Euro Zone Economy Shrinks, Darkening Outlook

ASET Book Club

Join the Arizona Society of Economics Teachers Book Club to discuss current popular economics books.

Upcoming Dates:

Thursday, September 20, 2012: Why Nations Fail by Daron Acemoglu and James Robinson

Wednesday, October 24, 2012: The Next Convergence by Michael Spence

Thursday, December 6, 2012: The Race Between Education & Technology by Goldin and Katz

Time:

5:45 - 7:45 p.m.

Location:

Arizona Council on Economic Education office

3260 North Hayden Road, Suite 207

Scottsdale, Arizona 85251

Positive review - Why Nations Fail

The framework used in the book is based on a rigorous fifteen-year research process conducted by the authors and examined previously in some of their earlier, more analytical work. Regular readers of their work will recognize many of the ideas on the consolidation of democracies and political transitions coming from their 2006 book, Origins of Dictatorships and Democracy, along with many academic articles. Why Nations Fail builds on these findings thus providing the crowning achievement in their political economy theory. It is a recommended read to all professions and anyone interested in finding out why some nations are rich while others are poor. Even though the book lacks academic rigour in supporting the theory and proving the causality of certain events and their further manifestation, such virtues were probably not the authors’ objectives.

For anyone interested in the academic proofs behind certain historical events, I recommend their earlier work in which the analytical framework can be thoroughly analyzed. This book had different goals. Its emphasis on historical case studies to make it more interesting to the general reader succeeds in transferring the idea to all those outside the economic and political science profession. They have managed to summarize their theory and make the case for institutional change, while presenting it in an understandable, yet brilliant way for all those who are not economists. That alone marks the book as a success.

http://www.adamsmith.org/research/articles/review-why-nations-fail-the-origins-of-power-prosperity-and-poverty

Russell Roberts - 3 Questions

This morning, NPR interviewed Russell Roberts (well worth listening to) and the interview ended with 3 questions that Roberts suggested 3 for both parties in the upcoming election.

August 26, 2012

Weekend Edition Sunday guest host Linda Wertheimer talks with Russell Roberts of George Mason University and the Hoover Institution for the final installment of her series of interviews with top economists.

1. Role of government

Ask of the right, you say that government should be smaller, what functions of the government do you argue could be "better" conducted by the private sector.

Ask of the left, you say government should be larger, what functions of the private sector do you argue could be better conducted by the public sector.

2. Deal with demographic challenge.

How do we deal with the challenge of entitlement spending.

3. Fiscal cliff - deal with the ongoing budget deficit.

How would your economic plan close the ongoing 1 trillion dollar budget deficit?

If you click below you can both listen to the 5 minute interview as well as scroll down to read comments by listeners, very revealing about the perspective of NPR listeners.

http://www.npr.org/2012/08/26/160063499/looking-at-the-economy-on-the-campaign-trail

Thomas Friedman Review - Why Nations Fail.

http://www.nytimes.com/2012/04/01/opinion/sunday/friedman-why-nations-fail.html

I’M reading a fascinating new book called “Why Nations Fail.” The more you read it, the more you appreciate what a fool’s errand we’re on in Afghanistan and how much we need to totally revamp our whole foreign aid strategy. But most intriguing are the warning flares the authors put up about both America and China.

. . .

Acemoglu worries that our huge growth in economic inequality is undermining the inclusiveness of America’s institutions, too. “The real problem is that economic inequality, when it becomes this large, translates into political inequality.” When one person can write a check to finance your whole campaign, how inclusive will you be as an elected official to listen to competing voices?

Jared Diamond Review - Why Nations Fail

In their narrow focus on inclusive institutions, however, the authors ignore or dismiss other factors. I mentioned earlier the effects of an area’s being landlocked or of environmental damage, factors that they don’t discuss. Even within the focus on institutions, the concentration specifically on inclusive institutions causes the authors to give inadequate accounts of the ways that natural resources can be a curse. True, the book provides anecdotes of the resource curse (Sierra Leone cursed by diamonds), and of how the curse was successfully avoided (in Botswana). But the book doesn’t explain which resources especially lend themselves to the curse (diamonds yes, iron no) and why. Nor does the book show how some big resource producers like the US and Australia avoid the curse (they are democracies whose economies depend on much else besides resource exports), nor which other resource-dependent countries besides Sierra Leone and Botswana respectively succumbed to or overcame the curse. The chapter on reversal of fortune surprisingly doesn’t mention the authors’ own interesting findings about how the degree of reversal depends on prior wealth and on health threats to Europeans.

