0.8 Institutions (intangible capital)

Introduction

The study of the role of Institutions in economic growth and development seems to have passed through three distinct phases in the last century. The first was in the heyday of such high-profile “Institutionalists” as Thorstein Veblen. See Thorstein Veblen, (1899), Theory of the Leisure Class: The Economic Study of Institutions , New York, NY: Macmillan. The appeal of approach was sufficiently such that the Harvard Economics Department brought Veblen to Cambridge, See Edward S. Mason&Thomas S. Lamont, (1982, August), “The Harvard Department of Economics from the Beginning to World War II,” The Quarterly Journal of Economics , 97(3): 383-433. in 1910 to be considered for a faculty position, which he then spurned. For the next six decades after Veblen, economists focusing on institutions as both cause and effect of development were few and far between, isolated in small pockets in universities across the nation.

The third, present, phase began in the late 20 ^th century with the work of Nobel Laureate Douglas North Douglas C. North (1990), Institutions, Institutional Change and Economic Performance , New York, NY: Cambridge University Press. and then blossomed with the appearance of significant contributions by younger economists, especially in and around Cambridge, Massachusetts, who once again made the study of the rule of institutions in economic processes not only respectable, but impossible to ignore.

Prominent among this group has been Daron Acemoglu of MIT, See, for example; Daron Acemoglu, Simon Johnson&James Robinson, “Institutions as the Fundamental Cause of Long-Run Growth”, Cambridge, MA: NBER Working Paper #10481, May 2004. Simon Johnson of MIT, James Robinson at Berkeley, See Daren Acemoglu&James A. Robinson, (2012), Why Nations Fail , New York, NY: Crown Publishing Group. all of whom are concerned with how prosperity and poverty are determined or affected by institutions and the incentives they create. Other major contributors have been Dani Rodrik at Harvard Of his several publications on this topic, see especially “Institutions for High-Quality Growth”, Cambridge, MA: NBER Working Paper #7540, February 2000. and William Easterly, William Easterly, (2008, May), “Design and Reform of Institutions in LDCs and Transition Economies: Institutions: Top Down or Bottom Up?” The American Economic Review , 98(2): 95-99. among many more.

These and other authors have presented persuasive arguments for including institutions along with technology, physical capital, human capital and natural capital. There has been useful controversy over the question, “do good institutions cause growth, or are they the results of investment in human capital and pro-growth government policies. See Edward L. Glaser, Rafael La Porta, Florencio Lopez-de-Silane&Andrei Schleifer, “Do Institutions Cause Growth”, Cambridge, MA: NBER Working Paper #10568, June 2004. These authors and others have identified a number of institutional arrangements most relevant for progress, or poverty.

Some of the questions that flow from the more recent work on institutions include:

• Is the press free, largely free or suppressed?
• Can I enter a business easily, without coping with entry restricting prohibitions or large license fees? Licensing Restrictions played a major role in the stagnation of the Greek economy in the first decade and a half of the 21 ^st century.
• Are these government-protected monopolies or oligopolies that stifle commerce?
• Does weak governance make costs of corruption high (see Chapter 10)?
• Are tax rates enforced, and/or are they even enforceable?