This years Econ Nobel goes to the three stooges who wrote this-
This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development.
If this were the case, all regions within a territory with the same institutions would show an equal level of economic development.
This is nowhere the case. Thus, empirically, this claim is nonsense.
We first document the empirical importance of institutions by focusing on two "quasi-natural experiments" in history, the division of Korea into two parts with very different economic institutions
South Korea was actually shittier than North Korea till a dictator took over and, on Irma Adelman's advise, devalued the currency and went in for export led growth. I believe he forced those who had gotten rich off corruption to invest in domestic industry. However, South Korea only took this route because it faced an existential threat. The North Korean 'Chollima' movement appeared to be succeeding. Indeed most economists thought North Korea was growing faster than the South till about the early Seventies. South Korean institutions changed greatly over the course of the Eighties but it continued to grow. North Korea had become dependent on aid and suffered terribly after the collapse of the Soviet Union.
and the colonization of much of the world by European powers starting in the fifteenth century.
This 'colonization' was only cosmetic in many parts of the world. The Portuguese claimed to be ruling vast areas where they, in fact, had zero presence or control.
We then develop the basic outline of a framework for thinking about why economic institutions differ across countries.
Institutions don't matter. Mechanisms do. But those mechanisms may work in the opposite manner to that in which institutions are supposed to do. What appears a Democracy may be a corrupt oligarchy or, equally likely, what happens in Parliament makes zero difference to actual Social outcomes. Equally, a King or Dictator may be more focused on consultation and consensus building that an elected Head of State.
Still, even mechanisms don't matter as much as resources- including 'Human Capital' or the drive that the people have to catch up or maintain their lead.
Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes.
Only if they are incentive compatible 'mechanisms' rather than window-dressing.
As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power.
But 'political power' may be disintermediated in various ways. There could be a 'capital strike' or else the productive sector insulates itself by bribing those they need to.
The distribution of political power in society is in turn determined by political institutions and the distribution of resources.
So this is a circular argument. It explains nothing. No matter what the outcome, we can say 'institutions' determined it. If a country is invaded or suffered a natural disaster, we can say its institutions were so bad that it was not able to avert this outcome.
Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power.
They can also run away from the country and exercise their de facto power somewhere else. Exit from shitholes- no matter how sweet and cuddly their institutions- to places where money is being made hand over fist occurs no matter what 'Institutions' obtain. Some 80,000 American expats live in Saudi Arabia. It is unlikely they do so because they like Saudi institutions.
We therefore view the appropriate theoretical framework as a dynamic one with political institutions and the distribution of resources as the state variables.
In other words, you assume what you need to assume to do some junk econometrics to prove what you want to prove
These variables themselves change over time because prevailing economic institutions affect the distribution of resources, and because groups with de facto political power today strive to change political institutions in order to increase their de jure political power in the future.
Or they exit. The possibility of the golden goose flying away may be sufficient to moderate 'de facto political power'. Indeed, power needs to do sensible things if it wants to continue to exist. But this also means de facto power is much less than, de jure, appears to be the case.
One further point- if a small oligarchy or elite has vast power then it is likely that they will spend a lot of time proscribing or expropriating or defenestrating each other. By contrast, property in provincial towns would be secure enough. It was just that the Capital of the Imperial Republic would repeatedly decimate its own elite till barbarians recruited into the Praetorian Guard, imposed themselves as Emperors.
Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement,
Property rights enforcement costs money. You have to go to court and hire bailiffs etc. The game has to be worth the candle. However, local communities can ensure property rights and contractual obligations are well enough enforced without using up scarce resources. Still, even in these 'high trust' networks, if the expectation is that productivity will stagnate, then there will be no growth. By contrast, if the expectation is that total factor productivity will rise then hedges will be available such that transactions can burgeon even without personal trust or shared norms or nice insti-fucking-tutions.
when they create effective constraints on power-holders,
These exist even where there are no fucking institutions. Assassination tempers autocracy. Alternatively, the oppressed may run the fuck away.
and when there are relatively few rents to be captured by power-holders.
If supply and demand are elastic, there is no economic rent to extract. Some territories will simply be too poor and shitty to have institutions or any type of wealth that can't be killed and eaten.
We illustrate the assumptions, the workings and the implications of this framework using a number of historical examples.
Why bother? We can see, within any country that some places are shitty while others are thriving. This is because productivity is rising in some places and is stagnant or falling in others. Institutions can always be bypassed so that productivity rises. Sadly, it is rather difficult for Institutions to raise productivity by themselves.
The most trite yet crucial question in the field of economic growth and development is: Why are some countries much poorer than others?
Productivity. It will be low in Malthusian shitholes with involuted agriculture. It will be high where women are educated and hold down well paid jobs with the result that they have far fewer kids.
Traditional neoclassical growth models, following Solow (1956), Cass (1965) and Koopmans (1965), explain differences in income per capita in terms of different paths of factor accumulation. In these models, cross-country differences in factor accumulation are due either to differences in saving rates (Solow), preferences (Cass-Koopmans), or other exogenous parameters, such as total factor productivity growth. More recent incarnations of growth theory, following Romer (1986) and Lucas (1988), endogenize steady-state growth and technical progress, but their explanation for income differences is similar to that of the older theories. For instance, in the model of Romer (1990), a country may be more prosperous than another if it allocates more resources to innovation, but what determines this is essentially preferences and properties of the technology for creating ‘ideas’.
Having lots of smart folk helps. Look at Israel.
Though this theoretical tradition is still vibrant in economics and has provided many insights about the mechanics of economic growth, it has for a long time seemed unable to provide a fundamental explanation for economic growth.
Tardean mimetics- people imitating what more successful people have done- explains 'catch up growth'. After that competition to capture capital gains through higher net present value can drive R&D and thus productivity growth. It may be that some Scientific breakthroughs are bound to generate endogenous growth as new applications are found for a new theory. But we are straying into high IQ territory here.
As North and Thomas (1973, p. 2) put it: “the factors we have listed (innovation, economies of scale, education, capital accumulation etc.) are not causes of growth; they are growth.
Indeed. Sadly, what looks like growth today may appear, from tomorrow's perspective to be stupidity. A White Elephant may look like Investment or Consumption. It is neither. It is just an albino pachyderm which shits on everything.
Factor accumulation and innovation are only proximate causes of growth. In North and Thomas’s view, the fundamental explanation of comparative growth is differences in institutions. What are institutions exactly? North offers the following definition: “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.”
Which country has the highest growth rate in 2024? Guyana at 34 percent. Smart people from there ran away from it long ago. Discovering oil is what has boosted its growth. Still, I suppose North thinks China's institutions are lovely. It has grown very rapidly since 1990.
He goes on to emphasize the key implications of institutions since, “In consequence they structure incentives in human exchange, whether political, social, or economic.” Of primary importance to economic outcomes are the economic institutions in society such as the structure of property rights and the presence and perfection of markets.
China has risen rapidly because its Communist Party was sufficiently strong and cohesive to let markets function while retaining 'residuary control rights' over everything and everybody.
Economic institutions are important because they influence the structure of economic incentives in society.
But not getting shot or sent to the Gulag is an even bigger incentive.
Without property rights, individuals will not have the incentive to
invest in physical or human capital or adopt more efficient technologies.
They won't do so even with property rights if there isn't much they can do with extra cash. The Prince may prefer to hunt in a vast forest rather than cut it down to create more farm-land. The Bishop may be more interested in getting to Heaven than in ensuring that the Cathedral town he controls rises up through commerce. Democratically elected leaders may be more interested in ideological purity than in growing the economy.
Economic institutions are also important because they help to allocate resources to their most efficient
uses, they determine who gets profits, revenues and residual rights of control.
Sadly, this isn't the case. The laws may change- or some pre-existing laws may be more tightly enforced- such that residuary control rights are reallocated. The Social Contract, we must remember, is incomplete.
When
markets are missing or ignored (as they were in the Soviet Union, for example), gains
from trade go unexploited and resources are misallocated.
The Vietnam War or the recent War on Terror weren't cases of resource misallocation at all- right?
Societies with economic institutions that facilitate and encourage factor accumulation, innovation and the efficient
allocation of resources will prosper.
Not necessarily. Suppose you facilitate and encourage me. I will still be shit. You can't make a silk purse out of a sow's ear.
Central to this chapter and to much of political economy research on institutions is
that economic institutions, and institutions more broadly, are endogenous; they are, at
least in part, determined by society, or a segment of it.
In which case there is little point mentioning them as a separate, causative, factor. I may say 'the people of country X are smart, hard working and rich'. I am not adding any information if I say 'X has good institutions because X has good people'.
Consequently, the question of
why some societies are much poorer than others is closely related to the question of why
some societies have much “worse economic institutions” than others.
The answer is their leaders did stupid shit or, if they were shitty as a people, their leaders could not prevent them doing stupid shit.
Even though many scholars including John Locke, Adam Smith, John Stuart Mill,
Douglass North and Robert Thomas have emphasized the importance of economic institutions, we are far from a useful framework for thinking about how economic institutions
are determined and why they vary across countries. In other words, while we have good
reason to believe that economic institutions matter for economic growth, we lack the crucial comparative static results which will allow us to explain why equilibrium economic
institutions differ (and perhaps this is part of the reason why much of the economics
literature has focused on the proximate causes of economic growth, largely neglecting
fundamental institutional causes).
