World War II devastated the economic infrastructures of Germany and Japan. It flattened their factories, reduced their rail yards to rubble, and eviscerated their harbors. But in the decades that followed, something puzzling happened: the economies of Germany and Japan grew faster than those of the United States, the United Kingdom, and France. Why did the vanquished outperform the victorious?
In his 1982 book, The Rise and Decline of Nations, the economist Mancur Olson answered that question by arguing that rather than handicapping the economies of the Axis powers, catastrophic defeat actually benefited them, by opening up space for competition and innovation. In both Germany and Japan, he observed, the war destroyed special-interest groups, including economic cartels, labor unions, and professional associations. Gone were Germany’s partisan unions and Japan’s family-controlled conglomerates; the U.S. Teamsters, the United Kingdom’s Society of Engineers, and France’s Federation of Building Industries all survived. A generation after the war, only a quarter of West Germany’s professional associations dated back to the prewar era, whereas a full half of the United Kingdom’s did. Olson’s findings had a disturbing implication: in politically stable countries, narrow coalitions of business lobbies hold back economic growth through self-serving policies, and only a major military defeat or a grisly revolution can overcome the resulting inefficiencies.
Back when Olson was writing, few economists cared about economic inequality in advanced countries; unemployment and sluggish investment were the problems of the day. To the extent that experts did focus on inequality within countries, they did so with respect to the late industrializers, where migration from poor villages to richer cities was accentuating income disparities. Even there, however, inequality was considered a temporary side effect of development; the economist Simon Kuznets argued that it dissipated with modernization.
Had Olson considered inequality, he might have noticed that World War II had two other curious economic consequences. First, the devastation reduced inequality—not just in the defeated countries but also in tries, and even in neutral ones. Second, these reductions proved temporary. Around the 1970s, developed economies started becoming less and less equal, defying Kuznets’ celebrated hypothesis.
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