WHEN railways and factories began transforming 19th-century Europe, the rulers of the Habsburg Empire understood their economic potential. Yet they resisted industrialisation.

Friedrich von Gentz, Metternich’s adviser, explained why: “We do not desire at all that the great masses shall become well-off and independent.” His reasoning ended with a revealing question: “How could we otherwise rule over them?”

The Habsburg rulers were not necessarily ignorant of the economic benefits of technological progress. They feared its political consequences. A more prosperous society might also become more independent, weakening their grip on power.

This historical episode helps explain a persistent puzzle in Pakistan: why do those in power repeatedly choose institutions (rules of the game) and policies that constrain economic progress, even when they too benefit from better alternatives? The answer may lie in the distinction between economic and political returns.

Elites do not necessarily choose arrangements that maximise national income, or even their own immediate economic gains. They also consider how a change might affect their ability to retain power and capture future returns — what we call the political replacement effect in economics.

Technological and institutional changes can expand economic opportunities while simultaneously creating new centres of political power. Incumbents may, therefore, resist changes that threaten their hold on power. The calculation is straightforward. A reform may make the economy larger and even increase the income of existing elites. But if it also raises the probability of their political displacement, or reduces the share of future gains they can command, their expected returns may decline. Under these conditions, elites may rationally prefer an........

© Dawn