In his influential work, Mancur Olson explores the concept of “institutional sclerosis” in his book, The Rise and Decline of Nations. He presents a rather bleak outlook: as nations stabilize and achieve prosperity, they become increasingly susceptible to this sclerosis. This phenomenon occurs because smaller groups manage to overcome the issues of free-riding, which allows them to mold the system to favor their specific interests. Over time, as these groups proliferate, they thrive and extract benefits, yet this ultimately leads to the stagnation of the overall system.
Taking Olson’s arguments to their extreme, one might conclude that a catastrophic war could serve as a radical antidote to economic stagnation. While this is far from an ideal solution, Olson identifies a genuine concern: the longer a society enjoys stability, the more it becomes hindered by special interest groups. These “distributional coalitions” are focused not on expanding the economy but on utilizing government resources to safeguard and enhance their own advantages. Their persistent rent-seeking behavior results in a sclerotic system, historically requiring drastic upheavals—like the total devastation experienced by Germany and Japan during World War II—to reset the institutional landscape. Without their entrenched lobbyists, these nations found themselves well-positioned to foster significant economic growth.
However, relying on systemic collapse or warfare as a means to eliminate rent seekers is not a feasible strategy. We need a peaceful approach to achieve what Olson describes as a clean “institutional slate.” This is where artificial intelligence (AI) can potentially play a transformative role as a systemic jolt.
To grasp how AI could facilitate this shift, consider the convoluted German tax system as a case study. Its intricate and dense tax laws create barriers that generate substantial benefits for a particular coalition comprised of tax consultants, bureaucrats, and politicians who dispense favors to favored groups. Navigating this bureaucratic labyrinth demands specialized knowledge, ensuring these groups maintain a lucrative status quo. Consequently, they are strongly motivated to resist any genuine efforts at tax simplification that would threaten their business model.
Enter artificial intelligence: an exogenous technological force capable of disrupting this stagnant situation. If AI can effectively interpret and apply complex tax codes at a fraction of the current cost, it threatens the economic foundation of the tax consulting industry. As the revenues for this sector decline, so too does its financial ability to lobby for the preservation of tax complexity. With a diminished, well-funded constituency advocating for the status quo, the political barriers that impede reform begin to dissolve. In this scenario, technology can clear the path for significant change, weakening the coalition’s lobbying power and paving the way for meaningful legislative reforms.
Yet, this scenario may be overly simplistic, as it underestimates the resilience of entrenched coalitions. Olson points out that these distributional coalitions will inherently resist technological advancements to maintain their power. Before AI can fully diminish their lobbying influence, incumbents are likely to engage in strategic rent-seeking behavior. For instance, the tax coalition may lobby for regulations that require AI-generated tax submissions to be validated by certified human professionals, using arguments rooted in “data privacy” and “liability.” In essence, those benefiting from the status quo will veil their self-interest under the guise of ideals like “tax justice” or warnings about “algorithmic bias.” Rather than quietly fading, the incumbent coalition will likely mobilize for a final, vigorous push to regulate AI out of existence before it can achieve widespread adoption. This anticipated backlash will create a significant political challenge moving forward.
To successfully navigate this conflict, we must recognize the larger political economy at work. While AI is not a cure-all, it represents a vital opportunity to weaken entrenched distributional coalitions. However, to seize this opportunity and ignite Schumpeterian creative destruction, we must actively combat these coalitions that seek to regulate new technologies into oblivion. This could involve raising awareness among the often-difficult-to-organize general public. Economists and Hayekian advocates for free innovation must defend the freedom to innovate against rent-seekers striving to protect their interests. Ultimately, it is clear that achieving a clean slate will demand concerted effort and proactive engagement on our part.