Do read the whole review (that is not just the usual cliched command to do so), and I will gladly link to any response by Acemoglu and Robinson. Here is Diamond’s bottom line:

My overall assessment of the authors’ argument is that inclusive institutions, while not the overwhelming determinant of prosperity that they claim, are an important factor. Perhaps they provide 50 percent of the explanation for national differences in prosperity. That’s enough to establish such institutions as one of the major forces in the modern world. Why Nations Fail offers an excellent way for any interested reader to learn about them and their consequences. Whereas most writing by academic economists is incomprehensible to the lay public, Acemoglu and Robinson have written this book so that it can be understood and enjoyed by all of us who aren’t economists.

Review from Marginal Revolution

http://marginalrevolution.com/marginalrevolution/2012/05/jared-diamond-reviews-why-nations-fail.html

Washington Post Review - Why Nations Fail.

“Why Nations Fail” isn’t perfect. The basic taxonomy of inclusive vs. extractive starts to get repetitive. After chapters of brio, the authors seem almost sheepish about the vagueness of their concluding policy advice. And their scope and enthusiasm engender both chuckles of admiration — one fairly representative chapter whizzes from Soviet five-year plans to the Neolithic Revolution and the ancient Mayan city states — and the occasional cluck of caution.

It would take several battalions of regional specialists to double-check their history and analysis, and while the overall picture is detailed and convincing, the authors would have to have a truly superhuman batting average to get every nuance right. Their treatment of the Middle East, for instance, is largely persuasive, but they are a little harsh on the Ottoman Empire, which they basically write off as “highly absolutist” without noting its striking diversity and relatively inclusive sociopolitical arrangements, which often gave minority communities considerably more running room (and space for entrepreneurship) than their European co-religionists.

Acemoglu and Robinson have run the risks of ambition, and cheerfully so. For a book about the dismal science and some dismal plights, “Why Nations Fail” is a surprisingly captivating read. This is, in every sense, a big book. Readers will hope that it makes a big difference.

Warren Bass is a senior political scientist at the RAND Corporation and a former adviser to U.S. ambassador to the United Nations Susan Rice.

http://www.washingtonpost.com/entertainment/books/book-review-why-nations-fail-by-daron-acemoglu-and-james-a-robinson/2012/04/20/gIQAcHs8VT_story_2.html

Chapter 15 - Understanding Prosperity and Poverty

The authors summarize their 2 part theory -

Distinction between extractive and inclusive institutions - the institutional component of their theory and --

Mechanism for the emergence of inclusion in a world historically characterized by extraction.

I wonder if any of my fellow clubbers are struggling to articulate the second part of the theory?

The theory seems to rest on the idea of circles - vicious ones that support extractive institutions (which tend to persist and can generate short term growth) and virtuous ones that support inclusive institutions.

Again, how convincing is this analysis?

One of my persisting questions is the role of the "degree of state centralization" (441) as it seems that centralization at the supranational level and at the subnational levels (to use the terminology employed by North in Violence and the Social Order) plays a part in both circles and both types of institutional evolution.

I found the empowerment discussion as a transitional mechanism disappointing and not as clear as I would have liked.

Chapter 14 - Breaking the Mold

This chapter uses example to explore the possibilities and challenges of transition from extractive to inclusive institutional framework. I am very interested in the reacetion of our book club to this analysis. North, in his recent work, is pessimistic in his evaluation of the transition from natural state (extractive) to open access (inclusive) social order. In fact, my reading of his work leds me to believe it is more likely that the reverse would take place.

I wonder how convincing the examples in chapter 14 - Botswana, China, and the US South are as support for the mechanism of transition, which I continue to find murky and hard to articulate from my reading.

Chapter 13 - Why Nations Fail Today

The short answer - extractive institutions which are the legacy of colonalism. I am not convinced - and while the authors use examples of European colonies that developed inclusive institutions - US and Australia in contrast to the majority of European colonies that evolved with extractive institutions, I was unable to detect the mechanism - what caused this difference? It seems that geography might be the answer -the US and Australia had large land masses that were quickly depopuluated of native populations - is that the mechanism? If so, going back to the 3 theories reviewed and rejected by Acemoglu and Robinson early in the book, isn't this then evidence for geography as the key determinant? I look forward to our discussion of this chapter at book club next month.

