Impact of Pressure Groups on Economic Growth and Institutions

Impact of Pressure Groups on Economic Growth

Pressure groups interfere with the economy's capacity to embrace innovation and thus reduce the rate of growth. For example:

• A labour union may repress labor-saving innovation
• Slow decision-making may cause delays in adapting to new technologies
• Pressure groups may slow growth by reducing the pace of resource reallocation

Olson’s theory of collective action suggests that the structure of pressure groups affects the distribution of income and individuals' incentives, impacting long-run economic performance.

Significance of Economic Institutions in Long-Run Economic Growth

The prosperity of a society depends on its economic institutions. Market failures provide a rationale for government intervention, and 'good' institutions establish an incentive structure that reduces uncertainty and promotes efficiency, contributing to stronger economic performance.

Economic institutions help allocate resources to their most efficient uses. However, institutions are often created to serve the interests of powerful groups, not to maximize the overall pie. The commitment issue prevents groups with conflicting interests from agreeing to impose institutions that enlarge the social pie.