This paper develops a model to analyse economic performance under different political regimes. An 'oligarchic' society, where political power is in the hands of major producers, protects those producers' property rights, but also tends to erect significant entry barriers for new entrepreneurs. Democracy, where political power is more widely diffused, imposes redistributive taxes on producers, but tends to avoid entry barriers. While taxes in a democracy are high and distortions caused by entry barriers low, an oligarchic society achieves greater efficiency. But because comparative advantage in entrepreneurship shifts away from the incumbents, the inefficiency created by entry barriers in an oligarchy deteriorates over time. The typical pattern is one of rise and decline of oligarchic societies: an oligarchic society may first become richer, but will later fall behind a similar democratic society. The author also discusses how democracies may be better able to take advantage of new technologies, how intra-elite conflict in oligarchies may cause a transition to democracy, and how unequal income distribution may keep inefficient oligarchic institutions in place.
Financed by the National Centre for Research and Development under grant No. SP/I/1/77065/10 by the strategic scientific research and experimental development program:
SYNAT - “Interdisciplinary System for Interactive Scientific and Scientific-Technical Information”.