Chapter 12 - The Vicious Circle

". . . vicious circles create powerful forces toward the persistence of extractive institutions. History is not destiny, and vicious circles are not unbreakable. They create a powerful process of negative feedback, with extractive political institutions forging extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions." (365) This argument is developed via exemplification in this chapter with examples ranging from African countries to the American south. The chapter ends with the assertion that this vicious circle - "engender continuous infighting and civil wars" (366-7 due the motivation of special interest groups (the iron law of oligarchy) to snatch control of extractive institutions.

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.

http://www.pambazuka.org/en/category/books/71574

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.

http://www.iig.ox.ac.uk/output/articles/OxREP/iiG-OxREP-Collier.pdf

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.

Chapter 10 - The Diffusion of Prosperity

It seems intuitive that inclusive institutions would serve to promote the exchange and the diffusion of technology, ideas, activity, and wealth. Acemoglu and Robinson see the roots of the initial divergence in world progress in the industrial revolution and the degree to which institutions in various parts of the world incentivized industrialization.

Interestingly, in a recent blog post, Dani Rodik ( http://www.project-syndicate.org/commentary/no-more-growth-miracles-by-dani-rodrik ) argues that the process of diffusion identified in Why Nations Fail is decelerating -

"Successful long-term development therefore requires a two-pronged push. It requires an industrialization drive, accompanied by the steady accumulation of human capital and institutional capabilities to sustain services-driven growth once industrialization reaches its limits. Without the industrialization drive, economic takeoff becomes quite difficult. Without sustained investments in human capital and institution-building, growth is condemned to peter out.

But this time-tested recipe has become a lot less effective these days, owing to changes in manufacturing technologies and the global context. First, technological advances have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-quality end of the spectrum. As a result, the capacity of manufacturing to absorb labor has become much more limited. It will be impossible for the next generation of industrializing countries to move 25% or more of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China in particular, has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. Although Chinese labor is becoming more expensive, China remains a formidable competitor for any country contemplating entry into manufactures.

Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in the past. Policymakers in the industrial core looked the other way as rapidly growing East Asian countries acquired Western technologies and industrial capabilities through unorthodox policies such as subsidies, local content requirements, reverse engineering, and currency undervaluation. Core countries also kept their domestic markets open, allowing East Asian countries to export freely the manufactured products that resulted."

I found chapter 10 to be a key one in book as the identification of diffusion as a key process in development is supported by comparison and contrast (Japan v China). I do wonder, however, at the significance attributed to colonization and the nature of the society colonized (see pages 299-300) by the authors and look forward to our discussion of this chapter and examination of diffusion.

Paul Collier Review - Why Nations Fail.

So, if inclusive institutions are necessary, how do they come about? Again, Acemoglu and Robinson are radical. They argue that there is no natural process whereby rising prosperity in an autocracy evolves into inclusion. Rather, it is only in the interest of the elite to cede power to inclusive institutions if confronted by something even worse, namely the prospect of revolution. The foundations of prosperity are political struggle against privilege.

A thesis can be summarised, albeit crudely, in a short review. Yet the main strength of this book is beyond the power of summary: it is packed, from beginning to end, with historical vignettes that are both erudite and fascinating. As Jared Diamond says on the cover: "It will make you a spellbinder at parties." But it will also make you think.

http://www.guardian.co.uk/books/2012/mar/11/why-nations-fail-acemoglu-robinson-review

Chapter 9 - Reversing Development

This chapter was useful for me by introducing me to the work of nobel laureate Arthur Lewis and the "dual economy" paradigm. (258) Acemoglu and Robinson argue that the dual economy is an artifact of colonization and the process by which extractive institutions are imposed.

"World inequality today exists because during the nineteenth and twentieth centuries some countries were able to take advantage of the Industrial Revolution and the technologies and methods of organizations that it brought while others were unable to do so." (271)

The authors argue that the "underdeveloped" societies were "unable" to participate in rising income and wealth due to growth as a result of extractive institutions (slavery is the example explored in this chapter) imposed by European colonization.

I wonder to what extent this argument is a complete explanation of the rising world inequality.

