Oligarchic versus Democratic Societies

This paper develops a model to analyze economic performance under different political regimes. An “oligarchic” society, where political power is in the hands of major producers, protects their property rights but also tends to erect significant entry barriers against new entrepreneurs. Democracy, where political power is more widely diffused, imposes redistributive taxes on producers, but tends to avoid entry barriers. When taxes in democracy are high and the distortions caused by entry barriers are low, an oligarchic society achieves greater efficiency. Because comparative advantage in entrepreneurship shifts away from the incumbents, the inefficiency created by entry barriers in oligarchy deteriorates over time. The typical pattern is one of rise and decline of oligarchic societies: An oligarchic society may first become richer, but later fall behind a similar democratic society. I also discuss how democracies may be better able to take advantage of new technologies, how within-elite conflict in oligarchies might cause a transition to democracy, and how the unequal distribution of income may keep inefficient oligarchic institutions in place. (JEL: P16, O10)