Here’s an interesting piece worth slogging through on ways in which policy changes implied by traditional economic analysis can skew power in ways that make a lot of people a lot worse off. The prose is a bit dense and opaque, but the point and the many historical examples are interesting and convincing.
The authors — Acemoglu and Robinson — are the same duo behind “Why Nations Fail,” a similar foray into the way policy choices can lead to starkly different outcomes, based on whether the political economy supports “inclusive” or “extractive” institutions.
The point of their new article comes down to this: When economic “rents” or market failures provide economic benefits to weaker groups — those with less stature or power in society — efforts to eradicate such “inefficiencies” may further empower dominant elites in ways that are counterproductive for the larger society.
For example, policy makers often argue that unions, minimum wages, or financial regulation create inefficiencies that reduce growth, jobs, investment, business formation, yada-yada, bark-bark-woof-woof. A&R cook up a simple “two-period” model where such “efficiency gains” now lead to power imbalances later that reduce aggregate social welfare (the best outcomes for the most people).
Take unions, for example. It’s simple to show using Econ 101 concepts that unions distort the price of labor, by raising their members’ wages above the market equilibrium. And there’s little worse in the firmament of basic economic theory than distorting price signals. So when you “fix it” by whacking the union, equilibrium is restored. (more…)