Well Put My Friend

The reason that the United States had a banking industry that was radically better for the economic prosperity of the country had nothing to do with differences in the motivation of those who owned the banks. Indeed, the profit motive, which underpinned the monopolistic nature of the banking industry in Mexico, was present in the United States, too. But this profit motive was channeled differently because of the radically different U.S. institutions. The bankers faced different economic institutions, institutions that subjected them to much greater competition. And this was largely because the politicians who wrote the rules for the bankers faced very different incentives themselves, forged by different political institutions.

- James A. Robinson and Daron Acemoglu Why Nations Fail? Kindle Location 654

Reading through Why Nations Fail?, paragraphs like this frustrate, yet intrigue me. First, why does it frustrate me? It makes no distinct/rejectable claim. For two acclaimed social scientists, I expected boldness. instead, throughout the entire book Robinson and Acemoglu basically say "good institutions produce good results and bad institutions produce bad results" and give example after example. I know that their thesis is more specific. Extractive institutions are bad and inclusive institutions are good is a more accurate summary. Yet, many will come away remembering just what I first said, good=good, a tautology.

Yet, this paragraph is what I enjoy about political economy. Traditional "economic" reasons
(capital, labor, technology, Cobb-Douglas) do not explain the difference between the United States and Mexico. The institutions- ignored by most economists- are the difference between prosperity and poverty. They drive which nations fail.

This goes to the heart of our intellectual history. Adam Smith did not argue that the invisible hand directs the private good towards the public good under any conditions. Instead, this only occurs under proper institutions. The role of the political economist is to understand what these "good" institutions are (or more importantly, which are "bad") and how they arise. Robinson and Acemoglu have their theory. Deirdre McCloskey has her theory. Douglass North has his theory. And countless others exist. While there is considerable overlap, the theory is far from settled and much has yet to be written and understood. It is a topic which I (and hopefully others) find fascinating and worthy of further study, maybe even formal education.

Hence, it is why I enjoyed Robinson and Acemoglu's book. It provided a lot of evidence to a general concept. It does not make many enemies. More importantly, as a book accessible to laymen, it (re)introduces people to comparative institutional analysis. It is not an end of the discussion, but a start. This is a good thing for economics- look an economist making an openly normative remark. Call in the science police.

 

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