If a democracy becomes an oligarchy, the economy is likely to be affected in several significant ways:
- Entry Barriers and Reduced Competition: Oligarchic societies tend to protect the property rights of a small group of powerful producers but create substantial entry barriers that prevent new entrepreneurs from entering the market. This reduces competition and innovation, leading to economic inefficiencies over time
- Income Inequality: Democracies generally redistribute income more equally through taxation, benefiting workers and reducing inequality. In contrast, oligarchies reduce labor demand and depress wages to increase profits for the elite, resulting in a more unequal income distribution
- Short-Term vs. Long-Term Economic Performance: Initially, oligarchies may achieve higher efficiency and faster growth because they avoid the distortions caused by high taxes in democracies. However, as economic opportunities and comparative advantages shift to new sectors or new entrepreneurs, the entry barriers in oligarchies become increasingly costly, causing oligarchic economies to stagnate or decline relative to democratic ones in the long run
- Innovation and Technology Adoption: Democracies tend to be better at leveraging new technologies because they allow new entrants with comparative advantages in emerging sectors to participate. Oligarchies, by blocking new entrants, may fail to capitalize on technological advances, further hindering long-term growth
- Political and Economic Entrenchment: The elite in oligarchies use their political power to maintain their privileged positions, making it difficult to transition back to democracy or to reform economic barriers. This entrenchment can perpetuate inefficiencies and inequality
In summary, while an oligarchy might initially boost economic output by protecting incumbent elites and avoiding high taxation, over time it tends to create barriers that stifle innovation, increase inequality, and reduce overall economic growth compared to a democracy
