Mancur Olson’s photo The Rise and Decline of Nations it doesn’t paint a particularly optimistic picture: once your nation has been stable for a while, and may have risen to wealth, it becomes more vulnerable to “institutional sclerosis.” This happens because small groups are better able to win free rides, which leads to their ability to effectively distort the system in their own interests. As more and more of these groups emerge, survive and are able to reap rents—protected from that competition that makes normal progress and growth—the system as a whole collapses.
If you take Olson’s work to its logical conclusion, the most effective solution to economic stagnation is catastrophic war. Obviously that is not a desirable solution. But Olson was pointing to the real issue: the more stable society is, the more it is choked by special interest groups. These “distribution cooperatives” are not interested in economic growth; they want to use the government to protect and increase their share. Over time, their relentless rent-seeking made the whole system stronger, and Olson noted that historically it took major shocks—such as the total destruction of Germany and Japan in WWII—to wipe the “institutional slide” clean. Deprived of their staunch supporters, those countries had great opportunities for economic growth.
However, relying on systematic collapse or war to remove rent seekers is clearly not an effective policy prescription. We need a peaceful way to achieve this Olsonian “institutional slate”, and this is where artificial intelligence enters the picture as a potential shock to the system.
To understand how this process can work, let’s use some systems thinking in a concrete example: Germany’s notoriously complex tax system. Currently, the high density of the German tax law acts as an artificial barrier to entry, which generates a large tax for a certain distribution coalition—tax consultants, officials responsible for overseeing taxes, and politicians who can hand over taxes to popular groups. Because navigating the bureaucratic maze requires very special people, these groups hold an advantageous position. Therefore, they have a strong incentive to lobby for any tax simplification, as doing so would destroy their business model.
Artificial intelligence presents an external shock to technology that can destroy this status quo. If AI can analyze and apply complex tax codes at a fraction of the cost, the economic base of the tax consultant industry is effectively erased. As the sector’s revenue dries up, its financial capacity to fund lobbying efforts is simultaneously reduced. Without a powerful, well-paid jobseeker’s lobby that continually seeks to preserve the tax complex, the political frictions that prevent reform disappear. In this case, technology wipes the slate clean, greatly reducing the power to lobby the coalition and ultimately make meaningful legal change possible.
However, this not only sounds too easy to be true, it also ignores one thing: the strength of entrenched alliances. Olson made it clear that distribution unions are trying to reduce society’s ability to use new technologies to protect their status quo. Before AI completely exhausts its leverage, existing industries should be expected to engage in rent-seeking. The tax coalition, for example, is likely to lobby the government to mandate that AI-generated tax returns remain legally invalid unless reviewed and stamped by an authorized human expert, citing general reasons such as “data privacy” or “liability.” That is, those who benefit from rent-seeking will cover their interests with a good defense of, say, “tax justice” or invoke the risk of “algorithmic bias.” Instead of quietly fading away, the incumbent alliance will pour all of its resources into the final, hard-hitting quest to control the AI before it grows. This inevitable backlash will create a bitter political battle for years to come.
Winning this battle requires us to be aware of the broader political economy that exists. If we want to escape the trap of institutional sclerosis, we must understand that AI is not a magic bullet. Rather, it is actually a window of opportunity to weaken and defeat entrenched distribution alliances. But in order to use this window and release the Schumpeterian destruction of creativity, we must forcefully push back against these cooperatives that will try to control this new technology out of existence. This may, for example, involve raising awareness of the difficulties of organizing large groups, that is, citizens at large. This will certainly be the work of economists and second-hand Hayekian peddlers of ideas who consciously defend innovation and freedom of innovation against rent seekers who wish to protect their rents. What is certain in all of this is that the battle for a clean slate will not be won automatically; it requires action on our part.
