can only account for a modest amount of long-term growth. Abramovitz’s (1956) and Solow’s (1956) early attempts at growth theories only illustrate the inability to provide a satisfactory explanation. Their models could only explain 10–20%, with a residual of 80–90%. This approach has since been refined, yielding far better results (e.g. Mankiw et al., 1992), but has met with criticism (Dinopoulos and Thompson, 1999: 137; Grossman and Helpman, 1994: 28). Economic analyses in any case routinely attribute such significant portions of overall growth to technological progress that Schumpeterian growth is important enough to justify an exclusive focus on this (Kim and Lau, 1994; Moe, 2007). 3 A number of scholars identify the same core industries. Freeman and Perez (1988: 50) single out five ‘technoeconomic paradigms’, of 50–60 years each, from the Industrial Revolution on towards today, based on cotton textiles, iron, steel, electric industry (including chemicals), oil and consumer durables, and computers and microelectronics. Similar industries can be found with Bairoch (1982), Gilpin (1987), Hobsbawm (1969), Landes (1998), Modelski and Thompson (1996), Rostow (1978). 4 This feeds into Schumpeter’s reasoning about how monopoly positions might be more conducive to technological progress than perfect market competition. 5 Definitions of the state have tended to focus on two separate issues. First, to what extent does the state have the necessary political autonomy to implement policy? The question has normally been raised within a temporally static framework, with the state considered an exogenous variable. Second, congruity: how do institutional structures change in response to changes domestically or abroad? This is a question that has normally been answered within a temporally dynamic framework, with the state as an intervening variable (Krasner, 1984: 224). Here, I end up somewhere in-between. First, I draw on static approaches. I suggest a role for the state that has to do exactly with the implementation of government policies. The extent to which the state has the necessary autonomy to carry out policy is crucial. The state is an independent actor as in the statist model. This corresponds to the Olsonian part of the framework. But second, there is a dynamic focus, corresponding to the mix of Schumpeter and Olson. Unlike statists, I am concerned with processes of change. To what extent is the state able to affect these processes, and to what extent is it able to adapt to them? In this context, the state becomes an intervening variable, in a framework that is temporally dynamic. This is a framework in which institutional change is abrupt, and where stasis is the norm for long periods of time, but where crisis gives rise to sudden change and to efforts to meet challenges (Krasner, 1984: 234) presented by new breakthrough technologies. Krasner (1984: 224) suggests four different conceptualizations of the state: (1) The state as government: ‘the collective set of personnel who occupy positions

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of decisional authority in the polity’; (2) The state as ‘public bureaucracy or administrative apparatus as a coherent totality and as an institutionalized order’; (3) The state as a ruling class; and (4) The state as normative order. While I do refer to the state as ruling elites, the ruling class, and as political elites, there is nothing Marxist to this, as opposed to (3) above. Rather, the definition of the state employed here falls closer to (2). The state is an administrative apparatus and a legal order. Also drawing on (1), the most important actor within this apparatus is the government. However, the state is more than just the government, and while being the most important actor, by no means the only actor. A country’s political elites encompass more than just the government, hence terms like ‘political elites’ rather than just government. Conditions like well-functioning markets, property rights and infrastructure are obviously also crucial. Growth on any scale has rarely happened in countries where property rights were systematically abused. But property rights give us little leverage as a tool of analysis for present-day growth and development in the industrialized countries, for the obvious reason that most of these countries are already doing well in this area (there is no variation on the independent variable!). Hence, for these nations, we need to look beyond background variables. While acknowledging the importance of good framework conditions for industrial growth, this is not where the extra intellectual effort should be put in. Autocorrelation might still be a problem. While typically associated with time series, it may also occur in units that are geographically contiguous (Hamilton, 1992: 118). Britain and France are obviously not independent cases. Britain’s rise to economic stardom was accompanied by a succession of military and political successes, mainly at France’s expense. Also, there has been widespread diffusion of ideas and technologies across the Channel. French inventions normally depended heavily on British technologies diffused across the Channel. With the French Revolution and the impending wars, diffusion came to a halt, and France suffered much the worse for it. However, with nine cases and only one variable, autocorrelation is not a major problem. In Eckstein’s (1975: 108) terminology, this is a plausibility probe. The results of the study are not conclusive, but sufficiently rooted in data to warrant more rigorous testing. Corn Law repeal also had the effect of alleviating hunger and providing workers with cheap and abundant food and industry with fit and healthy workers. Regressions suggest that workers’ living costs were increased by 8–14% by the Corn Laws (Lindert, 2003: 329). Other estimates indicate that in the 1830s repeal would have yielded a real wage increase of 12.3–23.3% (O’Rourke, 1994: 133). Granted, two thirds of the Tories voted against their own Prime Minister. The remarkable part is not that numerous Tories voted against Peel, but that a full third voted for something that they had been massively against as recently as 1842 (Hoppen, 1998: 127; McKeown, 1989: 356; Pugh, 1999: 69). The government, while encouraging modern methods of metal production, at the same time caved in to the least modernized iron makers by promoting the use of wood for iron-smelting. Further, the government’s mining bureaucracy was extremely conservative and discouraging with respect to industrial activity. At Briey, later the site of one of Europe’s richest iron ores, the mining bureaucracy first denied the strike’s existence, then doubted whether it could be mined, discouraged industrial attempts at extraction, and finally parceled ´ out the ore-field in undersized lots. The blame should be shared with the Ecoles