Chapter 8 - Not on our turf

This chapter concludes, in a section titled, Enduring Backwardness, with a further description of the role that extractive institutions play in incentivizing elites to reject emerging technologies, the process toward modernization and industrialization. A continuum of political institutions from absolutism to failed states (Somalia, Afganistan, etc) can lead to firmly entrenched extractive institutions.

I look forward to our discussion of a comment at the end of this chapter:

"Inclusive political and economic institutions necessitate some degree of political centralization . . . ." (243)

I wonder if this assertion penetrates fully to the mechanism that is a necessary condition for inclusiveness. As I recall from North's book Violence and the Social Order the institution of the state was examined at its various levels or manifestations - (subnational)local, state or province and national. Perhaps it is, as North seems to argue, the depth and breadth of this federalism that is key to inclusiveness.

Chapter 7 - The Turning Point

This chapter again seems to channel Schumpeter's creative destruction - "Conflict over institutiosn and the distribution of resources has been pervasive throughout history."(184)

The authors go on to examine England, the Glorious Revolution and the Industrial Revolution as an illustration of a "turning point" from extractive to inclusive institutions. I think of Joel Moykr's work on technology and the industrial evolution and wonder to what extent the analysis in this chapter holds up. That is, the answer to Why England? sees to remain an open question and the institutional response presented in this chapter is one of a number of alternatives rather than the conclusion.

In any event, the overview in this chapter does connect political change and technological change in an interesting manner.

Chapter 6 - Drifting Apart

This key chapter analyzes the nature of institutional drift, critical junctures and the evolution toward or away from inclusive institutions. The take aways from this chapter, and the book are, I think:

Most societies have historically been and continue to be extractive in nature

Inclusiveness is fragile and easily can be reversed

Small institutional differences and critical junctures are ephemeral (157)

The use of example in this chapter (Venice, Rome and England) illustrate these three points and, I found provocative the use of Virtues and Vices as an organizing paradigm when examining the evolution of Rome. This terminology echoed Smith's Theory of Moral Sentiments and the development in this book of the complex nature of human character and behavior. The role of the "moral sense" and the dimly understood manner in which this sense develops seems to be a key variable in the movement toward inclusiveness.

Chapter 5 - I've seen the future and it works

This chapter echoes Schumpeter's Creative Destruction and makes, for me, a valuable distinction between growth under extractive institutions v growth under inclusive institutions.

I look forward to our discussion of an assertion made by the authors early in the chapter:

". . .sustained growth requires technological change,"(124)

While this is an intutively attractive cause/effect relation, I wonder to what extent has it been reflected in the literature and in empirical work. That is, the Solow model of growth, Romer's growth model and other models assign differing weights to the role of technology in the complex process of change. So, I wonder to what extent this assertion is useful.

That said, the discussion of growth under extractive institutions is very helpful for understanding the hurdles faced when a society facing transition. There are a number of players in extractive societies that do in fact earn rents and, in the short run, provide some level of growth to the entire society. "Extractive institutions are so common in history because they have a powerful logic: they can generate some limited prosperity while at the same time distributing it into the hands of a small elite. For this growth to happen, there must be political centralization."(149)

So, here is a dilemna, previous the authors argue that some degree of political centralization is necessary for the development of inclusive institutions. But here, in chapter 5, they recognize that political centralization is necessary for extractive institutions to emerge and persist. Is it a matter of degree? That is, how does the "proper" level of centralization emerge and persist?

On page 131 the authors further assert: "It [growth] had been done by government command, which could solve some basic economic problems."

I have an issue with the idea that any systme can "solve" problems. Economic systems set up incentives that motivate activity that can address problems, create problems and provide alternatives to existing responses to problems.

That said, I would have liked to know which economic problems are solved by command economic systems.

Chapter 4 - Small Differences and Critical Junctures

In a chapter that argues for the importance of path dependence through an examinination of history and, what the authors call, "small" differences, it is an odd choice to begin with an analysis of the Black Plague - a far from small difference.

However, the argument seems to be that, however small the distinctions may be between societies, there are moments in history - critical junctures - that offer the opportunity for a change in the path of development. That is, if I am reading the argument correctly.

