AI vs the Rent Seekers

Overcoming Institutional Sclerosis: The Role of Artificial Intelligence in Economic Reform

Mancur Olson’s book, The Rise and Decline of Nations, paints a grim picture of the fate of stable nations. According to Olson, as a society remains stable and wealthy, it becomes more susceptible to “institutional sclerosis.” This occurs as small interest groups gain power and manipulate the system to serve their own interests, leading to a decline in overall economic growth.

Olson suggests that historically, only catastrophic events like war have been able to reset the institutional slate and pave the way for economic growth. However, relying on such extreme measures is not a sustainable solution. Enter artificial intelligence, a potential systemic shock that could disrupt entrenched rent-seeking behavior and pave the way for meaningful reform.

Let’s consider the example of the complex German tax system. Currently, a distributional coalition comprising tax consultants, bureaucrats, and politicians benefits from the complexity of the tax laws, creating barriers to entry and generating rents. Artificial intelligence has the potential to streamline tax processes, eroding the financial power of this coalition and opening the door for reform.

But the path to reform is not without challenges. Incumbent industries are likely to resist technological change that threatens their interests. The tax coalition, for instance, may lobby for regulations that restrict the use of AI in tax submissions. Overcoming these entrenched interests requires a concerted effort to raise awareness and push back against rent-seeking behavior.

To truly unleash the potential of AI as a catalyst for economic reform, we must be vigilant in defending innovation and resisting efforts to stifle technological progress. The battle for a clean institutional slate will require active participation and advocacy from all stakeholders.