If any such thing existed, there would be a magic bullet such that all regions governed by the same institutions would exhibit equal opulence.
This chapter has three aims. First, we selectively review the evidence that differences
in economic institutions are a fundamental cause of cross-country differences in prosperity.
Poor countries have poor institutions because they are poor. Also poor people have poor resource bases because they are poor.
Consider the development of property rights in Europe during the Middle Ages.
Property was stuff you stole which nobody else could steal because you would kill them.
There is no doubt that lack of property rights for landowners, merchants and proto- industrialists was detrimental to economic growth during this epoch.
No. There is no doubt that a Prince or Bishop who had a kick ass army could protect an industrious population who would pay taxes such that the Prince or Bishop lived large.
Since political institutions at the time placed political power in the hands of kings and various types of hereditary monarchies, such rights were largely decided by these monarchs.
They were perfectly happy to grant Charters and create 'Liberties' so as to attract industrious immigrants and gain tax revenue. Sadly, the local populace might insist on killing Jews and other such wealth creators.
Unfortunately for economic growth, while monarchs had every incentive to protect their own property rights, they did not generally enforce the property rights of others.
They would do so for a fee.
On the contrary, monarchs often used their powers to expropriate producers, impose arbitrary taxation, renege on their debts, and allocate the productive resources of society to their allies in return for economic benefits or political support.
This could also happen in republican City States.
Consequently, economic institutions during the Middle Ages provided little incentive to invest in land,
unless the population was growing and land was scarce.
physical or human capital,
Cathedrals and Monasteries and defensive Castles were popping up all over the place. If life was nasty, brutal and short, people turned their eyes to Heaven and sought to congregate in defensible locations.
or technology, and failed to foster economic growth.
The Vikings and Normans and Arabs and so forth did foster economic growth. The Domesday book meant that English land records were better than anything Ireland had till Cromwell's invasion and Sir William Petty's invasion. Sadly, at the beginning of the eighteenth century, a law was passed compelling Catholics to subdivide Estates on death. This directly resulted in the horrors of the Potato famine 140 years later.
These economic institutions also ensured that the monarchs controlled a large fraction of the economic resources in society,
No. Kings were often poorer than prelates or some of their own feudatories. There were some wealthy merchants even in the 12th century- e.g. Aaron of Lincoln- and the number grew in the 13th and 14th century.
solidifying their political power and ensuring the continuation of the political regime. The seventeenth century, however, witnessed major changes in the economic and political institutions that paved the way for the development of property rights and limits on monarchs’ power, especially in England after the Civil War of 1642 and the Glorious Revolution of 1688, and in the Netherlands after the Dutch Revolt against the Hapsburgs. How did these major institutional changes take place? In England, for example, until the sixteenth century the king also possessed a substantial amount of de facto political power,
William of Orange had substantial power into the eighteenth century.
and leaving aside civil wars related to royal succession, no other social group could amass sufficient de facto political power to challenge the king.
And yet King John had been challenged. England was a limited monarchy.
But changes in the English land market (Tawney, 1941) and the expansion of Atlantic trade in the sixteenth and seventeenth centuries (Acemoglu, Johnson and Robinson, 2002b) gradually increased the economic fortunes, and consequently the de facto power of landowners and merchants.
The English had been careful to keep the King financially dependent on Parliament rather than permit him to use money from overseas colonies to increase his power at home.
These groups were diverse, but contained important elements that perceived themselves as having interests in conflict with those of the king: while the English kings were interested in predating against society to increase their tax incomes,
Not really. Since the time of Henry Beauclerc, the Exchequer had been rather well managed. Predation is counter-productive.
the gentry and merchants were interested in strengthening their property rights.
Through Parliamentary acts of Enclosure. What annoyed people was any action by the King making him financially independent- e.g. granting monopolies or taking funds from a foreign monarch.
By the seventeenth century, the growing prosperity of the merchants and the gentry, based both on internal and overseas, especially Atlantic, trade, enabled them to field military forces capable of defeating the king.
The motivation was Religious, not Economic. Charles I married a Catholic. James II converted to Catholicism. That's why they had to go.
This de facto power overcame the Stuart monarchs in the Civil War and Glorious Revolution, and led to a change in political institutions that stripped the king of much of his previous power over policy.
Not really. William was disliked as a Dutchman (though his mother was English) and gained the throne through his wife. He had plenty of power. The first two Georges were Germanic and had little interest in the country they, being Protestants, were called to rule. George III might have reversed this tendency but he went mad and lost America. Still, it wasn't till Victoria came to the throne that the King lost the right to choose the Prime Minister. This was because Victoria did not have a penis. This did not amuse her at all.
These changes in the distribution of political power led to major changes in economic institutions,
Not really. Cromwell did abolish the East India company's monopoly for three years but he renewed it when he needed money from them.
strengthening the property rights of both land and capital owners and spurred a process of financial and commercial expansion.
which continued even under James II who took a great interest in the Navy.
The consequence was rapid economic growth,
not as rapid as Russia's under Peter the Great.
culminating in the Industrial Revolution,
Russia's came much later. Why? Subsequent Emperors lacked Peter's drive and determination.
and a very different distribution of economic resources from that in the Middle Ages.
It is worth returning at this point to two critical assumptions in our framework.
First, why do the groups with conflicting interests not agree on the set of economic
institutions that maximize aggregate growth?
Because nobody knows what that might be. Britain deposed two kings for religious not political or economic reasons.
So in the case of the conflict between the
monarchy and the merchants, why does the monarchy not set up secure property rights
to encourage economic growth and tax some of the benefits?
It had done so by about the time of Henry Beauclerk. Aaron of Lincoln was very rich. But he was Jewish and his people were slaughtered and Jews were banned from the country till the time of Cromwell.
Second, why do groups
with political power want to change political institutions in their favor? For instance, in
the context of the example above, why did the gentry and merchants use their de facto
political power to change political institutions rather than simply implement the policies
they wanted?
You can't force a King to give up his religion though you can cut off his head or chase him away.
The answers to both questions revolve around issues of commitment and
go to the heart of our framework.
The distribution of resources in society is an inherently conflictual, and therefore
political, decision.
Very true. How come some places are beside the Sea and others aren't? London should demand that Brighton hand over some portion of their shore-line to us.
As mentioned above, this leads to major commitment problems,
since groups with political power cannot commit to not using their power to change the
distribution of resources in their favor.
If the thing is impossible, sure they can. I suppose you may say 'what is stopping Sir Keir Starmer taxing the rich and giving money to the labouring classes?' The answer is that tax revenue will fall because the rich will slyly fuck off. Guys with political power lose that power if they do stupid shit. On the other hand, if people expect you to do stupid shit, they will fuck off if there is any chance you will come to power. Expectations can create reality.
For example, economic institutions that increased
the security of property rights for land and capital owners during the Middle Ages
this happened when people no longer feared Viking raids or rebellions of various kinds
would
not have been credible as long as the monarch monopolized political power.
Nonsense! Plenty of people flock to a Sheikhdom where the Dynasty is known to be smart and to have no desire to kill the golden goose. If there is no 'monopoly of political power', you may have anarchy or internecine conflict. You should quit the jurisdiction before you are killed or plundered.
He could
promise to respect property rights, but then at some point, renege on his promise, as
exemplified by the numerous financial defaults by medieval kings (e.g., Veitch, 1986).
Edward III defaulted on his foreign debts which hurt foreign lenders but was good for his subjects. Bankers need to be prudent. I suppose, they had made inordinate profits while the King was solvent and thus had only themselves to blame.
Charles II suspended all payments in 1672. This led to a Court Case and an act of Parliament reducing the interest rate and giving no compensation for the years in which no payments were made. The Bank of England was created in consequence. In both cases, lenders had been imprudent and took a hit. But this had nothing do with the personality of the King. Both Edward and Charles were popular enough. During a National Emergency, it is likely that lenders will take a haircut one way or another. Of course, if a regime collapses, there may be a complete write off. Look at Confederate bonds.
Credible secure property rights
Depend on the country being strong enough to kill invaders or rebels and various sorts of gangsters. Saying 'institutions are strong' just means 'the country is strong'.
necessitated a reduction in the political power of the
monarch.
Or its increase. If the King has little political power, you will be preyed on by the Duke and the Earl and the Baron and Robin fucking Hood.
Although these more secure property rights
resulting from economic growth
would foster economic growth,
growth fosters growth
they were not appealing to the monarchs who would lose their rents from predation
and expropriation as well as various other privileges associated with their monopoly
of political power.
They only had such a monopoly if they were strong. But, being strong meant doing sensible things- e.g. not killing the golden goose.
This is why the institutional changes in England as a result of the
Glorious Revolution were not simply conceded by the Stuart kings. James II had to be
deposed for the changes to take place.
Charles I and James II had to go because of their religion. It is easy enough to limit the power of the King while keeping him alive. But it is only necessary to do so if he does stupid shit. But this is true of any type of government.