The analysis in this chapter is provocative and I found myself reflecting upon contemporary debates about the direction of institutional change. After comparing and contrasting various European approaches to colonization, we read:

"These distinctions, which initially appeared small, started to matter a great deal . . ." (page 105)

This is, I think, an important point, if one not fully supported by evidence. That is, the junctures that offer what appear to be 2 small or insignificant differences in institutional development, way well have very large consequences. Today, the debate over regulation of sugar, fat or other food properties may seem small to some (ok, this may not be the best example) may end up with critical impact on development in the foreseeable future. Perhaps a better example is the current debate over women's rights.

The authors introduce the idea of institutional drift(108-9) as mechanism that leads to differences in institutional evolution and thus outcome. I am anxious to hear how my colleagues react to the analysis and argument for this mechanism.

"The richly divergent patterns of economic development around the world hinge on the interplay of critical junctures and institutional drift. Existing political and economic institutions - sometimes shaped by a long process of institutional drift and sometimes resulting from divergent responses to prior critical junctures-create the anvil upon which future change will be forged."(109-110)

This mechanism seems to me to be Hayekian and thus attractive to my understanding of the process of change. But it is a nagging concern that the parallel between genetic drift (which I believe is a generally accepted process in evolutionary biology) and institutional drift which is asserted by the authors is not . . . fully developed and perhaps not valid? That is, I also recall that Hayek warned about attempting to make parallels from natural world process (which he called simple?) to social processes (which he called complex?)

In simple terms, is institutional drift a valid/useful mechanism to apply to understanding the process of economic change?

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

http://www.econlib.org/library/Smith/smWN20.html#B.V, Ch.1, Of the Expences of the Sovereign or Commonwealth

V.1.69

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.

V.1.70

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."

http://thinkmarkets.wordpress.com/2012/07/18/spntaneous-or-planned-a-sharp-dichotomy-or-a-gradient/

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.

Chapter 2 - Theories that Don't Work

Three theories of development are offered, described and rejected in this chapter as valid explanations for world income/wealth inequality.

Geography Hypothesis

Culture Hypothesis

Ignorance Hypothesis

The first considers differing climate and factor endowments with particular attention to the view of Jared Diamond regarding initial plant and animal endowments.

The second is one that considers culture as a set of social norms and conventions and as such would seem to be a part of institutional analysis of change. Culture as manifest in religion and nationalism are rejected as useful explanations for change.

The final theory is considered and presented as the most dangerous of explanations. If only the "right" leader or elites can control society, then the ignorance of proper development policy can be overcome.

After reviewing these theories the chapter concludes with a call for economics to "understand how different types of policies and social arrangements affect economic incentives and behavior." (69)

Chapter 1 - Why Nations Fail

In this first chapter - So Far and Yet So Different the following assertion made on page 42 may be worthy of discussion at our ASET book club next month:

"The United States today is also far richer than . . . [third world countries] . . . because of the way its institutions, both economic and political, shape the incentives of businesses, individuals and politicians."

So far, so good. This institutional analysis is one that I suspect we might all agree on. But the authors go farther and, I would expect that the following argumentation will generate some discussion and disagreement. I hope that this discussion is analytic and based upon our previous text discussions rather than opinionated and based upon a lack of any evidence. The Liberty Fund discussion model would be very helpful here.

"Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively. Economic institutions shape economic incentives; the incentives to become educated, to save and invest, to innovate and adopt new technologies and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works."

I wonder to what extent the authors of confused correlation with causality here. That is, because a set of economic and political institutions appear together does not in any way establish causality. In a previous book, Acemoglu and Robinson try to make that argument ( Economic Origins of Dictatorship and Democracy )

So, over on page 43 we read: ". . . it is politics and political institutions that determine what economic institutions a country has."

I look forward to the assessment of my fellow book clubbers on how well this assertion is supported in the book.

Co author of Why Nations Fail

Why Nations Fail - equality

This is an important overview of the meaning of equality v inequality in the context of the argument of Why Nations Fail. This very short video by the author is very important as he incorporates examples from the US today and places these in historical context. Click below for the entire (excellent) lecture. http://forum-network.org/lecture/why-nations-fail-origins-power-prosperity-and-poverty

Why Nations Fail - extractive political institutions

Extractive v open access political institutions and a nice overview by the author.

