When economists try to explain economic growth, they behave like art historians, as they attempt to explain Mona Lisa’s rise to prominence by its intrinsic attributes. Hence, possible explanations for the rise of the Western world usually revolve around its various characteristics: its geography, its endowment with resources such as coal and iron, its empires, Protestant ethics, or its peculiar culture.
While most of these conjectures seem flawed, for different reasons, a consensus is emerging in the economic profession around the idea that institutions provide the most satisfactory explanation for differences in economic performance, and therefore for the economic rise of the Western world.
It is easy to see why. Economists like explanations built around incentives. And if we believe that incentives matter for economic outcomes, we will expect rules that reward predation, theft, or slavery to lead to worse outcomes than those which reward productive entrepreneurship and innovation. If we want, we can get much more granular than that: most of us would agree that low entry barriers to industries are good, that prohibitive tax rates imposed on productive activities are bad, that capture of government by special interests is bad, and so on. We may also be able to say what changes in institutions and policies will likely lead, at the margin, to better or worse economic outcomes.
The institutionalist story may be the best we have. North, Wallace and Weingast, Besley and Persson, and Acemoglu and Robinson each have a slightly different take on what is essentially the same account of growth—namely that institutions rewarding productive behavior lead to good economic outcomes, whereas institutions that fail to do that lead to poverty. Many economists and development practitioners, including those in organizations like the World Bank, seem to concur, although the evidence that they’re making much difference is mixed.
But even when we abstract away from the messy practicalities of giving policy advice to governments in underdeveloped countries—or the difficulties of measuring institutions and estimating their effect of economic performance—economists will still face the challenge of explaining the emergence of institutions and their change. More specifically, what leads bad institutions to be replaced by good ones (in a durable way), and can that process be meaningfully helped? In other words, is there a way of remaking Nigeria’s institutions to function like Denmark’s?
The weakest element of common institutionalist accounts of economic growth is that they lack a real theory of institutional change. Take Acemoglu and Robinson as an example, as it is the most recent and most prominent instance of such reasoning. Besides describing the self-reinforcing tendencies of “extractive” and “inclusive” institutions, they also recognize that countries can embark on different institutional paths in moments Acemoglu and Robinson call “critical junctures.” In other words, there are moments in history when bad or good institutions can be turned around. Such moments include the American Revolution, the Glorious Revolution in England, or the Black Death in Europe. One would also think of aftermath the Rwandan genocide or the fall of communism in Eastern Europe, which both created a window of opportunity for irreversible decisions about institutional development. And, similarly, Mona Lisa hadn’t been a particularly acclaimed painting until it was famously stolen from the Louvre in 1911. The theft can be seen as a “critical juncture” in the life of the painting.
However, the notion of critical junctures has little predictive power, as it is retrospectively imposed on our record of economic and institutional development. There is no way of using it to make testable predictions about institutional development. In a sense, to invoke critical junctures is to give up on producing a compelling explanation of institutional change and accepting luck, or randomness, as a major factor in economic development.
Consider the fall of communism. In some countries—Poland, Hungary, or Czechoslovakia—the critical juncture was seized to create institutions that fostered economic growth and development, whereas in others—think Russia, Ukraine, or Moldova—it served as an opportunity for the predatory elite to regroup and entrench its hold on power through slightly different means. If one relied solely on Acemoglu and Robinson’s framework back in 1990, one would have no way of telling how things were going to turn out in any of the transitional countries—it would be like trying to predict that a painting will become famous based on the fact that it has been stolen from a major gallery in the past year or so.
Nobel Laureate Robert Lucas is the author of the famous quotation: “Once one starts to think about [questions of economic growth], it is hard to think about anything else.” It is therefore frustrating that our account of the economic rise of the West, and of the drivers of economic growth more generally, leaves so much to be desired. But it does not mean that institutional analysis is a blind alley—after all, it still gives us a lot of non-trivial insights into what institutions are good for economic outcomes, although it leaves economists with relatively little understanding of what, other than luck, drives institutional change—and therefore economic outcomes.