Friday, August 10, 2012

Chapter 3 - The Making of Prosperity and Poverty

Acemoglu and Robinson use the Korean pennisula in their argument advancing institutions (political then economic) as the basis for economic change or lack of change.

We see the familiar night map of the pennisula -

The distinction between extractive and inclusive economic institutions is presented in this chapter. Inclusive institutions are: "To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it must permit the entry of new businesses and allow people to choose their careers." (74-5)

This is an interesting list - beginning with the universal of private property rights as an institutional foundation for an inclusive or, to use North's terminology, open access society, the authors insert the notion that some public provision of services is necessary for societies to grow and develop. I anticipate a heated discussion on this point. As I recall, Hayek would have agreed with this point, in the second half of The Fatal Conceit he listed and analyzed a set of public services that he felt were necessary for a free and responsible society.

The authors go on to argue that the list above: " . . . all reply upon the state, the institution with the coercive capacity to impost order, prevent theft and fraud, and enforce contracts between private property."(75-6)

I think the authors might well have spent some time here discussing and distinquishing between formal institutions (state police power) and informal institutions (trust, adherence to the state, etc) to extend this point. The US experience, as that of other countries [advanced (open access or inclusive) and natural (extractive)] have indicated that the state is challenged in its effort to prevent theft and fraud, particularly in the face of informal institutional norms and conventions that encourage fraud.

But the authors go farther and, I think reach back to Adam Smith, when they extend their argument.

Smith advocates for public services and infrastructure in:

Of the Expence of public Works and public Institutions, Ch.1, Of the Expences of the Sovereign or Commonwealth


The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires, too, very different degrees of expence in the different periods of society.


After the public institutions and public works necessary for the defence of the society, and for the administration of justice, both of which have already been mentioned, the other works and institutions of this kind are chiefly those for facilitating the commerce of the society, and those for promoting the instruction of the people. The institutions for instruction are of two kinds: those for the education of youth, and those for the instruction of people of all ages. The consideration of the manner in which the expence of those different sorts of public, works and institutions may be most properly defrayed will divide this third part of the present chapter into three different articles.

The authors channel this Enlightenment view in the top paragraph of page 76 and conclude in this paragraph convincingly:

"The state is thus inxorably intertwined with economic institutions . . . Inclusive economic institutions need and use the state." (76)

Acemoglu and Robinson recognize the danger of state involvement as they go on to show convincingly the negative or wealth destroying potential of this sympiotic relation between the state and economic institutions. I think of the over simplified NRA contention that guns do not kill, people kill. I wonder what are the weaknesses of applying that metaphor - the institutional relation between the state and economic systems does not creat poverty (or prosperity) the path depend development (people) lead to the outcome?

Page 77 first full paragraph describes the process of education and technology as engines of economic growth. I hope our book club selects the Goldin/Katz book The Race Between Education and Technology so we can more deeply consider this relationship and its impact on progress, development and prosperity as well as examine the role played by political institutions in faciliating an open access or inclusive system of political and economic decision making.

Pages 79 - 94 in chapter 3 consider political institutions and the third paragraph under the section heading begins with a statement worth examining - "All economic institutions are created by society." (79)

While this is true I see economic institutions from a Hayekian perspective - they emerge and evolve as a result of exchange between individuals. It is undeniable that individual interaction comprise society, but I would emphasize the role of the individual in formation of economic institutions - as well as the path dependence of institutional development and change.

I found a recent posting over on Think Markets on point here - "But real social orders are rarely (ever?) of either extreme. The extremes are ideal types, and real orders more or less instantiate the types. Take musical groups, a social structure with which I have fair familiarity. Even in an orchestra, which is well towards the planned end of the range, the individual musicians still have room for individual creativity and expression. (Otherwise it is hard to imagine anyone spending their life playing in orchestras.) And even the most free-form, improvisational jazz group needs some planning: “OK, we’ll start at eight, and end at about eleven.”

I think most social groups are in the “somewhere in the middle” category: we each make our own decisions driving down the road, for instance, but within a planned framework of designated lanes, stop signs, traffic lights, and so on. A basketball team may run set plays, but the players must be ready to respond creatively to unexpected situations that arise as the play develops. Our discussions of these types of orders will benefit, I think, from seeing reality presents us with a gradient of mixtures of the two ideal types, and few, if any, pure examples of either."

The first sentence of the last paragraph on page 79 might well be controversial in our group, although I find it sound analysis. Perhaps we will have an animated text based debate over this assertion.

What I do find provocative is the first full paragraph on page 81 - which served to help clarify my reading of North et al Violence and the Social Order.. Prior to my thinking on this topic the assertion that "centralized" political institutions were "inclusive" would have resulted in either a blank stare or knee jerk opposition. As developed by the authors here and in their previous work, a degree of centralizatiion is necessary to safeguard opportunity to participate - both in the political process and the economic system. I think of fully decentralized areas (failed nation states) of the globe - Somalia, the Gaza Strip, Chad, Sudan etc . . . .

The remainder of this chapter provides a useful analysis of the costs and benefits of creative destruction to society and the rent seeking behavior as agents in both inclusive and extractive societies acting to prevent private losses that inevitably result from this process. The last sentence on page 84 rings true and is, very, very important to understanding the process of economic change. As individuals we can fall into the opposition or luddite camp. As my institution I recall the reaction of admissions employees when the movement began to online adminssion, enrollment and registration. They feared for their jobs and thus found reasons that this new process - making use of technology - would "hurt" the institution. The last 4 pages of chapter 3 are inportant as they clarify the potential for short run grow under extractive institutions. The authors have spoken on the potentail for teh BRIC block and, China in particular, we can apply the framework in the book to understand how the Dutch disease may well lead to some short term, though in the eyes of the authors, unsustainable growth.

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