4 minute overview of Why Nations Fail by the author

Preface - Why Nations Fail

Acemoglu and Robinson end the preface by outlining one of their goals - to better understand the "transition" from, to use North's framework - natural state societies to open access societies. They go argue that: "Fundamentally, it is a political transformation of this sort that is required for a poor society to become rich." (page 5). Bold assertion - I wonder what my fellow book clubbers make of this assertion and how they might disagree. I can think of societies that maintained a closed political order with rule of elite and still engaged in a transition - Singapore? In an important book editted by Benjamin Powell - Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development a Schumpeterian alternative to transition is offered through the emphasis on entrepreneurship and the innovative work of individual agents stimulate the transition. It consists of three main parts. The first part deals with institutions and entrepreneurship. The second part is about the importance of constrained entrepreneurship on economic development in Africa, Latin America, Scandinavia, and the transitional economies of the former USSR. The final part stresses the benefit of the reforms underlying the growth spurt in entrepreneurship in China and the Republic of Ireland, and the difficulties that challenge entrepreneurship in India, New Zealand, and Botswana. Now, we might well quibble about chicken and egg - are the political institutions necessary for this creative destruction? One of the essays in Powell's book by William Baumol, a short version of his book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (note - this would be a great book club selection). So, rather than political institutions, the seed of transition from natural state societies to open access societies has multiple and complex stimuli. I suppose that the question for better understanding the transition (which North acknowledges is Violence and the Social Orders and his earlier book Understanding the Process of Economic Changes) is very difficulty given the complexity of the process and the challenge or pretense of understanding both the beginning point for society as well as the path of change which is, arguably unique to each society. "Baumol and his co authors have identified four models of capitalist economy. The first is capitalism guided by the state, otherwise known as mercantilist capitalism. This model has been favored in Asian countries, where the state controls the banks and other financial institutions. The states underwrite low wage export oriented businesses to produce goods primarily for the world market. The problem with this kind of pratice is that governments tend to overinvest in favored industries and underinvest in those needed for their domestic use. States are also notoriously slow in responding to the demands of a changing marketplace. Secondly, there is oligarchic capitalism. This is when a wealthy elite uses the state as its personal fiefdom. This was the case of Russia shortly after the fall of the Soviet Union. However, the oligarchs are now in retreat, Putin is moving the country toward state-guided capitalism. Both of these models can work for a period of time. Russia, which is blessed with large amounts of natural resources, can probably get away with it for a longer period of time. But this is not enough to sustain long-term growth and prosperity. Thirdly, there is big-firm capitalism. This was the model used by Japan and Europe during the postwar era. Big firms can produce solid growth for many years, but as they mature they tend to settle for the status quo, rarely do they produce innovation or breakthrough technologies that foster dynamic growth. Lastly, there is entrpreneurial capitalism, clearly the authors' favorite. William Baumol, the primary author, is arguably the doyen of innovation economists. The great breakthroughs in technology are usually brought to market by individuals or small firms. This type of organization - free of the constraints of big firms - is better at creating new markets and opportunities. Most countries practice a combination of the above models. According to the authors, the US is so successful because it is a blend of big firm and entrepreneurial capitalism, arguably the optimal combinaton."

The Next Convergence: Introduction

The Next Convergence: The Future of Economic Growth in a Multispeed World

Spence writes: "This book is about the 100-plus years that began in 1945 and will run to the middle of the twenty-first century."(4). He goes on to call the book a midterm report card (interesting) and when reading the introduction I was struck by the quotes that begin the book.

The first, Hayekean in nature, resonates with me and I think reflects an essential humility that the social scientist and is audience should consider when considering these topics of critical importance.

I am torn in my reaction to the second quote. On one hand, the ability to reflect and revise based upon new information, data, values and evolving belief seems also a commendable perspective. Emergent orders, it seems, do reflect the characteristic of adaptation which is at the heart of change. So I wonder, why am I disquieted by this notion?

The Samuelson quote is provocative and I hope our reading and discussion of Spence will give me a depth of critical analysis to consider what reaction is appropriate.

Back to the introduction and a set of really profound questions on page 5

Can we learn over time to manage something as complex as the emerging and evolving global economy, with its rising interdependencies and complexities?

Is the management and governance of the global economy that was in place for the last quarter century going to work in the future, or is it going to need fundamental change?

