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chapter 7 - 7 The Causes of Economic Growth Institutions...

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7 The Causes of Economic Growth: Institutions Our analysis in chapter 2 guides us to ask a series of questions. We must first address the inter-related questions of whether (and how) institutions encourage growth, and which sorts of functions it is most necessary for institutions to per- form. The latter question has a more particular facet: can we identify superior insti- tutional forms for various institutional functions? Special attention will be paid of course to the relationship between institutions and investment and technology. Since we will find evidence that institutions are indeed important, the next major question is how to encourage beneficial types of institutional change. Part of the answer here is institutional itself: certain political institutions may facilitate the adoption of certain economic institutions. Unlike in the study of investment, we face the advantage and challenge here that many disciplines have studied institutions. Institutional analysis was rediscov- ered in several disciplines in the 1980s and 1990s: economics, economic history, sociology of organizations, social anthropology, and industrial relations, along with several fields in political science (Rothstein, 1998, 144). This simultaneity was not entirely coincidental but reflected conversations across disciplinary boun- daries. Nevertheless we shall see that there are important differences in discipli- nary approaches. We shall also find that much remains to be done. While the fact that institutions are essential to long run growth has now been amply demonstrated by both historical and statistical analyses, this research has occurred at a very gen- eral level (Rodrik 2005, 1005). 7.1 Institutions and Growth Institutions were largely ignored by economists from the 1840s through the 1970s, but interest rebounded for a variety of reasons: in part as theoretical developments (especially in game theory) suggested that institutions mattered, and in part due to empirical interest in comparative economic performance. Most rich countries seem to possess ‘good’ institutions while most poor countries seem to lack these. It is now well understood that market exchange is not ‘natural’ but depends on a host of institutions. Different economists emphasize different causal links from institutions to economic performance: Douglass North (economic historian) has stressed the reduction in transaction costs and also uncertainty (by limiting the range of behaviors observed) that good institutions provide. Oliver Williamson has emphasized the ways in which institutions increase economic efficiency. Jack Knight, like many sociologists, emphasizes the distributional effects of institu- tions. Loasby (1999, 46) argues that institutions are a response to uncertainty: a means by which individuals acquire patterns of behavior from others. Happily there is no need to choose among these competing visions, for they are entirely R. Szostak, The Causes of Economic Growth , DOI: 10.1007/978-3-540-92282-7_7, © Springer-Verlag Berlin Heidelberg 2009 191
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192 7. The Causes of Economic Growth: Institutions compatible. All except the distributional argument suggest that good institutions
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