University of Michigan Press Market-augmenting Government: The Institutional Foundations for Prosperity (Economics, Cognition & Society)

Excerpt. © Reprinted by permission. All rights reserved. Market-Augmenting Government: the Institutional Foundations for ProsperityBy Charles CadwellUniversity of Michigan PressCopyright © 2003Charles CadwellAll right reserved.ISBN: 0472098179Market-Augmenting Government: How, Why, and When States Support Markets Omar Azfar and Charles A. Cadwell Market-augmenting government is the answer Mancur Olson developed in response to the question of what type of government is needed for economic growth. The idea that markets are the best mechanism for facilitating economic growth now dominates prescriptions for economic development, but the circumstances in which markets develop are not fully understood. Despite our ability to share information nearly instantaneously between rich and poor places, in some countries markets develop while in others they do not. Where markets are undeveloped, people remain mired in poverty and attendant human ills. Why is it that in some places markets operate to permit millions to be better off while in others markets remain primitive and people poor? And what activities of the state are required for markets to function well? Mancur Olson (193298) was, of course, a major figure in the evolution of thinking on these questions. When he coined the phrase market-augmenting government in 1997, it reBected a lifetime of scholarship and observation. Olsons famous books, so familiar to graduate students and others, address some fundamental aspects of the design of good government, describing why it is difficult to organize groups, why groups may organize in ways that are inimical to economic growth, and why different types of regimes have different incentives to promote or inhibit markets. Market-augmenting government is an attempt to distill ideas that are bound up in Olsons Power and Prosperity (2000), the last chapter of which is entitled The Kind of Markets Needed for Prosperity. In Power and Prosperity, Olson concludes that prosperity can be achieved in societies with rights-respecting governments that provide for both secure property and contract enforcement while avoiding predation of various sorts (most harmfully that benefiting narrow lobbies). In his last months, Olson was testing his new phrase, market-augmenting government, on a variety of interlocutors, seeking to determine whether it achieved the right balance between simplicity and capturing a complex problem. Had he survived to see Power and Prosperity to publication, the title for its final chapter might well have been Market-Augmenting Government. The study of how governments (the primary focus of political science) augment markets (the primary focus of economics) falls squarely into interdisciplinary political economy. It is fitting that this book is appearing in the Economics, Cognition, and Society series of the University of Michigan Press. From the inception of this series of 1990 until his untimely death, Mancur Olson served on its advisory board. In that capacity, he urged consideration of books that integrate economics with political science and sociology. Market-Augmenting Government is just such a book. Market-augmenting government was not, for Olson, a lightly considered articulation of an ideological middle between advocates of state or market. Instead, in developing this phrase, Olson turns on its head the question of how to get government out of the way of markets. Olson here suggests a key challenge for government: how to augment the markets that exist everywhere, supporting the complex transactions characteristic of successful economies. His formulation serves several useful purposes. It focuses us, first, on how it is that markets actually work and on the details of the particular institutions that contribute to that functioning. Second, he leads us beyond the question of which institutions constitute a market-augmenting government to the question of how such institutions emerge. Sadly, Olsons sudden death in 1998 at the a