Private Incentives versus Class Interests: Implications for Growth

We consider an economy, in which the elite controls the means of production. The private incentives of each elite member contradict the interests of the elite as a whole. While each member of the elite would benefit from engaging into new productive activities, the byproduct of such activities is an increase in competition and hence decrease in elite's profits. We provide a model which allows us to parameterize the degree of consolidation of the elite q. We find that in a steady-state, the rate at which new technologies are implemented is constant and is decreasing in q. We next allow the elite to invest into a productivity enhancing public good. We show that the investments in public good increase in q. We conclude that there exists an optimal level of consolidation of the elite which maximizes economic growth. We illustrate our model using examples from the period of the Industrial Revolution in England and Russia.