The reason why political power is often used to change political institutions is related.
That reason, in England, was Religion. It wasn't some silly story about the King setting up as a highwayman.
In a dynamic world, individuals care not only about economic outcomes today but also
in the future.
In England, they cared about Religion. Did you know Catholics will burn in Hell fire because the Pope is the Whore of Babylon. Ian Paisley often tried to explain this to his fellow MEPs in Brussels.
In the example above, the gentry and merchants were interested in their
profits and therefore in the security of their property rights,
which were secure enough if they were prudent. What wasn't prudent was to think you could keep getting six percent interest on Treasury Bills you bought for a 40 percent discount.
not only in the present but
also in the future. Therefore, they would have liked to use their (de facto) political power
to secure benefits in the future as well as the present.
They did this by getting Parliament to pass Bills of Enclosure or, like William Penn, getting the King to sell him Pennsylvania. Sir William Petty had gotten very rich by grabbing land in Ireland after Cromwell's conquest of that country. If you have de facto power today, you seek to turn it into landed wealth though this may mean fucking over the peasants by enclosing their land or gaining a monopoly on a particular type of trade.
However, commitment to future
allocations (or economic institutions) was not possible because decisions in the future
would be decided by those who had political power in the future with little reference to
past promises.
Keep enough cash handy- or be sufficiently credit-worthy- to be able to buy off the new jacks-in-office. This isn't fucking rocket science.
If the gentry and merchants would have been sure to maintain their de facto political power, this would not have been a problem.
Medieval merchants had secured Charters and Liberties and so forth. The gentry controlled the local courts in return for their contributions to the Exchequer. Parliament was an ancient Institution which had the power to levy taxes. If Kings were smart, they solved the 'collective action problem'. If they were stupid or converted to the wrong Religion, they became the fucking collective action problem. But we might say the same of the CEO of a Company.
However, de facto political
power is often transient, for example because the collective action problems that are
solved to amass this power are likely to resurface in the future, or other groups, especially
those controlling de jure power, can become stronger in the future.
Which is why you need to be turning a profit so as to be able to bribe them at a later date.
Therefore, any change
in policies and economic institutions that relies purely on de facto political power is
likely to be reversed in the future.
If you do stupid shit in the present, you won't have the opportunity to do stupid shit in the future. That's a good reason not to spend your substance on cocaine and hookers.
In addition, many revolutions are followed by conflict
within the revolutionaries. Recognizing this, the English gentry and merchants strove
not just to change economic institutions in their favor following their victories against
the Stuart monarchy, but also to alter political institutions and the future allocation of
de jure power.
They passed a Law ensuring that no future monarch would be Catholic. True, the power of Parliament increased, but the people needed a strong King to protect the country and expand the Colonies. Thus, though William of Orange wasn't much liked, he pretty much got his way.
Using political power to change political institutions then emerges as a
useful strategy to make gains more durable.
It had failed. That is why England had a King, no a Lord Protector.
The framework that we propose, therefore,
emphasizes the importance of political institutions,
which can either do stupid shit or smart things. In the former case, the country as a whole loses wealth and power and may come under foreign domination.
and changes in political institutions,
as a way of manipulating future political power, and thus indirectly shaping future, as
well as present, economic institutions and outcomes.
This framework, though abstract and highly simple,
is a set of tautologies premised on the notion that some political institutions have a magical power to do only smart things while other political institutions are under a Divine curse to do only stupid, short-sighted, things. History does not bear this out.
enables us to provide some
preliminary answers to our main question: why do some societies choose “good economic
institutions”?
Countries doing smart things are considered to have good institutions because smart things are what good institutions do. Sadly, an institution which is doing smart things today, may do stupid things tomorrow or else, an invader may do even smarter things. Equally, bad luck may doom a smart country with very sweet and dainty institutions. There is no substance to this thesis whatsoever. The older racist view was better. WASPs did well wherever they went, no matter what institutions were involved. America had different institutions from British India. Whites did well in both places.
At this point, we need to be more specific about what good economic
institutions are. A danger we would like to avoid is that we define good economic
institutions as those that generate economic growth, potentially leading to a tautology.
This danger arises because a given set of economic institutions may be relatively good
during some periods and bad during others. For example, a set of economic institutions
that protects the property rights of a small elite might not be inimical to economic
growth when all major investment opportunities are in the hands of this elite, but could
be very harmful when investments and participation by other groups are important for
economic growth.
This is nonsense. Suppose, just because I belong to the elite, my property rights are 'protected' even if I mortgage all my land, spend the money on booze and whores, and then default on my debts. There will be no fucking economic growth. Resources won't be reallocated through the market. People foolish enough to pay for a leasehold interest in land, find the freeholder can assert his 'property rights' and chuck them out so as to sell to another dude. He gets away with it because he is of the elite while you are a mere commoner.
Perhaps, what these nutters mean is 'if contracts are enforced' there will be more growth'. But contract enforcement doesn't have to be done through institutions of any kind.
To avoid such a tautology and to simplify and
focus the discussion, throughout we think of good economic institutions as those that
provide security of property rights and relatively equal access to economic resources
in which case Anglo-America has never had 'good economic institutions'. It simply isn't true that poor peeps have 'equal access' to lots of fucking money.
to
a broad cross-section of society. Although this definition is far from requiring equality
of opportunity in society, it implies that societies where only a very small fraction of the
population have well-enforced property rights do not have good economic institutions.
That was England during the period of its ascent to becoming 'Mistress of the Seas' and 'the workshop of the world'. It was said, this was the country where sheep ate people and poaching a goose off the Common was heavily punished, while stealing the Common from the goose was very well rewarded. Indeed, what was distinctive about England was the Poor Law system. Vagrancy was prohibited. Even little children were set to work in the Work House when they could not more profitably be employed down a coal mine or up a chimney.
Consequently, as we will see in some of the historical cases discussed below, a given
set of economic institutions may have very different implications for economic growth
depending on the technological possibilities and opportunities.
And the race and religion and level of education of the people- not to mention their natural resources and such defensive advantages as are provided by being an island or being protected by high mountains or vast deserts. In other words, the advantages a people have determine whether they will be advantaged by whatever institutions they have. It is not the case that if a shithole copies the economic and other institutions of an advanced country, that it will itself become advanced. True some shithead working for the IMF or some stupid Professor of Econ, can gas on about institutions and transparency and the importance of not being so fucking black, you fucking niggers.
Given this definition of good economic institutions as providing secure property rights
for a broad cross-section of society, our framework leads to a number of important comparative statics,
are you White and living in an advanced country? Yes? Well that's all right then provided you keep out niggers who will eat your puppy dog.
and thus to an answer to our basic question. First, political institutions
that place checks on those who hold political power, for example, by creating a balance
of power in society, are useful for the emergence of good economic institutions.
They may prevent development. The Executive branch may say 'we have coal yet are having to import it. Let's open a coal mine.' Some NGO files a court case and so nothing is done for a dozen years. Meanwhile, the population has increased and people want free electricity. Thus more coal is imported. The Executive tries once again to open a coal mine and once again there is litigation and so nothing happens.
This
result is intuitive; without checks on political power, power holders are more likely to
opt for a set of economic institutions that are beneficial for themselves and detrimental for the rest of society, which will typically fail to protect property rights of a broad
cross-section of people.
Once you recognize the 'property rights' of indigenous people to the air and water and trees and bushes, then there are no property rights. Nothing can be built anywhere because the property rights of some set of people are violated. Meanwhile, sinister Multi-Nationals break into the huts of starving peasants and drain them of valuable jizz through aggravated acts of fellatio or even cunnilingus. Arundhati Roy protests against this but the Nazi regime of Narendra Modi cuts off her head and shoves it so far up her arse that it pops out of her neck once again. All is the fault of Neo-Liberalism. If we had good economic institutions everybody would receive one million dollars a day and evil Multi-Nationals will be told to fuck the fuck off.
Second, good economic institutions are more likely to arise when
political power is in the hands of a relatively broad group with significant investment
opportunities.
If you have lots of dudes with plenty of money to invest, you are a rich country. That's why people say 'that country has good economic institutions. Compare their central bank with the one in a shithole country. The former has lots of gold bullion in its vaults. The latter doesn't have a vault though it does have some nice cowrie shells its daughter found when playing on the beach.
The reason for this result is that, everything else equal, in this case power
holders will themselves benefit from secure property rights.
Power is needed to enforce rights of any kind. Economists think this is done for free. They don't know that you have to hire lawyers and then bailiffs etc. If the other guy has deeper pockets than you or can get your daughter raped, you may have to wave goodbye to your property.
Third, good economic institutions are more likely to arise and persist when there are only limited rents that power
holders can extract from the rest of society,
No. The reverse is the case. If there is a lot of rent then the country can have a kick-ass army and navy and colonies and favourable trade agreements as well as an effective police system. It can even lower the cost of accessing justice for the poor. Equally, in a country where the King alone is very very rich, there may be zero crime (because criminals are killed in cruel and unusual ways) very low or even zero taxes and perfect securing of property and enterprise. True, a crazy spendthrift may become King but assassination tempers autocracy.
since such rents would encourage them to
opt for a set of economic institutions that make the expropriation of others possible.
