Entrepreneurs and global wealth since 1850 – Part II

November 7, 2013

Entrepreneurs are the “missing gap” in the analysis of national wealth and innovation, according to Geoffrey Jones’s book, in which he suggests that current dominant explanations of global wealth and poverty tend to focus more on deficient institutions, poor human capital development, geography, and cultureAlthough these factors should not be minimized,

Entrepreneurs were also actors and not simply responders to institutions and resource endowments.  They could train their own workers and introduce investor protection into their own bylaws.

Professor Jones writes that the modern economic growth wrought by the Industrial Revolution diffused from its origins in the North Sea region to the rest of Europe, the US, and (later) Japan, but was slow to gain traction elsewhere because the “societal and cultural embeddedness of the new technologies posed significant entrepreneurial challenges.”  One such example would be deficient or broken institutions.

Institutions “provide the incentive structure of economies” and the author cites a handful of other authors in order to offer a fairly broad definition:  they’re a combination of formal rules (constitutions, laws, property rights) and informal constraints (sanctions, taboos, customs, traditions, codes of conduct); a system of rules, beliefs, norms and organizations that together generate a regularity of (social) behavior.

In practice, the primary focus of attention has been on systems of property rights.  It has been asserted that societies that provide incentives and opportunities for investment will be richer than those that fail to do so, and that the protection of property rights was an essential incentive behind such investment.  By reducing transaction costs and facilitating potential gains from exchange, institutions fuel productivity and growth.  The literature has particularly favored the use of three proxies in particular for “institutions”:  risk of expropriation, government effectiveness and constraints on the executive.  North famously identified the Glorious Revolution in England in 1688 as providing the institutional arrangements which explain why that country had the Industrial Revolution.

Some countries were more fortunate than others in the institutions they inherited:

“(T)he legal tradition countries inherited or adopted in the distant past has a long-term effect on financial development… which in turn can be assumed to have impacted the nature and speed of economic development.”  Countries with common law systems had on average better investor protections than most civil law countries, and within civil law countries some were worse than others.

Colonialism transmitted European institutions around the world, with mixed results.  In regions with soils and climates that provided a comparative advantage in extracting resources and/or growing crops, and with prosperous and densely settled areas, Europeans introduced or maintained extractive institutions to force people to work in mines and plantations.  In more sparsely settled areas, with soils and climates that favored mixed farming and livestock with limited economies of scale, Europeans settled and created institutions of private property across a broad cross-section of society.

Jones has much to say about the impact of colonialism and the importance of ethnic minorities in each culture – which will be the subject of our 3rd installment in a few days.

(Here is Part I, which summarizes the author’s framework of 3 economic eras that followed the Industrial Revolution.) 

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