Institutions Flashcards
Acemoglu
Three theories
1. ‘Political Coase Theorem’ - when property rights are well defined and there are no transaction costs, economic agents will contract to achieve an efficient outcome irrespective of who has the property rights on particular assets; the best outcomes arise irrespective of who has political power. Hence policy and institutional differences are not the major determinant of differences in economic outcomes.
2. Theories of belief differences - modified PCT. Societies may choose different policies because they disagree on what is good for society. Sufficient uncertainty means well-meaning actors differ on ideas about what is right for the people. Societies that are right ex post are the ones that prosper
3. Theories of social conflict - societies choose different policies, which are sometimes bad because decisions are made by powerful politicians and social groups interested in maximising their own payoffs. They do not care about aggregate output or social welfare.
Acemoglu: theories of social conflict are most accurate. But why does PCT not happen? Why do powerful groups not make a deal with the rest of society to choose policies that maximise social welfare then redistribute gains to themselves? Due to inherent commitment problem:
a) parties hold political power
b) they cannot make commitments to bind their future actions
c) there is no outside agency with the coercive capacity to enforce these commitments
d) contracts are enforced by the state, and groups controlling the state cannot commit not to use their power to renege on their promises
Rent-seeking elites create bad institutions which are good for them but not others. Based on Y = F (X, P), economic growth is a function of geography and policies. P explains variations of Y, even for places with the same geography eg. South vs North Korea.
1. Policies have winners and losers, so difficult to determine ‘optimal policy’ eg. for tax rates.
2. Commitment problems, eg. an autocrat who wants to make their country rich will have to support innovation; but innovation will create centres of power that the autocrat does not have control over. Ex post these companies will renege on their promises due to time inconsistency and lack of external agents to enforce contracts. Rent-seeking groups can erode technological adoption.
Hence the distribution of political power determines institutions - institutions determine incentives - incentives lead to economic outcomes
Acemoglu and Robinson (institutional change)
Link institutional change to political equilibrium - the ‘critical juncture’ which leads from one institutional framework to the other
Eg. Black Death - changed the labour to land ratio and the relative power of groups - labour had more power compared to landowners because there were fewer workers for each bit of land. The marginal product of labour is raised, which could either 1) raise the bargaining power of the workers so there is more labour freedom; or 2) there is more to be gained from this labour and eg. enslaving the entire population. The latter mechanism won out, so the Black Death led to increased amounts of labour coercion instead of serfs becoming relatively freer
North and Weingast
Importance of institutions and credible commitment. In the UK after the Glorious Revolution, institutional changes were successful as they were based on the goals of the winners - secure property rights, protection of their wealth, and the elimination of confiscatory government. This led to successful financial markets - not only did the government become financially solvent, but it in just nine years, government borrowing increased by more than ten times. The UK being able to solve this commitment problem was historically contingent, dependent on the shocks, financial conditions, or the fact that they had a standing army. The crucial political factor underpinning economic growth is the degree to which regimes or the sovereign is bound by rules governing economic exchange. Concludes that the institutional changes of the Glorious Revolution permitted the drive towards British hegemony and dominance; Britain could not have beaten France without its financial revolution, and the funds made available by the growth in debt in 1688-97 were a necessary condition for England’s success in multiple wars. Hence importance of secure contracting
Acemoglu and Robinson (extractive growth)
Analyse stationary vs roving bandits (Olson’s theory), arguing that even if you have rent-seeking elites, such rent-seeking elites have an incentive to provide at least some basic level of property rights if they are invested in society so they can recoup payoff from these institutions. Hence autocratic regimes can sometimes be good for economic growth
Olson
Observes that autocracies rarely have good economic performance for more than a generation. The conditions needed for a lasting democracy are the same necessary for the security of property and contract rights that generate economic growth. When there is a sufficiently short time horizon, dictators will confiscate property, repeal contracts and ignore long-term economic consequences. Hence, historical evidence shows that capital flees from countries with continuing dictatorships to stable democracies. Democracies prevent significant extraction of surplus by leaders.
Effects of despotic and limited government. Absolutist princes are concerned primarily with the tax revenues that their domains yield and cripple economies. VS limited governments are more concerned with private economic prosperity: either they are led by merchant oligarchs who have a stronger interest in maintaining and expanding the flow of commerce than in the power of the state and the splendor of the court, or they give a veto to parliaments or estates-general that feel the weight of heavy taxes. Hence low tax rates to minimize their disruptive effect on the economy creating bias toward promoting economic growth.
De Long and Shleifer
Absolutist governments are associated with low economic growth, as measured by city growth and urbanisation, during 800 years prior to the Industrial Revolution, because of unfavourable tax policies. They examine parasite cities (extraction) vs productive cities (production), arguing that European cities were largely productive under limited governance and merchants, which are good for growth. ‘The typical post-Classical European city was primarily a centre of commerce, and not bureaucracy, administration or landlord consumption’.
