Saturday, March 20, 2010
Governments are often barriers to the functioning of markets, but if you really want markets to function you need governments to support them—with law and order, regulation, and public services.
“We have done a lot of empirical work that shows a very clear causal link between inclusive economic institutions—those that encourage participation by a broad cross section of society, enforce property rights, prevent expropriation—and economic growth,” Acemoglu asserts. “The link to growth from democratic political institutions is not as clear.”
The textbook contends there was no sustained growth before 1800, first, because no society before that date had invested in human capital, allowed new firms to bring new technology, and generally unleashed the powers of creative destruction; and second, because all societies before 1800 lived under authoritarian political regimes. And economic takeoff started in western Europe because international trade rose after the discovery of the New World and the opening of new sea routes. The trade uptick boosted commercial activity and vested more economic and political power in a new group of merchants, traders, and industrialists, who then began to operate independently from European monarchies.
There will be three obstacles to growth under authoritarian regimes: there are always incentives for such regimes to be even more authoritarian; these regimes tend to use their power to halt Schumpeterian creative destruction, which is key to sustaining growth; and there is always infighting for control of authoritarian regimes, which causes instability and uncertainty.
“Dysfunctional societies degenerate into failed states,” asserts Acemoglu, “but we can do something about it. We can build states with infrastructure and law and order in which people are confident and comfortable going into business and relying on public services, but there is no political will to do that. You would not need armies to implement such a scheme—just a functioning bureaucracy to lay down the institutional foundations of markets.”