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In many countries, significant inefficiencies are caused by the vested interests of small groups. The best-known example is the agricultural lobby in Europe and the US, who represent no more than 5% of the population, yet via their combined market distorting efforts deprive large slices of the rest of the world’s population from a fair income. Even domestically, the cost of maintaining agricultural subsidies gives a disproportionate subsidy to a small group.Other examples abound. For instance, in the Netherlands it has been proven politically infeasible to challenge laws that allow 15% of the working population to enjoy 70% of their last income indefinitely as ‘disabled’. In reality, this benefit is abused by employers and unions to get rid of ‘difficult’ or unproductive individuals.
A similar problem is created by the rule that many pensions (including for civil servants) are based on the incomes earned at the end of working lives. This creates a tremendous incentive for people to stop working just after the peak of their productive life because otherwise they will see their pensions fall to such a degree that total future earnings is simply higher when stopping work earlier. For such reasons, work participation between the age 55-65 is the lowest in the Netherlands of anywhere in the OECD (about 20%).
It has also proven politically impracticable to challenge the effective cartel of the medical specialists, who themselves are allowed to determine how many new competitors they will educate. The predictable shortage of medical specialists leads to ever increasing prices for their services, political lobbying by specialists to keep out foreign trained competitors and power imbalances in hospitals, all causing tremendous inefficiencies.
Similar problems hold for the cartel by actuaries, notaries, and accountants. Many other such examples of inefficiency creating vested interests abound in the Netherlands, as in any other country.
The interesting aspect of these problems is that these are widely known by top civil servants and intellectuals. Indeed, many economists warned of these problems at the time these laws were introduced. Debates within political parties often rage about this. It is hence not a lack of knowledge of the inefficiencies of these laws that keeps them as they are.
The inefficiencies are also so large that they cause serious problems for all other functions of the state. Any extra money thrown at the Dutch health service is for instance directly gobbled up by the specialists using their market power. Nevertheless, no political party seems to have a hope in hell in overturning this ‘coordinated mutual robbery’. Why not?
Machiavelli notes that any politician who overtly proposes to go against a small vested interest will immediately feel the full wrath of such a group, whilst enjoying no support from the majority. Only after reforms will a ruler be credited, and then only if the reform is seen to have been done by someone whose power was unassailable (only the king is popular, never his servant). It seems a situation whereby the vested interests aggressively attack declared adversaries until no one challenges them and then credibly announce they will hit with full force on the first adversary to appear. This makes it very difficult to get organised resistance against the vested interest going (the first to try is literally often killed).
Machiavelli advises one should never appear to be a reformist. Reforming should, according to him, be done in a big bang, i.e. all at once and unexpectedly, such that the vested interests are taken by surprise and are effectively powerlessly given new facts ‘on the ground’. If Machiavelli is right, the only hope for structural improvement in the Netherlands (or indeed most other countries) would seem to lie in a crisis situation where a crisis manager would have to opportunity of improving things in such a big bang.
Modern economists have suggested several explanations. Game theorists note that coordination problems are more easily overcome if the individual gain from coordination rises above a threshold level. The argument is that a small group of people who lose a lot organise quicker and scream louder than the masses. This begs the question though as to why major political parties can’t bunch a whole set of such issues into a reform platform supported by the vast majority.
A more interesting explanation is that the persistence of interest groups allows them to, over time, generate a new set of beliefs amongst the populations that supports their interests. Irrational fears of medical errors supporting a ban against importing foreign medics would suit such an argument. Irrational fears against GM food supporting a ban against foreign imports in the case of French farm products also fit into this. A nice example is that of the French government, egged on by its farmers, which actively disseminates misleading science on GM that implicitly supports the interests of its farmers but destroys opportunities for foreign farmers or French consumers. The development, maintenance, and adoption of irrational fears however require further explanation.