If you want to understand the American crisis, you must read these three books.

Making government work better.
Dec. 14 2009 9:44 AM

These Three Books Explain the American Crisis

Looking for a gift for the policy wonk in your life? Here are some recommendations.

More than a year after the most inspiring presidential election in a generation, and despite the most severe economic crisis in two generations, the change that so many Americans hoped for has not come. A modest health care reform bill is limping through Congress. The government has not tackled climate change or fixed the financial markets that nearly destroyed the economy. In the most significant policy arenas—economic growth, health reform, and foreign policy—we are seeing not the transformational politics we had hoped for but, at best, mere incrementalism. Why?

Does the United States even have the capacity—emotionally or politically—to make the massive changes necessary for us to compete in the 21st century global economy?

I've been seeking answers to this question, and I have found some interesting ones in three books. If you're buying holiday gifts for the policy wonks in your life, you may want to add them to your basket. They are not among the crop of recent volumes detailing how the current economic crisis unfolded—though some of those are superb, and one in particular, John Cassidy's How Markets Fail, is fascinating and important.

The three volumes I'm suggesting were written by economists who thought like sociologists and political scientists. Rather than being ideologues, they actually understood—in ways that stand the test of time—how things really work: why nations fail, why some reform themselves, what it takes to transform organizations. These books should be required reading for those who want to appreciate both the critical need for structural reform and the enormous difficulty of it.

1_123125_123076_2207918_2237825_091211_bp_1risedeclinenations

The first book is Mancur Olson's 1984 The Rise and Decline of Nations. Perhaps better than any other book I have read, it explains how "special interests" can lead to a calcification of the arteries of a society. The rigidity created by interest groups makes change increasingly difficult and ultimately proves fatal to a nation– especially when more nimble competitors arise. Without passing judgment on the "interests" at play—one person's good-government group is another person's obstructionist—Olson both explains the impact of interest-group politics and then tests the actual impact of these groups on growth rates in various economies. He concludes that societies that have gone through significant traumas, resulting in the elimination of the pre-existing social structures, can often revive themselves in a new way that permits genuine change and adaptation. A true crisis creates the opportunity to sweep aside the influence of the special interests that ordinarily prevent change.

1_123125_123076_2207918_2237825_091211_bp_2exitvoiceloyalty

The second book is Albert Hirschman's 1970 Exit, Voice, and Loyalty, a brilliant, small volume whose title crisply captures the range of possible responses a consumer has to a failing organization. Whether that organization is a company producing toothpaste, a company whose stock he owns, or a political party whose ideology is beginning to stray, this book explains how we might respond and how those responses affect the likelihood that the failing organization might right itself. In too many of our institutions, loyalty may well have generated a lack of "voice," and the ease of "exit" has left mere loyalists as opposed to dissenting voices behind. This prevents the needed pressures for transformation from building up inside the organization.

This volume does much to explain the flailing state of corporate governance—and the absence of shareholder voices: The cost of "voice" outweighs the benefit to the individual shareholder, especially in a highly liquid market where exit is so easy. It is also valuable in understanding how our political parties often wander aimlessly, as loyalists remain and dissenters exit.

1_123125_123076_2207918_2237825_091211_bp_3shorthistory

Finally, John Kenneth Galbraith's A Short History of Financial Euphoria —which came out in the wake of the 1987 crash—seems eerily to have been written just last month. Our ability to delude ourselves that "this time the financial engineering will be different and the leverage will be sustainable" is remarkable. After each bubble, we convince ourselves that we are now smarter and thus impervious to the risks of excess debt. Maybe—despite the angst that accompanies every bubble's crash—we are doomed to constantly relive our own financial history.

This trio of books explains why the change sought by voters last year is so difficult to attain. Layers of special interests—often well-meaning and thoughtful—connected to organizations that themselves are protected from adaptive pressures, coupled with a mistaken belief that we have learned the lessons of a misguided economic past, paralyze us and make us almost impervious to the dramatic change that we all know is necessary.

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