In which case others would have no incentive to develop the land or to build up enterprises. But Democracies can destroy incentives just as well as crazy Princes.
These comparative statics therefore place political institutions at the center of the story,
Institutions don't matter. What they do matters.
as emphasized by our term “hierarchy of institutions” above.
That hierarchy can do stupid shit or fail to protect the country from invaders, insurrectionists, or murderous cartels.
Political institutions are
essential both because they determine the constraints on the use of (de facto and de
jure) political power
in which case they reduce power. Indeed, control rights over property may also be reduced. Furthermore, a country may imbibe a different 'spirit' and emulate a different mimetic model.
and also which groups hold de jure political power in society.
De Jure political power may be zero if the Head of State is merely ceremonial.
North and South Korea took different paths. Why? One followed a dynastic type of Marxist-Leninism while the other had a Dictator who was assassinated and some degree of political turbulence. The South Korean turned out to be as brilliant or more brilliant than the Japanese possibly because the US was and is a less reliable partner than China and the USSR. That's why the South Koreans sent a lot of soldiers to Vietnam but the US ran away from there. At a later point, South Korea helped China to rise rapidly in export industries as did Taiwan, Singapore, Hong Kong and the American and other Chinese diaspora. North Korea's political institutions were so strong that the Dynasty survived a famine and remains in power.
By the late 1960’s South Korea was transformed into one of the Asian “miracle” economies,
It was badly hit by the oil shock. It also had its own version of the Cultural Revolution in the countryside with the 'New Village movement'. However, it was touch and go as to whether the Dictatorship could survive discontent among industrial workers and students. It was only in 1974 that its per capita income overtook North Korea.
experiencing one of the most rapid surges of economic prosperity in history while North Korea stagnated. By 2000 the level of income in South Korea was $16,100 while in North Korea it was only $1,000.
The collapse of the Soviet Union had led to famine. Fortunately, the Chinese had done nuclear proliferation into Pakistan and South Korea and so the Dynasty had an ace in the hole.
By 2000 the South had become a member of the Organization of Economic Cooperation and Development, the rich nations club, while the North had a level of per-capita income about the same as a typical sub-Saharan African country. There is only one plausible explanation for the radically different economic experiences on the two Koreas after 1950: their very different institutions led to divergent economic outcomes.
No. Their very different leaders led to that divergence. North Korea did stupid shit. South Korea didn't. But North Korea's dynasty was insulated from the consequences of their stupidity.
Haiti and the Dominican Republic weren't that different at one time. But Haiti had shitty leaders and now has one sixth of the per capita income of its neighbour.
It is possible that Kim Il Sung and Communist Party members in the North believed that communist policies would be better for the country and the economy in the late 1940s.
Many believed it. Communism was scientific. Also, South Korea in the Fifties was corrupt, authoritarian and utterly shitty. It was because it faced an existential threat that it changed. The alternative was to go the way of South Vietnam.
However, by the 1980s it was clear that the communist economic policies in the North were not working.
Not really. The Soviets could keep it afloat. Maybe it would even do 'perestroika'.
The continued efforts of the leadership to cling to these policies and to power
The South Korean dictator wanted to cling to power. But his Intelligence chief shot him.
can only be explained by those leaders wishing to look after their own interests at the expense of the population at large.
Which leader wants to lose power?
Bad institutions are therefore kept in place, clearly not for the benefit of society as a whole, but for the benefit of the ruling elite, and this is a pattern we encounter in most cases of institutional failure that we discuss in detail below.
Bad institutions are kept in place even in vibrant economies because of qwerty problem. It is expensive and the cure may be worse than the disease. It is easy enough to use existing institutions to achieve different ends.
However convincing on its own terms, the evidence from this natural experiment is not sufficient for the purposes of establishing the importance of economic institutions as the primary factor shaping cross-country differences in economic prosperity.
It is enough to show that particular economic policies are shit. But this can be done comparing any two countries which took different paths.
First, this is only one case, and in the better-controlled experiments in the natural sciences, a relatively large sample is essential. Second, here we have an example of an extreme case, the difference between a market-oriented economy and a communist one. Few social scientists today would deny that a lengthy period of totalitarian centrally planned rule has significant economic costs.
Or benefits. It depends. Sometimes the alternative to 'central planning' is anarchy. Lots of Russians thought Stalin was a better alternative to enslavement under Hitler.
And yet, many might argue that differences in economic institutions among capitalist economies or among democracies are not the major factor leading to differences in their economic trajectories.
India had the same institutions as Britain- indeed, the Indians may have been 'more progressive' in some respects- but their 'economic trajectories' are different. Why? It is because institutions don't matter. Indeed, having better institutions may be counterproductive. Consider the Supreme Court. India has had one for more than seventy years. Britain has only had it for a dozen. Yet, the Indian Supreme Court- which is more powerful than even SCOTUS- has done much more than the UK Bench to fuck the economy in the ass. Hopefully, Sir Keir Starmer can reverse this outcome.
Acemoglu (2003a) refers to what he calls the Political Coase Theorem. Although the intuition
that individuals and groups will strive towards efficient economic outcomes is appealing,
there are both theoretical and empirical limits to the Political Coase Theorem.
As there are to Coase's theorem. There are 'hold out' problems and strategic considerations. The Iranians give the example of a wealthy merchant who is able to provide funds for the Zoroastrian theocracy. In returns he asks that his family be allowed to learn how to read and write. The theocracy needs the money but won't do the deal because it might be the thin edge of the wedge. Religions which promoted literacy tended to thrive unless its priests and monks were killed and chased away.
First, as
argued by Acemoglu (2003a) and further discussed below, in politics there is an inherent
commitment problem, often making the Political Coase Theorem inapplicable.
Not really. Once a guy gets used to taking your money, or flattery, or whatever, you can rely on him. If there is a sociopath who always demands more, be beforehand in running the fuck away.
Second, the Political Coase Theorem does not take us very far in understanding the
effect of economic (or indeed political) institutions on economic outcomes —
They have none. A.O Hume founded the Indian National Congress because he foolishly believed that Indian lawyers and landowners would want to improve agriculture and thus get richer. It wasn't till eighty years later that the Indian politicians permitted a 'Green Revolution'.
in this view,
economic institutions are chosen efficiently, and all societies have the best possible economic institutions given their needs and underlying structures; hence, with the Political
Coase Theorem, economic institutions cannot be the fundamental cause of income differences.
They aren't. The fundamental cause of income differences is differences in productivity. Sadly, more productive people, one way or another, will gain more power and since power is a 'positional good' with a zero sum aspect, economic analysis is useless. What brings about change is existential threats where everybody in the society loses if a change is not made. Indeed, those with most literally lose the most. True, an invader may buy off the indigenous elite and if the control more lucrative trade routes this may be 'incentive compatible'- i.e. there is no 'commitment' problem. The Indian Princes did well out of their deal with the Brits.
However, the empirical results we discussed above suggest a major role for
such institutional differences.
Even where there were no fucking institutional differences- e.g. different Indian states or even different parts of the same City.
The only way to understand these patterns is to think of economic institutions varying for reasons other than the underlying needs of societies.
But economic and other institutions can be wholly disintermediated during certain periods. It appears that North Korea survives only because of its Black Market.
the theory of political institutions developed by Moore (1966) in his Social Origins of Dictatorship and Democracy... Moore attempted to explain the different paths of political development in Britain, Germany and Russia.
Britain is an island and was favourably placed to have a kick-ass Navy. This meant it had little need for militarism. Germany did. Russia was always going to have characteristics associated with Cossacks and the Golden Horde.
In particular, he investigated why Britain evolved into a democracy,
Industrialization. This meant manufacturing towns wanted more representation because they were paying more in tax. The Great War showed that the age of Emperors was over. War was no longer the 'sport of Kings'. The outcome of conflicts would be decided by women working munitions factories as much as by young men spilling their blood in the trenches.
while Germany succumbed to fascism
because of a Communist threat.
and Russia had a communist revolution.
because Kerensky was shit. Power would go to those who could wade through a deeper pool of blood.
Moore stressed the extent of commercialization of agriculture
which had been completed in England before there had been any 'democritization'
and resulting labor relations in the countryside,
which had been irrelevant in all three countries by the end of the eighteenth century.
the strength of the ‘bourgeoisie,’
which was also irrelevant as the failed revolution of 1848 in Germany showed
and the nature of class coalitions.
they had no nature.
In his theory, democracy emerged when there was a strong, politically assertive, commercial middle class,
that would just get you to a property based franchise- e.g. UK in 1832.
and when agriculture had commercialized so that there were no feudal labor relations in the countryside.
Which, in England, had been the case for centuries.
Fascism arose when the middle classes were weak and entered into a political coalition with landowners.
No need to bring Fascists into the equation when the Church- e.g. the German Centrum party- could do the job better. Look at Salazar. He didn't need stupid Phalangists goosestepping all over the place.