North definition of institutions
Institutions as ‘humanly devised constraints that structure political, economic, and social interaction’, which consist of informal constraints, such as taboos and customs, and formal rules, such as constitutions, laws, and property rights to ‘create order and reduce uncertainty in exchange’
North
Institutions and the effectiveness of enforcement (together with the technology employed) determine the cost of transacting, which in turn determine the amount of investment and economic growth. Countries with better ‘institutions’, more secure property rights, and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve a greater level of income. Argues institutions
1) increase the mobility of capital,
2) lower information costs,
3) spread risk,
4) solves agency problems and contract negotiation,
5) provide economies of scale
Argues that good institutions might not be chosen by those with political power since their revenues may not be maximised (similar to Acemoglu, who argues those with political power to block economic change because there is no credible commitment to compensate the powerful once the changes occur
Acemoglu and Robinson (political losers)
‘Political losers’ thesis - the effect of economic change on political power determined whether political elites decided to take up technology for the Industrial Revolution. Crucially, this only applies for agents who have political power but are afraid of losing it. Hence Russia and Austria-Hungary, whose powers were threatened by technology, did not industrialise, compared to countries like Britain and Germany which could maintain their political power. The landed elites in AH and Russia had more to lose because they had an almost unreformed feudal system. We should hence look to the nature of political institutions and determinants of distribution of political power. Concludes that incumbent monopolists are more likely to block new technology when:
1. It is more likely to stay in power when it blocks intro of new tech
2. When political rents from staying in power are greater
3. When monopoly profits from blocking are greater
4. When tax revenue they can collect are smaller
Acemoglu et al
Extractive colonial institutions led to poor economic growth in places where Europeans could not settle due to high settler mortality rates in disease-prone environments. European colonisers implemented two broad types of institutions in the colonised countries - either having ‘extractive states’, such as the Belgian colonisation of Congo, with little protection of private property and the aim to transfer as much of the resources of the colony to the coloniser; or having ‘neo-Europes’ (Crosby) such as Australia and the US, where they tried to replicate European institutions with strong emphasis on private property.
Extractive states had 1. slave labour, 2. natural resources, and 3. high taxes. Effects:
1) detrimental for economic development
2) no protection for private property
3) no checks and balances against government appropriation
4) no investment in human capital
Fouquet and Broadberry
Growth was highly variable before the Industrial Revolution, which is not consistent with the theory that Europe had already pulled ahead before the Industrial Revolution. There was a lot of divergence and convergence in pre-modern economic growth
Blaydes and Chaney
Why did the Glorious Revolution occur in England instead of in Egypt? Christian kings became increasingly long-lived compared to Muslim sultans, with forms of executive constraint under feudal institutions leading to increased political stability. While feudal institutions served as the basis for military recruitment by European monarchs, Muslim sultans relied on mamlukism, or the use of military slaves imported from non-Muslim lands. Dependence on mamluk armies limited the bargaining strength of local notables in relation to the sultan, hindering the development of a productively adversarial relationship between ruler and local elites. VS in England, the military had an independent power base
Feudal vs Muslim institutions
1. European monarchs lacked the financial resources to outsource military needs to foreign mercenaries after the fall of Rome, so landed nobility emerged as the warrior class. When monarchical abuses occurred, barons imposed executive constraint, forming the basis for secure property rights
2. VS mamluks - local elites did not serve as the source of military recruitment so they were poorly positioned to impose executive constraints
3. Armed local elites in Europe were able to extract a better ‘soft contract’ from their monarch, whereas in the Islamic world they were more likely to overthrow the monarch
HENCE the Muslim world fell behind because of the inability of Muslim sultans to be credibly constrained
Voigtlander and Voth
Thesis: Europe’s turbulent politics and deadly liking for warfare meant a sustained advantage in per capita income. Warfare kept population densities down and incomes up. Black Death → population ratio was low → land to labour ratio high (Malthusian principle) → per capita incomes remain high as survivors had more land per head for cultivation → higher tax revenues which financed war → more war. Hence high premodern incomes improved the chances of industrializing
Respond to Acemoglu et al who argue that European dominance was driven by institutions which fostered commerce, eg. the UK and the Dutch Republic, where trading strengthened the bourgeoisie, which in turn constrained the power of rulers. V and V argue that they do not explain income divergence in a world dominated by demographic forces. In present-day, developed countries do not face Malthusian constraints whereby land-labour ratios determine per capita income; human capital, institutions and technology are key instead. The relationship between war, population loss and higher incomes are unlikely to repeat
Glaeser and Shleifer
On legal origins and why the French had civil law while the English had common law. French civil law countries have heavier regulation, less secure property rights, more corrupt and less efficient govts, less political freedom. The central goal of the legal system was to protect law enforcers from being bullied - France chose state-employed judges and the politicisation of justice because local feudal lords were too powerful.
Examines how justice is politicised because of threats from the outside. Higher risks of coercion means citizens need more protection and control of law enforcers by the state, which makes law enforcers beholden to the state and politicises justice. Compares France (civil law) vs England (common law). In the twelfth and thirteenth centuries, France had royally controlled professional judges, while England had relatively independent juries, with the idea being ‘the politicization of justice may be necessary when the state is the only institutions with enough military power to fight local bullies’. England had weaker bullies, so there was less need to politicise justice.
However, these findings only apply to England and France where they chose the system. Where they were forced onto other countries by French or English colonisers, then the results differ
Hall and Jones
The quality of “social infrastructures” is the primary reason behind international variations in productivity and incomes