Hayek - The Pretense of Knowledge

The foundations for Acemoglu and Robinson's book - Why Nations Fail include: Spontaneous order Emergent and evolutionary processes Path Dependence The role of informal institutions The role of formal institutions Moreover, the book also seems to be informed by a humility and recognition of the limits of the economic way of thinking founded in the Hayekian view of the: Pretense of Knowledge In his Nobel lecture, Hayek reminds the audience: "This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes." Acemoglu and Robinson make every effort to avoid the fallacy that seems to bedevil social scientists in there exploration of power, prosperity and poverty. This subtitle, echoing Smith, outlines the argument that political institutions and the informal norms that shape these institutions are a useful place to begin a quest to understand the outcomes at macroeconomic level - prosperity (Nogales, Arizona) v poverty (Nogales, Sonora). Here in Arizona, we are as familiar with this natural experiment and in Chapter 1, Acemoglu illustrates Spontaneous order, Emergent and evolutionary processes, Path Dependence, The role of informal institutions and The role of formal institutions and, how over time, outcomes can be radically different for a beginning homogenous group separated by opposing institutions. A note, this is a work attempting to understand reality, not a theoritical polemic. Therefore, while one might prefer a society of anarchism or central control and obviously Nogales (or Korea) do not illustrate any theoritical preference.

Milton Friedman on institutions

It seems to me that Acemoglu and Robinson are consciously channeling Milton Friedman's view on the relation between economic and political institutions. From Capitalism and Freedom - Chapter 1: Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.

https://www.mtholyoke.edu/acad/intrel/ipe/friedman.htm

This does not establish causality - which way does the influence flow - from economic institutionalized freedom to political or vice versa?

But, in a very important assertion in the same chapter:

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on.

So, regardless of the causality, Acemoglu and Robinson may well be on to something in their exploration of the relationship between economic and political institutions.

Friedman's well founded advocacy of free markets supported by a political framework designed to support individualism and liberty follows the above support of limited government:

What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color-the majority wants and then, if he is in the minority, submit.

At our July bookclub a member of our group expressed both admiration and appreciation for the manner in which Friedman articulates and advocates for individualism, liberty and free market structures.

In the video below, Friedman clarifies the relationship between economic and political freedom.

He makes the important observation that the relationship is a complex one and that there are any number of possible outcomes from the interaction between economic and political institutions.

A younger Friedman discusses the nature of economic systems and this video references Leonard Reed's famous I, Pencil essay.

Engaged analysis and the role of the educator

Recently I was invited by parents at my children's middle school to join a grassroots parent group to discuss education in general and our own school district in particular.

My views on state control of most institutions are well known, so I was surprised by this invitation.  I have high regard and a great deal of respect for the parent who invited me, so I have attended.

What as most impressed me as been the effort and civility of the parents to digest my point of view.  The group is uniformily in support of public education and on Dan Klein's survey of views toward state involvement would be score close to my colleagues in higher education - particularly those in sociology, the humanities, history or political science.

That said, they repectfully allow me to present my point of view and question my point of view civilly and, in a manner that seems to me to be one of honestly trying to understand my analysis and rationale.

This model reinforces to me the importance of engaged and civil discussion and, more importantly, the need to engage with ideas that confront or challenge those that we hold closely.  It is through this engagement with opposing ideas that beneficial exchange can potentially take place.  This exchange of intellectual capital is a challenge as ideas and the resulting ideology take on the elements of belief.  As belief hards into faith there seems to be a tendency to develop "grid lock" as opposing beliefs battle rather than engage.

Opportunities to develop a higher order level of engagement have been present in the past and, I believe continue to exist.  As a recent book club our group recalled Milton Friedman and his participation in the last century on the Phil Donahue program and how this civil engagement can take place.

I am struck by the willingness of Donahue, an acknowledged modern liberal and interventionist, was willing to provide a stage for an alternative and opposing point of view. Friedman used that stage with respect and, while he did personalize his analysis, he did so with grace and a sense of humor. Most importantly, his analysis engaged with Donahue's question and point of view in a meaningful way, rather than merely judging and dismissing this view. For this, and many other reasons, I consider Friedman and exemplar of a public intellectual and educator working to constructively move an important debate forward. Both he and Hayek argued in a manner that was open, accessible and positive and, consistently avoided the negative, pejorative that all too often characterizes public discourse. The ASET book club is an excellent forum for exploring a wide variety of views and ideas and I hope continues to do so in a positive manner. It is difficulty to restrain from ad hominium and other types of negative reactions when dealing with opposing views, as educators this skill is one we hope to develop in ourselves and our students.