Finally, a communist revolution resulted when the middle classes were non-existent, agriculture was not commercialized, and rural labor was repressed through feudal regulations.
No it resulted when the Army command structure broke down. After that the question was whether the 'White' officers would prevail over the 'Red' other ranks who could also recruit from the urban proletariat.
In Moore’s theory, therefore, class coalitions and the way agriculture is organized determine which political institutions will emerge.
Nope. There actually has to be a fair amount of fighting to determine the outcome. In Germany the Freikorps prevailed. In Russia, Trotsky's Red Army. This was not inevitable.
However, the organization of agriculture is not chosen with an eye to its effects on political institutions, so these institutions are an unintended consequence.
If the peasants are indebted or suffer from land hunger, they will welcome a revolutionary upheaval.
Although Moore was not explicitly concerned with economic development, it is a direct implication of his analysis that societies may end up with institutions that do not maximize income or growth, for example, when they take the path to communist revolution.
Which could maximize growth by letting the less productive element starve or actively killing them.
Apart from contracts of adhesion on open markets, most contracts are 'incomplete'. Commitments have to change over the course of the contract. All parties need to have some basic understanding of the relevant opportunity costs.
...importance of commitment problems. The inability to
commit to how political power will be used in the future means that the impact of economic institutions on efficiency cannot be separated from their effects on distribution.
Institutions will be disintermediated if they are too inefficient. To preserve obligatory passage point status means either spending money or creating a benefit for others.
In any market situation where economic exchange takes place, and the quid is separated from the pro quo, issues of commitment will arise.
Only if the thing is an incomplete contract.
That these issues are of crucial
importance has been recognized in the literatures on incomplete contracts and renegotiation . Nevertheless, if the legal system functions properly, there
is an array of enforceable contracts that owners can sign with managers, workers with
employers, borrowers with lenders etc.
Agreements can be made without written contracts and can be enforced by the local Godfather.
These contracts can be enforced because there is
an authority, a third party, with the power to enforce contracts.
Or you can enforce them yourself with your strong right arm.
Although the authority
that is delegated to enforce contracts and to resolve disputes varies depending on the
exact situation, all such power ultimately emanates from the state, which, in modern
society, has a near-monopoly on the use of legitimate coercion.
Can it force workers to end a strike? Can it prevent employers closing down factories? What about the drug trade or prostitution? Can it end them? It can't even ban dicks though dicks cause RAPE.
... the presence of an impartial enforcer is important for contracting.
Not really. A gross substitute for 'enforcement' is insurance or a hedge of some sort. This creates an opportunity for a market maker to 'pool risk'. I buy stuff on Ebay from guys in China who may cheat me. But Ebay and Pay Pal charge a premium to sellers so they can cover my risk. Sadly, some small sellers may get cheated. But that is better than that buyers lose faith in the system.
The problem when it
comes to institutional choices is that there is no such impartial third party that can be
trusted to enforce contracts.
There may be. It depends.
This is the origin of the commitment problem in politics.
To elaborate on this point, let us consider a situation where society can be governed as
a dictatorship or as a democracy.
Which society? Not the US. Not the UK. If you haven't had a Dictator for centuries, chances are you won't suddenly get saddled with any such thing. What we should be considering a situation where a society can either consist solely of Beyonce impersonators or else everybody pretends to be a cat.
Imagine that the dictator does not relinquish his power,
but instead he promises that he will obey the rules of democracy, so that individuals
can undertake the same investments as they would in democracy.
Why not imagine that he asks everybody to impersonate Beyonce while promising that they can make the same investments and do the same jobs they would otherwise do.
This promise would
not necessarily be credible. As long as the political system remains a dictatorship, there
is no higher authority to make the dictator stick to his promise.
Dictators can get shot. That's what happened to South Korea's dictator.
There is no equivalent
of a contract that can be enforced by an impartial third-party.
This is also true of a democratically elected leader who can pact the Supreme Court. So what? In life there is no guarantee that your wife won't cheat on you or that your son won't stab you to inherit your money. You may take precautions- e.g. don't marry a nympho and stay the fuck away from your son if he shows a tendency to stab people.
After all, the dictator
has the monopoly of military and political power,
He may think so and let his guard down. Then the head of his secret police puts a bullet in him. It is often the case that the Dictator or Absolute Monarch has to be be careful of keeping tabs on, or shaping, public opinion, than an elected head of government.
so he is the final arbiter of conflicting
interests. There is no other authority to force the dictator to abide by his promises.
A similar problem plagues the reverse solution, whereby the dictator agrees to a voluntary transition to democracy in return for some transfers in the future to compensate
him for the lost income and privileges. Those who will benefit from a transition to
democracy would be willing to make such promises, but once the dictator relinquishes
his political power, there is no guarantee that citizens would agree to tax themselves in
order to make payments to this former dictator.
If you ride a tiger, you can't afford to dismount. But this has nothing to do with 'institutions'. Gorbachev wasn't killed or incarcerated though he tanked the Soviet Union. People thought him a fool rather than a knave.
we can now discuss three different channels via which the
presence of commitment problems will lead to the choice and persistence of inefficient
institutions.
Institutions can always do smart things and thus promote allocative efficiency
Imagine a situation in which an individual or a group holds unconstrained political
power. Also suppose that productive investments can be undertaken by a group of
citizens or producers that are distinct from the “political elites”, i.e., the current power
holders.
The thing could be done on an off-shore basis- i.e. through a foreign Corporation and under a relevant International Trade Treaty. If the Dictator expropriates their investment, they can get a judgment attaching foreign property of the State.
The producers will only undertake the productive investments if they expect
to receive the benefits from their investments. Therefore, a set of economic institutions
protecting their property rights are necessary for investment.
This is easily done. Plenty of dictatorships have had long standing relationships with International Corporations. Look at the Saudis. On the other hand, a Chavez might win the elections and then fuck over the economy.
Can the society opt for a
set of economic institutions ensuring such secure property rights? The answer is often
no (even assuming that “society” wants to do so).
The problem is that the political elites–those in control of political power–cannot
commit to respect the property rights of the producers once the investment are undertaken.
History tells us some elites can which is why they have remained elite from century to century.
Naturally, ex ante, before investments are undertaken, they would like to promise
secure property rights.
Why promise? What would be the point? People look at your actual track-record. I often promise to securely hold all your gold and virgin daughters for you. Nobody takes me up this promise. I wonder why?
But the fact that the monopoly of political power in their hands
implies that they cannot commit to not hold-up producers once the investments are
sunk.
They can offer security based on assets they hold in other jurisdictions. Speaking generally, any sort of nutter can get some finance- though it may be at a steep discount and involve some sort of immediate pay-off such that the guy promoting the arrangement makes a profit though other members of the syndicate do not.
This is an obvious parallel to the hold-up problem in the theory of the firm,
for which the solution is obvious- viz. screening and signalling devices. A good signal would be indemnity insurance for unethical behavior.
where
once one of the parties in a relationship has undertaken investments specific to the
relationship, other parties can hold her up, and capture some of the returns from her
investments.
Unless that other party has also invested in ways to fuck them up if they do.
As in the theory of the firm, the prospect of hold-up discourages investment.
The prospect of being fucked over by shitheads does have that effect. But it is easy to get countervailing power over such people
But now the problem is much more severe, since it is not only investments that are
specific to a relationship that are subject to hold-up, but all investments.
There's always a fixer who can manage things. If the risk is great the reward must be commensurate. The fact is big American Corporations did a lot of business with Stalin. He paid on the nail. True, at a later point, he might kill some of his own people who worked for the foreigner. So what? That is the cost of doing business with furriners. Just don't get too attached to them.
In Econ, we seldom see 'causality' rather than correlation or 'Granger causality'. This means economists are especially prone to reverse causal arrows and thus talk nonsense- e.g.
The enclosure of common land thus led to a huge increase in inequality in early modern England.
Increased inequality led to enclosures. Otherwise, those who were more able and influential would have been fighting, not supporting, enclosures. The fact is people could see plenty of 'tragedy of the commons'. They didn't want more and more vagrants and poachers and wood cutters and charcoal burners degrading the environment. Bigger estates 'internalized externalities' and gained economies of scope and scale. They permitted agricultural labour moving into more productive activities.
Many peasants and rural dwellers had their traditional property rights expropriated. In protest, groups of citizens dispossessed by enclosure attempted to oppose it through collective action and riots–attempting to influence the exercise of political power. These groups were no match for the British state, however. Kett’s rebellion of 1549,
Kett was a wealthy farmer who would have benefitted from enclosures.
the Oxfordshire rebellion of 1596, the Midland Revolt of 1607, and others up to the Swing Riots of 1830-1831 were all defeated (see Charlesworth, 1983).
because you can pay poor people to kill other poorer people who aren't getting enough to eat.
The presence of economic losers did not prevent this huge change in economic institutions and income distribution.
No. The presence of economic winners caused changes such that the number of people living at the subsistence level decreased. It turned out this was a good thing. Indeed, those who emigrated to the New World, probably did very much for themselves over the generations.
