Economic Growth and Institutions: A Historical Perspective

Posted on Apr 30, 2024 in Social sciences

Chapter 1: Economic Growth in the Long Run

Key Concepts

  1. Modern economic growth is a relatively recent phenomenon, contrasting sharply with the stagnant growth of the pre-1800s Malthusian era.
  2. Historical growth spurts, such as those experienced by the Roman Empire and Song China, were often temporary and followed by reversals.
  3. Income divergence between nations can be explained by factors like geography, culture (e.g., Weber’s Protestant work ethic), and institutions (as explored in Diamond’s “Guns, Germs, and Steel”).

Chapter 2: Population and Economic Growth

Quality of Life Comparisons

  • Historical comparisons of quality of life involve examining factors like height, mobility, and diet.
  • The Neolithic Revolution, while a significant advancement, also brought challenges such as dietary changes and the spread of diseases.
  • Urbanization often came with a “penalty” in terms of health and life expectancy, particularly evident in infant mortality rates.

Malthusian and Post-Malthusian Dynamics

  • In the Malthusian world, population growth was seen as a key driver of progress, with checks on population including birth rates (preventive checks) and death rates (positive checks).
  • The Malthusian model has been criticized for its assumptions, such as the constancy of technology and the focus on a single economic sector.
  • The post-Malthusian world is characterized by the demographic transition, where declining mortality rates are followed by declining fertility rates.

Chapter 3: The Great Divergence

China and Europe: A Comparative Analysis

  1. Despite having many favorable conditions for growth (e.g., emphasis on education, social mobility, taxation), China fell behind Europe in economic development.
  2. Wittfogel’s “Oriental Despotism” theory attributed China’s lag to a strong, centralized state that stifled innovation and led to corruption. However, historical evidence suggests a more nuanced picture, with a fiscally weak state and a degree of social mobility.
  3. Pomeranz’s “Great Divergence” argues that Europe’s advantage stemmed from its access to coal and the New World, which allowed it to escape the Malthusian trap.
  4. The Industrial Revolution is viewed by some as a structural break, while others see it as a more gradual process.

Chapter 4: Democracy and Growth

The Glorious Revolution and Its Aftermath

  1. The Glorious Revolution of 1688 in England marked a shift towards a more constrained monarchy, with limitations on power imposed by institutions like Parliament and the Magna Carta.
  2. The period between the Glorious Revolution and the Industrial Revolution saw significant improvements in transportation, agriculture, and finance.
  3. North and Weingast argue that secure property rights and representative democracy are crucial for economic growth, as they encourage investment and reduce the cost of capital.
  4. Critiques of this view point to the role of demand for capital, the choice of proxy variables, and the distinction between secure and adaptable property rights.

Chapter 5: Dictatorships and Development

The Role of the State

  1. States hold a monopoly on the legitimate use of violence, and the extent to which this power is constrained or unconstrained affects property rights and economic outcomes.
  2. Dictatorships are not always detrimental to development, as they can provide stability and enforce contracts.
  3. Mancur Olson’s model suggests that roving bandits have no incentive to invest in the long-term prosperity of a society, while stationary bandits (autocrats) may do so to maximize tax revenue. Democracies, in theory, balance tax revenue with social welfare.
  4. Challenges to democratic development include the free-rider problem associated with public goods and historical conditions such as resource competition.
  5. Democracies are not without their flaws, including issues of taxation, corruption, and the complexities of causality in the relationship between democracy and growth.

Chapter 6: Formal and Informal Institutions

The Tragedy of the Commons and Private Order Governance

  1. The tragedy of the commons refers to the depletion of shared resources due to the lack of well-defined property rights and enforcement mechanisms.
  2. The case study of Trentino in Italy illustrates how communities can establish private order governance systems, such as charters and informal enforcement mechanisms, to manage common resources effectively.
  3. The effectiveness of informal governance depends on factors like community size, remoteness, and the nature of the resources being managed.
  4. The prisoner’s dilemma model highlights the challenges of cooperation in situations where individual incentives may conflict with collective interests.

Chapter 7: Order without Government

Case Studies: The Indian Caste System and Maghribi Traders

  1. The Indian caste system, despite its rigid social hierarchy, facilitated economic exchange by enforcing contracts, promoting occupational specialization, and providing a framework for trust and cooperation.
  2. Maghribi traders in the pre-modern world developed informal institutions based on social identity and reputation to overcome the principal-agent problem and facilitate trade in the absence of reliable legal systems.
  3. These examples demonstrate that order and economic activity can exist without formal government structures, but often require strict rules and a strong sense of collectivism.

Chapter 8: Size of Countries and Historical Trends

The Rise and Fall of Feudalism

  1. Feudalism emerged as a response to the need for security in a fragmented world, with power decentralized among local lords.
  2. The growth of market economies, the rise of merchants, and advancements in military technology contributed to the decline of feudalism and the rise of centralized states.

The Role of Warfare and Technological Change

  • Bean (1973) argues that technological changes in warfare have driven the trend towards larger and fewer countries, as states with greater resources and military capabilities are better equipped to survive.