Chapter 22 Flashcards
How are the proximate causes of prosperity different from the fundemental causes of prosperity?
- Proximate causes of prosperity are high levels of factors such as human capital, physical capital, and technology that results in a high level of real GDP per capita.
- Fundemental causes of prosperity are factors that are the root of the differences in the proximate causes of prosperty.
What does the geography hypothesis state?
-The geography hypothesis claims that differences in geography, climate and ecology ultimately determine the large differences in prosperity across the world.
- highy unfavorable circumstances beyond control
- unlikely chance to accumulate or effectively use factors of production
- climate impacts work effort and vigor, technology, diseases
- permanently diasadvantaged countries
What does the culture hypothesis state?
-The culture hypothesis states that different values and cultural beliefs fundamentally cause the differences in prosperity around the world. Culture is a key determinant of values, beliefs and preferences.
- different societies respond differently to incentives
- (shared experiences, religious teachings, strength of family ties, unspoken social norms)
- ex: protestant beliefs lead to greater work effort (Max Weber)
What is meant by “institution”? What are its 3 important elements?
-Institutions are the formal and informal rules governing the organization of a society, including its laws and regulations.
3 important elements that define institutions:
1) they are determined by indivduals as members of society
-determined by human-made factors
-based on choices on how to organise society
2) they place constraints on behavior
-stealing, opening a business (policies, regulations, laws)
3) They shape behavior by determining incentives
-formal (banning activities) and infromal (through social norms) contraints shape human interaction
and affect intencives
How does the institution hypothesis exolain the differences in prosperity among nations? What is the reasoning behind?
-The institution hypothesis claims that differences in institutions, that is in the way societies have organized themselves and shaped incentives of individuals and businesses, are the root of the differences in prosperity across the world.
1) different societies have different institutions
2) different institutions create different types of incentives
3) the incentives help to determine the degree to whoch societies accumulate the factors of production and adopt new technologies
-providing incentives for investment in physical K vs. outlawing private property and banning markets
What are private property rights? What does it mean to say that private property rights are well enforced in an economy? How does the enforcment of these rights foster economic development?
-Private property rights mean that individuals can own businesses and assets and their ownership is secure.
In a well enforced economy:
- business contracts are enforced by courts - personel income (taxes paid) - property well protected (law and order) - individuals can borrow money
It fosters economy through markets, where individuals can deploy their skills or use their income to purcahse goods that they need and desire.
What does economic institutions include? How does inclusive econimic institutiosn differ from extractive economic institutions?
Economic institutions include:
- protection of property rights and ownership
- impartiality of justice
- financial arrangements (between savers and borowers)
- regulations concerning businesses and occupations
- Inclusive economic institutions protect private property, uphold land and order, allow and enforce private contracts, and allow free entry into new lines of businesses and occupations. Distributes politial power more equally.
1) provde secure property rights
2) establish a judicial system that allows and facilitates private contracting and financial transactions
3) maintain relatively open and free entry into different businesses and occupations
-Extractive economic institutions do not protect private property rights, do not uphold contracts and interfere with the workings of markets. They also erect significant entry barriers into businesses and occupations. (extract resources from the rest of the economy). Distributes politcal power to elite politicians.
People have little incentives to work, as their work might be taken away. Discouraged investors.
1) insecure property rights
2) partial judicial system
3) entry barriers that protect businesses and incomes of a small segment of society at the expense of the rest
What does the return to entrepreneurship curve show? What is meant by the opprotunity cot of entrepreneurship? What is the effect of extractive economic institutions?
- number of entrepreneurs with at least return (y axis)
- it is obtained by ranking potential entrepreneurs from higher to lower return to entrepreneuship.
-the opportunity cost indicated the value to a potential entrepreneur of her best alternative activty
-extractive economic institutions shift the return to entrepreneurship to the left
-weak propery rights prevent entrepreneurs from capturing their full returns/lack of legal backup=no
reliable contracts
- They also shift the opportunity cost upward
- entry barriers=more expensive entry
- individuals entering the underground economy
- uncertainty
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How does creative destruction and political destruction force many rulers to ban the adoption of new technologies and bolck the process of eco. development?
- Creative destruction refers to the process by which new technologies replace old ones, new businesses replace established companies, and new skills make oldones rebundant.
- new technology creates economic losers => opposed individuals - Political creative destruction refers to the process by which economic growth destabilizes existing regimes and reduces the political power of rulers
- new actors, decisions falling outside the control of existing rulers => politicians fear losing their privileged positions
The notion of politcal creative destruction predicts that economic growth destabilizes existing regimes and reduces political power.
Are foreign aids useful?
- not enough to buy PK or education
- corruption
- if root of poverty is the extractive economic institutions, the foreign aid will not fix the fundemental causes of poverty (institution hypothesis)
Why prosperous countries 500 years ago experienced reversal of fortune?
-the establishment in those previously prosperous places of extractive institutions by Europen colonialistst could explain why
How does property right foster economic development?
-by providing incentives to start a business