First, the perspective of hold-ups
an example of which is the General Motors-Fisher Body contract which had nothing to do with political power. It was resolved by GM acquiring the smaller company
immediately suggests that situations in which there are constraints on the use of political power, for example, because there is a balance of political power in society or a form of separation of powers between different power-holders, are more likely to engender an environment protecting the property rights of a broad cross-section of society.
Nope. A guy who can enforce his own property rights can charge a bit to supply others with the same service.
When political elites cannot use their political power to expropriate the incomes and assets of others,
they are known as elites rather than gangsters. Also, if they can 'expropriate income' why not also rape everybody and chop bits off them just for a laugh?
even groups outside the elite may have relatively secure property rights.
Otherwise they'd have fucked off elsewhere.
Therefore, constraints and checks on the use of political power by the elite are typically conducive to the emergence of better economic institutions.
No. If you are at risk of being robbed and raped you emigrate. Only ugly and unproductive people would stick around.
Second, a similar reasoning implies that economic institutions protecting the rights of a broad cross-section are more likely to arise when
tough or smart geezers get paid to protect those rights and almost everybody is able to put some money towards this scheme for collective security.
political power is in the hands of a relatively broad group containing those with access to the most important investment opportunities.
Hedge fund managers? Private equity mavens? There may have been a time when 'those with access to investment opportunities' bought themselves rotten boroughs to gain representation in Parliament. Even now there may be billionaires who can hire lobbyists or finance candidates to defend their interests. But this does increase efficiency. It generally represents rent seeking.
When groups holding political power are narrower, they may protect their own property rights,
How? If you do nothing while a rich guy gobbles up the property of the poor, the day will come when he gobbles up your property because you will look poor to him.
and this might encourage their own investments, but the groups outside the political elites are less likely to receive adequate protection for their investments .
Protection has to be paid for one way or another. Power too does not come for free.
Third, good economic institutions are more likely to arise and persist when there are only limited rents that power holders can extract from the rest of society,
A rent is money you can extract without altering demand or supply. It has no 'deadweight loss'. If there is only 'limited rent', that means there isn't enough of a surplus for institutions of any sort. Consider a situation where there are no full-time policemen or judges or even lawyers. This would be a very basic type of society and economy. Even if everybody felt that certain types of action should be punished, actually punishing it would cause less supply of demand of goods which might reduce the ability of the society to survive.
since such rents would encourage them to opt for a set of economic institutions that make the expropriation of others possible.
These nutters don't get that people can kill those involved in 'economic institutions'. Expropriation is only possible if the expropriators aren't killed. Political power, too, is a fragile thing. Biden is likely to lose his power if he expropriates Pelosi's ass.
Finally, considerations related to issues of political losers suggest that institutional reforms that do not threaten the power of incumbents are more likely to succeed.
They are not likely to be supported. Institutional reform is as boring as fuck.
Therefore, institutional changes that do not strengthen strong opposition groups or destabilize the political situation are more likely to be adopted.
Nope. That's policy change, not institutional change.
The Colonial Experience in Light of the Comparative Statics
We now briefly return to the colonial experience, and discuss how the comparative statics
discussed here shed light on the differences in economic institutions across the former
colonies and the institutional reversal.
Indian institutions weren't very different from British institutions. The characteristics of the median citizen, however, were different. I don't suppose the material living standard of Judges or barristers were very different. But Britain could afford a much higher ratio of such high value adding professionals.
The second comparative static result above suggests a reason why better economic
institutions developed in places where Europeans settled.
and wiped out the indigenous people or reduced it to a small minority. Otherwise, White settlement, sooner or later would be reversed- e.g. in the 'White Highlands of Kenya', Zimbabwe and, some time soon, South Africa.
In these societies, a relatively
broad-based group of Europeans came to dominate political power, and they opted for a
set of economic institutions protecting their own property rights.
No. They took land away from the indigenous people. If they also succeeded in killing them, then there was a European society there. If entry was greater than exit, the place might do well. But plenty of parts of Europe became depopulated.
In contrast, in places
where Europeans did not settle, especially where they were a small minority relative to a
large indigenous population, they did not have the incentives to develop good economic
institutions
Nonsense! They developed good economic institutions in Madras, Bombay, Calcutta, Singapore, Hong Kong etc. Speaking generally, countries which inherited a British judicial/political system did a bit better the longer this had been the case.
because such institutions would have made it considerably more difficult for
them to extract resources from the rest of society.
No. Good institutions make it easy to buy and sell stuff. Robbing and raping are expensive. Slavery may solve the problem but, sooner or later, Slave armies rebel and establish Slave dynasties.
The third comparative static suggests an important reason why in places with more
wealth, resources and also a high density of indigenous population to be exploited,
Europeans were more likely to opt for worse institutions, without any protection for the
majority of the population, again because such institutions facilitated the extraction of
resources by the Europeans.
If Europeans were the minority they had to opt for whatever institutions already existed. Even otherwise, Governors sent by the home country would create the institutions in line with concerns back home. Sadly, if the terms of trade moved against primary producers, Europeans or mestizos would decline socially and economically unless the emigrated to the metropole.
The first comparative static result, in turn, is related to the persistence of the different
types of economic institutions that Europeans established, or maintained, in different
colonies. In colonies where Europeans settled in large numbers, they
either rebelled against the mother country or else cooperated with it so as to become self-administering and self-garrisoning.
also developed
political institutions placing effective checks on economic and political elites.
There was a circulation of elites or, more generally, different charismatic politicians rose up at different times. There was a marked diversion between countries which had military dictatorship and those which never did so. But Spain and Portugal were like Argentina and Brazil and Mexico etc. in this matter. Indeed, living standards weren't so different even into the Sixties and Seventies.
In contrast,
the political institutions in colonies with high population density, extractive systems of
production, and few Europeans, concentrated power in the hands of the elite, and built a
state apparatus designed to use coercion against the majority of the population.
No. In India, the opposite was the case. The vast majority were completely unaffected by the presence of Europeans though, from time to time, a nutter like Gandhi would pretend that they were draining Indian of wealth by sucking off every Indian.
These
different political institutions naturally implied different constraints on political and economic elites.
In the case of India, there was no and is no connection between the two. But this was also true of Britain. It is not the cast that the Cabinet in either country steals everything in sight. Military rule can be different and there are rapacious political dynasties, but that is not what these nutters are talking about.
In the former set of colonies, there were constraints on the development
of economic institutions that would favor a few at the expense of the majority. Such
constraints were entirely absent in the latter set of colonies.
There were no colonies of either type. What these nutters mean is that after Wars of Independence, there was divergence. In some places a tiny elite 'extracted' resources from the indigenous majority- e.g. American-Africans in Liberia or Creole elites in Banana republics. The problem here is that you could 'feudal' regions in Europe itself where a handful of aristocratic landlords rack-rented a vast indigenous peasant population. Parts or rural Portugal were more 'third world', in that respect that many parts of Latin America or even their ex-colony in Goa.
Finally, the fourth comparative static is useful in thinking about why many colonies
did not attempt to change their economic institutions during the nineteenth century
when new economic opportunities made their previous system based on forced labor,
slavery, or tribute-taking much less beneficial relative to one encouraging investment in
industry and commerce.
The traditional answer is that this would have posed competition to industry in the mother country. Independent states could go in for Listian protectionism.
Part of the answer appears to lie in the fact that the political
power of the elites, for example of the plantation owners in the Caribbean, was intimately
linked to the existing economic system.
Why did they not want to make even more money processing raw materials rather than sending them back to the mother country so someone else got the profit?
A change in the economic system would turn
them into political losers, an outcome they very much wanted to avoid.
No. They wanted money. You only went to some shitty colony to make enough money so as to be able to retire to Paris.
Reassessment of the Social Conflict View So far we have shown that the econometric evidence is convincing that differences in economic institutions are the root cause of differences in prosperity.
Though there are regions in the same country, and thus which have the same institutions, which have differences in prosperity.
We then argued that although there are different approaches which can account for variation in economic institutions,
though there is no point in accounting for it. The thing makes no difference.
the most plausible approach is the social conflict view.
It is cartoonish. Some regions have lots of social conflict though they have the same institutions as the rest of the country.
Though we believe that there are clear instances where history and ideology matter for the institutional structure of society, and clearly institutions are highly persistent, the most promising approach to understanding why different countries have different institutions is to focus on choices and their subsequent consequences.
.e.g choosing to have lots of oil under your soil.
The social conflict view emphasizes the distributional implication of economic institutions and how commitment problems imply that efficiency and distribution cannot be separated.
Though they are separate and 'commitment problems' can easily be overcome by securing a threat point or insuring against hold up.
Hence the fundamental conflict within society over the nature of economic institutions
their nature is economic. Some want it to be sexual and this leads to conflict.
has important implications for economic performance. Some economic institutions will promote growth, but they will not necessarily benefit all groups in society.
Nor will educational institutions. So what?
Alternative economic institutions may induce economic stagnation, but may nevertheless enrich some groups.
They may also sodomize certain other groups.
Which set of institutions results and whether or not a society prospers will be determined by which of these groups has the political power to get the institutions that differentially benefit them.
