Do institutions really matter ?

  • Institutions matter, but which ones?

    Institutions don't really matter : the geographical point of view

    Institutions don't really matter : the cultural, if not genetical point of view

    P. Bardhan, Ha-Joon Chang

    J. Sachs

    G. Clark

    1/It's impossible of objectively define the free market, 2/Institutions (institutional structure) that give maximum business freedom don't lead to a social optimum : First example, the 2008 global financial crisis was the consequence of the previous deregulation initiated in the 80's by the Reaganian administration. Thanks to securitization, banks have possibility to sell the risk of loans to insurtance companies. So they granted loans to very risky households. Worse : new financial assets/securities (loans transformed in marketable asset/securities) were sold to foreign banks all around the world : A strictly American crisis became a global financial crisis.

    Second example, using child labour can increase profit on the short run but ont the long run that results in a lower level of economic growth due to an impoverishment of human capital in terms of education, health. It's the quality of the futur labor force which is reduced. That's why "restricting individual business freedom may be good for the business sector itself ". Regulation, that is, market restrictions, is good for economy.

    Tropical diseases caused by the climate are more accurate to explain the deficit in economic growth than institutions. Good institutions can only improve (international) medical aid, not replace them. Think about the Bill and Melinda Foundation to fight malaria in sub-saharian countries.

    Sub-saharian Africa : tropical zone : presence of typical mosquitoes (anopheles mosquitoes) => bites=> excessive tiredness => lower productivity => lower economic growth.

    There already was good institutions in the medieval England, even much more pro-market than the Thatcherite England—a true paradox, especially a very low average tax rate. The reason of economic success is due to a darwinian process which selected the richest and their offspring. " The modern English are the descendants of the upper classes of the preindustrial world, those who prospered economically. The poor disappeared".


    But the reasoning is based on a particular conception of institutions : political et formal institutions. That's why G. Clark hesitate concerning ultimate explainaton : culture or genes? But from an institutional point of view, culture belong to informal institutions!




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