Tuesday
May012012

Who Are the Extractive Elites?

Key to our argument in Why Nations Fail is the idea that elites, when sufficiently political powerful, will often support economic institutions and policies inimical to sustained economic growth. Sometimes they will block new technologies; sometimes they will create a non-level playing field preventing the rest of society from realizing their economic potential; sometimes they will simply violate others’ rights destroying investment and innovation incentives.

An interesting article in The Economist’s Buttonwood column asks: Who are these rapacious elites in today’s Western economies?

Buttonwood suggests that two plausible candidates are too-big-to-fail huge-risk-taking bankers and public sector employees with their cushy jobs, which they protect using their power as voters and sometimes through public-sector unions.

Banks, which have huge political clout, as the world witnessed not only in the midst of the 2008-2009 crisis but again in the European debt restructuring debacle of the last two years, are a great candidate indeed. Buttonwood questions whether they have really been an impediment to prosperity. The answer is probably yes: excessive risk-taking by the banks created lots of economic distortions and is in part responsible for the crisis. The inflated salaries in the banking industry may have also damaged the economy by attracting a lot of the talent that should have gone into more innovative activities (as suggested by the evidence in this paper and this paper).

But what about public-sector employees? What about unions? Don’t they, as Buttonwood suggests, also exercise their power to block new technologies and create similar distortions?

On the face of it, this is a plausible hypothesis. In democratic societies organized groups can wield power, and it is only natural that they will exploit this power to their benefit — and to the great detrimental of others. Muncur Olson, in fact, suggested in The Rise and Decline of Nations such groups as the most important threat to the economic longevity of Western democracies.  In his magisterial Levers of Riches, Joel Mokyr uses the Luddites destroying textile machines as the exemplar of the resistance against the creative destruction wrought by new technologies. More recently, the print unions on Fleet Street had blocked the introduction of the superior offset litho printing process until their defeat by Rupert Murdoch’s News International in 1987. And of course unions do create a non-level playing field, advantaging their members at the expense of those left out.

So perhaps unions in general and public-sector unions in particular are the new extractive elites resisting technological change.

But here is the problem with this perspective. In most cases, unions and workers, even if they appear politically powerful, don’t seem to be able to stop the introduction of new technologies. Luddites feature in history books not as successful blockers, but to illustrate the futility of standing on the path of new technologies. Print unions did delay the introduction of superior printing technology but were ultimately cast aside.

And there is a good reason for this. The power of the Luddites in 19th-century Britain was limited — certainly compared to the near-absolute power of the Russian and Austria-Hungarian elites who strenuously resisted the introduction of factories and railways. Unions can mobilize their members to strike and can act as a powerful interest group, but their power is also probably limited relative to those of the very rich both in democratic and non-democratic societies — and in the US, the power of unions was probably seriously, perhaps irreversibly, damaged by Ronald Reagan’s victory over the air traffic controllers’ strike.

In consequence, in the US today, the fear is not that unions will take over the political process, but that the rich elite — including but not limited to the banking elites — will and in fact have already done so.

This makes us believe that, though the unions, when they have the power, can also act as extractively as other groups in pursuing their interests at the expense of the rest of us, they are not the main elites threatening the inclusivity of Western institutions.

That being said, it is probably true that unions have been in a more rent-seeking mode in the second half of the 20th century compared to their pivotal role in the development of inclusive institutions in the 19th and early 20th centuries. For example, the story of democracy in Britain would have likely been very different without the labor movement, which mobilized the disenfranchised to demand voting rights for all. Similarly, the US labor movement played a central role in giving voice to workers and improving working conditions. Is anything different today? The answer is not clear. But one possibility is that in fighting for broad-based issues such as democracy or limits on harsh, even coercive, working conditions for most workers, the labor movement in the 19th and early 20th centuries was both more effective and more clearly on the side of greater inclusivity in economic and political institutions. This may have changed once unions’ demands shifted to higher wages, more generous health insurance and better pensions for their narrow membership.

On the other hand, some also argue that a strong labor movement is even more necessary today as a counterweight against the creeping political inequality in favor of the very wealthy and the politically-connected corporations. We think that some sort of organization to counterbalance the political power of the mega-rich is indeed necessary. Whether this role can be — and should be — played by unions is a question that requires more thought and research (i.e., we don’t know the answer).

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