No. Whether or not a society prospers depends on exogenous, not institutional, factors. If something needs to be done, we can always find an institutional way of it to be done though, equally, we may not bother.
At this point we have therefore substantiated the first three points we made in the introduction. To develop our theory of economic institutions further we need to be more specific about political power–where it comes from and why some people have it and not others.
One can have political power as a agent or representative or else one can have power and use it in a political manner. In both cases, there is the risk of losing power by using it or the other way around.
The Social Conflict View in Action We now discuss three important examples to bring out the fact that conflict over economic institutions is critical to the functioning of the economy
It may be harmful. It isn't critical.
and that this conflict stems, not from differences in beliefs, ideology or historical accidents, but from the impact of economic institutions on distribution.
There is no such impact. Institutions may redistribute a certain amount of resources but then again they may not.
The examples also show that those with political power have a disproportionate effect on economic institutions
They may have none at all.
and they show how the distribution of political power is influenced by different factors.
or is wholly unaffected by them.
These factors include the allocation of de jure political power through the structure of political institutions
Sadly, the de jure allocation is a justiciable matter. We don't know what it is in advance.
and the ability of groups to solve the collective action problem, or exercise what we called de facto political power.
Sadly, political power may not align with actual power. We may say 'such and such caucus prevented such and such legislation' but the outcome might be worse than for them then if the law had gone through. Indeed, they may only have been granted political power so effective political power for their cause might be lacking.
Still, fiscal policy is, speaking generally, an area where there is social conflict and some redistribution occurs. But the thing can be highly non-linear. A 'Labour' administration may be more austere than a 'Conservative' one.
Why did elites in Britain create a democracy?
They didn't. Democracy came after the first world war and the Bolshevik revolution. Nobody created it. The thing merely reflected the fact that men without property and women with or without property who had worked in the munitions factories or Land Army had now become crucial to national defence. The Commander in Chief of the Imperial armed forces said he didn't have enough soldiers to put down a Bolshevik insurrection in England- forget about holding down Ireland or India or Egypt. Britain lost the war against the Bolsheviks and the Turks because neither its own people wanted to fight nor would Commonwealth help be forthcoming. The Labour Party was allowed to take power though crazy Lesbians ensured that the propertied class won the 'Great Strike' much to the relief of non-crazy, non-Lesbian, Trade Union leaders.
Our discussion makes it clear that democracy did not emerge from the voluntary acts of an enlightened elite.
But Prussian Democracy did. They actually had an elite 'beamten' class which included Professors and Civil Servants. However, they also had a militarized aristocracy.
Democracy was, in many ways, forced on the elite,
an aristocracy is not an elite nor are the elite necessarily aristocratic.
because of the threat of revolution.
One could with greater truth say Absolutism or Despotism of various kinds were forced on countries by the threat of Revolution or Counter-Revolution or just people making fun of the Dictator's moustache.
Nevertheless, democratization was not the only potential outcome in the face of pressure from disenfranchised, or even in the face of the threat of revolution. Many other countries faced the same pressures and political elites decided to repress the disenfranchised rather than make concessions to them.
Moreover, within the same country, there was both disenfranchisement as well as enfranchisement. In other words, the thing was ideographic and had no explanatory value.
This happened with regularity in Europe in the nineteenth century, though by the turn of the twentieth century most had accepted that democracy was inevitable.
Most had accepted it was irrelevant. Taxation could be higher with Representation and this could create a virtuous fiscal circle. But representation without taxation was useless. Electing guys who can't get you to pay more because you don't have a pot to piss in means that those elected dudes are fucking useless.
Repression lasted much longer as the favorite response of elites in Latin America,
Mexico had a lot of repression after its Revolution as did Russia. Revolutionaries, no matter how proletarian or declasse, have to kill counter-revolutionaries, left-adventurists, right-deviationists, kulaks, clergymen and guys who make fun of the Dictator's moustache or who might do so at some future time.
and it is still the preferred option for current political elites in China or Burma.
Myanmar is fighting a big Civil War. Indeed, it seems to have doing that most of the time. China has always been ruled in a Chinese way. Sometimes it does smart things and rises faster than anybody else. But sometimes it does stupid things. But this is also true of every other country. All are run as they have always been run and sometimes do stupid shit.
The problem with repression is that it is costly.
Also, autocracy is tempered by assassination. Sometimes being a useless fool, like Gorbachev, is your only survival strategy.
Faced with demands for democracy political elites face a trade-off.
Fortunately, they have two or more faces which can be displayed in various other trade-offs, real or imaginary.
If they grant democracy,
it will be useless and ineffective because if the thing is 'granted' it isn't democracy. It is just plebiscitary poverty or elected incompetence.
then they lose power over policy
which, truth be told, they never had power over in the first place. Doing what you need to do to survive isn't a policy if it changes exogenously. It is merely reaction or retreat in the face of circumstances.
and face the prospect of, possibly radical, redistribution. On the other hand, repression risks destroying assets and wealth. In the urbanized environment of nineteenth century Europe (Britain was 70% urbanized at the time of the Second Reform Act), the disenfranchised masses were relatively well organized and therefore difficult to repress.
The Tories gained by extending the franchise farther than the Liberals wanted. However, it was only after the Great War had forced the adoption of a virtually universal adult franchise that their decline and displacement by the Labour party became inevitable.
Moreover, industrialization had led to an economy based on physical, and increasing human, capital. Such assets are easily destroyed by repression and conflict, making repression an increasingly costly option for elites.
No. The fragility of such assets represents an existential threat not to elites but to proles. Money and talent can always move elsewhere. Also, proles hate immigrants, furriners, homosexuals and peeps wot went to Collidge.
In contrast, in predominantly agrarian societies like many parts of Latin America earlier in the century or current-day Burma, physical and human are relatively unimportant and repression is easier and cheaper.
These nutters don't get that the Burmese Army was to the Left of the elected Government it replaced. It did crazy shit which led to the flight of the non-Burman middle-class and then the complete destruction of even the Burman middle class and upper peasantry. The hope was that the return to some sort of cosmetic democracy would enable the Army to grow richer alongside a Burmese propertied class. Sadly, internecine conflicts remained. Let us see if China can engineer some sort of modus vivendi between the various ethnicities.
Moreover, not only is repression cheaper in such environments,
It is very very costly. Burma was able to export enough to keep fighting itself over the Sixties and Seventies but had to find a peaceful modus vivendi because the regime's earnings had collapsed.
democracy is potentially much worse for the elites because of the prospect of radical land reform.
Radical shite can always be made to work in your favour by painting yourself Red and killing people.
Since physical capital is much harder to redistribute,
It is easy to 'redistribute'. Kill a few people where oil is located and sell the lease to the Chinese. Saddam's mistake was to think the US had greenlighted his invasion of Kuwait. But, otherwise, he and Gaddafi had had no big problem redistributing physical capital. True, all the smart professionals and entrepreneurs ran away but some of them might have been tempted to make fun of the Dictator's moustache or wig or whatever.
elites in Western Europe found the prospect of democracy much less threatening.
Because they could put their money in Switzerland. The Eurodollar market, famously, catered to the Belgian dentist who didn't want to pay high marginal rates of tax. I believe 'Belgian Dentist' Euro-bonds currently pay about 4 percent free of tax.
Faced with the threat of revolt and social chaos, political elites may also attempt to avoid giving away their political power by making concessions, such as income redistribution or other pro-poor policies.
You can consistently redistribute income from the poor schmuck with a job to the poor layabout- but that's about all you can do. Redistribution is a great way to garner votes for the Right.
The problem with concessions however is their credibility, particularly when de facto power is transitory. For example, if a crisis, such as a harvest failure or business cycle recession creates a window of opportunity to solve the collective action problem and challenge the existing regime, the elites would like to respond with the promise of concessions. Yet windows of opportunity disappear and it is difficult to sustain collective action which entails people protesting in the streets and being away from their families and jobs.
Let them keep protesting till industry runs away so they can have more leisure to protest. But, by then, protesting is an ill-paid type of casual labour when it isn't a competitive sport for the starving.
Thus collective action quickly dissipates and once it does so, the government has an incentive to renege on its promise of concessions.
Anyone can make concessions and then turn around and say they have no money or power to make good on their promises.
The promise of concessions, which people know to be non-credible is unlikely to defuse collective action.
Collective action becomes a theatre of the absurd if 'concessions' aren't incentive compatible.
Hence, Acemoglu and Robinson (2000a, 2001, 2003) argue that democratization occurred as a way of making credible commitments to the disenfranchised.
Like what? We'll build a wall and keep out immigrants WHO WILL EAT YOUR PUPPY DOG?
Democratization was a credible commitment to future redistribution, because it reallocated de jure political power away from the elites to the masses.
Only the courts can decide what is de jure. But court decisions may never be enforced.
In democracy, the poorer segments of the society would be more powerful and could vote,
they are welcome to sell their votes. But that's not power. Plenty of people have to rent out their vaginas or rectums to get by.
in other words, could use their de jure political power, to implement economic institutions and policies consistent with their interests.
In the sense that getting fucked in the ass is in the interest of a starving rent-boy.