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12 13

14 15

16

17 18 19 20 21

des Mines, which had graduates at the highest theoretical level back out because they did not have the necessary skills to solve the practical problems. Thus, one of the richest ore strikes on the entire Continent was discounted (Trebilcock, 1981: 171, 185, 196). In part because it depended on imported raw materials, and did not want tariffs on these, but also because the dyestuffs industry was already competitive. Although quantitative evidence suggest that the decline in raw materials prices and the adoption of the Solvay process (British firms stayed with the less efficient Leblanc process) was more important than the tariff increases (Krause and Puffert, 2000). The German soda industry increased its production from 33,000 tons (1867) to 500,000 tons (1910) (Murmann and Landau, 1998: 29). True, towards the late 1920s, General Motors surpassed Ford as a consequence of having a far wider line-up of cars (Brinkley, 2003). However, Ford was not surpassed by GM because GM was in possession of superior technologies, but because Ford chose not to employ these technologies. Even if the car has undergone extremely rapid change, this has seldom brought one manufacturer a decisive advantage over the others. In the car industry, you have not had to be the technological leader as long as you have been able to compete on price. It is hard to find obvious countries to compare the US with. Rather than failure, the car industry is an example of both European and Japanese success, but with a later starting point than the US. But not because the US car industry was more sophisticated: On the contrary, in general, European cars were technologically more advanced. When, after World War II, Europe introduced mass-production techniques on a large scale, catch-up was immediate, and by 1960 western Europe accounted for 40% of world automobile production. Japanese growth was even more extreme (Freeman and Louça˜ , 2001: 279; Modelski and Thompson, 1996: 102). In the car industry, diffusion has been exceptionally rapid and monopoly profits hard to reap. Dominance has only to a limited degree had to do with technological advantage. By 1929, total expenditures on roads and streets (local, state and federal) amounted to $1.4 billion a year, or a full 2% of US gross national product (Heilbroner and Singer, 1994: 128). Although there is disagreement as to how much a number of these initiatives, for instance with respect to semiconductors, actually helped (Gilpin, 2000: 232). The domestic service industry, which accounts for three fourths of Japanese employment, has an overall productivity of only 63% of the US (OECD, 2001: 44; Sakakibara, 2003: ix, 42). The World Economic Forum (2003: 457) singles out the government’s lack of success in ICT promotion as one of Japan’s greatest competitive disadvantages. During times of structural economic stability, the interests of the most important vested interests, and the interests of the nation as a whole, may well be more or less completely overlapping. This most likely was the case for Japan during the first three postwar decades (or even longer). However, during times of structural change, sticking with the same vested interests became a problem. During times of change it is crucial that the industries of the future are allowed to grow and prosper. (Determining which these industries are is obviously another problem.)

NOTES ON CONTRIBUTOR Espen Moe has a PhD in political science from the University of California, Los Angeles (UCLA). This article was written whilst working as a post–doctoral Fellow

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at the Industrial Ecology Programme at the Norwegian University of Science and Technology (NTNU) in Trondheim, Norway. He is currently a post–doctoral Fellow at the School of Policy Studies at Kwansei Gakuin University in Sanda, Japan.

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