Saturday, August 18, 2012

Chapter 11 - The Virtuous Circle

I recall the concept of virtuous (and vicious) circles from Paul Collier's book The Bottom Billion, although I am certain he was not the first to employ this idea: Compared to classical development economics, Collier’s analysis is surprisingly static. Development economics typically postulated virtuous and vicious circles in the economy, not static traps. At the core of the virtuous circles of development lay a large division of labour, alongside the increasing returns and technological change found in the industrial sector.

Collier, in a 2009 paper on failed nations writes of the mechanism of circles or self reinforcing processes:

Besley and Persson (2008a) propose an economic formalization of Tilly. Their analysis has three layers: public policies, which can in principle be changed rapidly; institutions which take longer to build and so are in the nature of investments in capacity; and the initial structure of political power, describing the interests which the government represents. Different power structures and interests determine how much the government investments in institutional capacity for taxation and justice. They show that a political system which is not inclusive, and which has a high degree of likely to build the capacity needed for an effective state. In turn, if these institutions are not built, subsequent policy choices on tax rates and the regulation of private economic activity are constrained.

ChAtper 10 points to the rule of law as a key emergent institution that once in place can lead to virtuous circles.

"Once in place, the notion of the rule of law not only kept absolutism at bay but also created a virtuous circle: . . ." (308)

The previous discussion in the book outlines why this key institution is a fragile one that can easily be overcome by special interests seeking extractive rather than inclusive institutions. And, importantly, Acemoglu and Robinson point out:

"While the virtuous circle creates a tendency for inclusive institutions to persiste, it is neither inevitable nor irreversible." (309)

When reading this chapter I recalled William Easterly's work and his disagreement with Collier on this point of virtuous circles, if memory serves me correctly. I wonder if we will engage this idea during book discussion.

The authors conclude this chapter and introduce the next on vicious circles by asserting that while there is a strong tendency for both types of circles to be self reinforcing, the tension between the two is strong and if there is a tipping action it may well be in the direction of vicious circles.

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