Therefore, democratization was a way of transforming the transitory de facto power of the disenfranchised poor into more durable de jure political power.
Or not because loads of immigrants turn up.
Summary The emergence of mass democracy is another example illustrating our theory of institutions.
Whereas what it is an example of is changes in transport and communications technology.
Into the nineteenth century, economic institutions, particularly in the labor market, disadvantaged the poor.
Whereas in the twenty first century, poor people on zero hour contracts are very advantaged, not to say elite because they have the de jure right to become billionaire Presidents of the Republic. Also they can have their pick of super-models to wed. Meanwhile, over the last three decades, Communist China has lifted more people out of poverty than has ever happened in human history.
For example, trade unions were illegal and as late as the 1850 in Britain workers trying to organize a union could be shipped to the penal colony in Tasmania, Australia.
Nonsense! The Tolpuddle Martyrs, convicted for unlawful oaths, were brought back after popular protests in the 1830s. By the 1850's Tasmania itself had militant Trade Unions. True there was a period, during the Napoleonic Wars when the Combination Act made Unions per se illegal. But it was difficult to get convictions under such draconian laws. After 1825, there were restrictions on what 'friendly societies' could do in terms of picketing etc. The reason the Tories wanted to legalise Trade Unions is that they realized that the 'labour aristocracy' fucking hated the Irish and the Welsh and those evil bastards who live in the next town over.
The poor could not alter economic institutions in their favor because,
they had low productivity.
being disenfranchised,
because they were poor and thus didn't pay enough in property taxes
they had little de jure political power
nor did judges who wanted to transport poachers or agitators under draconian laws but could not do so because Juries refused to convict
and also limited de facto power,
because they had low productivity
the because they were often unable to solve their collective action problems.
because they had low productivity and could not collectively change this.
However, changes in the structure of society and the economy during the early nineteenth century
caused by changes in productivity
altered the balance of political power, in particular making the exercise of de facto power by the politically disenfranchised much easier (Tilly, 1995, and Tarrow, 1998, document the changing qualitative nature of collective action over this period).
Higher productivity people have countervailing power because they have higher mobility and transfer earnings. Also, Trade Unions only gain countervailing power when their members pay enough in contributions that they have a big enough strike fund. But this means they must be above a subsistence wage.
True, the State can legislate for a higher minimum wage but this just creates unemployment and casualization such that the the law is counterproductive.
The rise in the de facto political power of the poor necessitated a change in political institutions in their favor to defuse the threat of revolution.
There was no threat of revolution. General Napier showed the 'physical force' Chartists his canons. He had the 'physical force'. They did not. On the other hand, Protestant workers were a counterweight to the militant Irish Catholics in Parliament. Former Radicals, like Joseph Chamberlain, became Unionist and favoured Imperial Preference. Thus, the Tory party gained a new lease of life while the Liberals, a the height of their power, were already on the road to political extinction.
This was to tilt the future allocation of de jure political power, and consequently to ensure future economic institutions and policies consistent with their interests.
No. What happened was that the rate of productivity increase for those combining factors of production fell. First there was an agricultural recession in the eighteen eighties. Then industry too suffered a malaise. One tenth of the population had a private income and another tenth were their domestic servants. But the servants could be more productive in factories and the 'idle tenth' would have to move to a pensione on the Continent if they wanted to continue to be idle. The old order had to change because younger nations were overtaking Britain industrially and technologically. If you wanted to do a research degree, you had to learn German. Its Universities had taken the lead in almost every subject. Still, it was America which was truly modern. It had skyscrapers 25 years before the UK.
Whether or not increases in de facto power translated into democracy
was irrelevant. Napoleon III took power and became Emperor through universal manhood suffrage. Germany, having been united by Bismarck's blood and iron, had it from 1871-1918. Some countries started off with universal manhood suffrage and then restricted the vote to property owners- e.g. Columbia. Greece was ahead of England and France in getting universal manhood suffrage in in 1844. But nobody in that country had very much de facto power.
depended on a number of factors, in particular how difficult and costly it was for elites to use repression to counter the increase in the power of the masses,
There was plenty of repression in countries with manhood suffrage if the resources for that repression were available.
and how costly the prospect of democracy was.
Democracy made little difference to anybody. The corollary of 'No taxation without representation' is 'if you pay little in tax, your parliamentary representatives can do sweet fuck all for you.
The changes in political institutions that occurred with democracy had profound implications for economic institutions.
Where? In Greece in 1850? In Columbia in 1853? The fact is democracy and land reform could cause stagnation and agricultural involution thus retarding the growth of 'economic institutions'.
In the case of Britain, the period after the Second Reform Act of 1867 led the British state
there was no such thing. Scotland had universal education from an earlier period. England and Wales were less cohesive in religious matters
to commit itself to providing universal education for the first time
It could have done so earlier The problem was that Dissenters would not permit their rates being used to finance Anglican (or Catholic) schools. When a Tory government finally pushed this through in the early years of the Twentieth Century, the Dissenters launched a major campaign of Civil Disobedience or 'passive resistance'. This led to a big Liberal Victory in the subsequent elections.
and it also led to radical changes in labor market institutions allowing trade unions to form legally for the first time
They were legal since 1825 but only received legal protection after 1870 and gained the right to picket in 1875. The Taff Vale judgment, making Unions liable for strike action, in 1901 was a setback and led to the 1906 Act giving them immunity from liability. The US only granted Unions a similar status in 1935. But legal protection is irrelevant. Either Unions kick ass or they are a waste of time.
and increasing the bargaining power of labor.
Only increased productivity could do so.
Hence economic institutions changed radically in favor of those newly endowed with de jure political power,
Nobody was 'newly endowed' with anything of the sort. Having the right to vote means shit if you and the country are as poor as shit. Power has to do with money and being able to kick ass.
mostly the relatively poor. This is in fact a relatively general result of democratization. Democracy enfranchises the poor, and the poor are able to use democracy to tilt economic institutions and the distribution of income in society in their favor.
Only if this raises their productivity. Otherwise the poor make themselves poorer. The Rich can always fuck off to somewhere which isn't a shithole.
The emergence of democracy in the nineteenth-century Europe therefore also illustrates the workings of our theoretical framework.
Because Greece was similar to Belgium- right? The plain fact is democracy didn't matter. Productivity did. If it went up, things got better. If it didn't life for the majority was nasty, brutish, and short.
In particular, it shows how political institutions determine economic institutions
They don't. Only productivity matters. London has a great FinTech institutions. I can't access them because I am almost completely unproductive and thus as poor as shit. I did help my illiterate neighbour, who made a million when she sold the family house, to invest that money wisely. Not only had she and her husband worked hard, their money would work hard for their only daughter.
and policies, and thus the distribution of resources,
How resources are distributed does not matter. What matters is how productively they are employed. Neither political nor economic institutions matter in this connection. Any outcome whatsoever can be achieved without changing them. Equally, you can change them as much as you like without any change in outcome.
and it shows how political institutions change, especially in response to an imbalance of de facto political power, as a credible way of influencing the future allocation of de jure political power.
Nobody knows what is 'de jure' political power. The Supreme Court said BoJo's prorogation of Parliament was illegal. BoJo went on to win the election and brought in a bill making prorogation non justiciable.
These three Nobel laureate nutters have a theory which is 'anything goes' because nobody knows what 'economic institutions' actually are or what is de facto and what is de jure. Only productivity matters. Academic Economics is stupid and unproductive. Still, it can be very funny.
This is how these nutters conclude their worthless paper-
it is important to understand the role of policy and interventions in changing the institutional equilibrium.
Policies can change institutions which in turn change ex ante and ex post. Thus when the EU insisted that the UK get a Supreme Court, a matter which previously was not justiciable became so. But then, thanks to Brexit, Westminster was able to revert to the status quo ante. It is not 'important' to understand that a thing is changed by the the thing which changes it but that change may be reversed by that very thing.
Though social science research is of intrinsic interest,
to Socioproctologists who like pointing their finger at stupid, mendacious, assholes
one would hope that a convincing fundamental theory of comparative growth based on institutions would lead to policy conclusions that would help us improve the institutions and thus the lives and welfare of people in poor countries.
These nutters wanted to be in the business of telling very poor countries they needed to improve their institutions when what they actually needed to do was disintermediate those institutions so as to raise productivity by any and every means.
It should be obvious that, at the moment, we are a long way from being in a position to draw such conclusions.
That didn't stop a whole host of virtue signalling cunts from making money scolding various poor countries.
In a world where political choices are made rationally and are endogenous to the structure of institutions, which are themselves ultimately endogenous, giving policy advice is a conceptually complex issue.
It is something only stupid and useless shitheads would do.
Recognizing our current ignorance on this topic in no way diminishes its importance,
we are ignorant of the manner in which the farts of unicorn affect monetary policy. This does not mean this isn't a very very important field of study.
and its role as the Holy Grail of political economy research,
the Holy Grail is very very important because it is the fart of the fart of a flying unicorn.
however. And we believe that better and empirically more realistic theoretical frameworks in the future will take us closer to this Holy Grail.
after which we can focus on the farts of flying unicorns. Surely that's worth a Nobel Prize?
