The question of why some countries develop while others lag has increasingly led economists and political scientists onto each other's territory, in 1994, John P. Powelson, Emeritus Professor of Economics at the University of Colorado, provided answers to this question in his book Centuries of Economic Endeavor (University of Michigan Press, 1994). Powelson's book has withstood the testof time and manyof his points have been borne out by recent global events.
The organizing concept of the book is that durable economic development is a result of a diffusion of power among different groups in a society. Power diffusion occurs over long periods of time when groups negotiate with each other; by shifting their alliances among groups having more power, groups with less power tend to become more powerful. Over time this process creates the institutions that form the basis of market economies. The diffusion, or balance, of power ultimately produces a variety of institutions in the political realm characteristic of open liberal democratic systems. However, where rulers attempt to dictate the development of market institutions, power tends to be concentrated. The absence of decision-making negotiation among the most seriously affected groups ultimately undermines liberal institutional arrangements.
The problems of development, or lack thereof, are as much political as they are economic, or as Powelson puts it "The problems are institutional. Unfortunately, economists have failed to reach out beyond their own boundaries, and to recognize that economic development is not principally an economic phenomenon, but rather a factor of having good and functional political institutions that are accountable to divergent societal interests." Thus simply altering economic policy without addressing the problem of undemocratic institutional structures will not result in long-term prosperity.
Power diffusion and democracy is not the same thing, however. "Power diffusion in an economic sense allows individuals to have free choice over their economic occupations and transactions," said Powelson recently. Thus, power diffusion predates democratic govemance and not only makes it possible, but creates it. Likewise, having the institutions of a democracy does not mean that power is diffuse. "President Chavez of Venezuela is a dictator despite the fact that he was elected," Powelson added.
One concern is reversal of power diffusion in the developed world. According to Powelson this trend is not new and began with the countries that had advanced most in power diffusion. "Governments, with popular support, began to see problems in the economy and they thought the government had acquired enough power to correct them, an incorrect supposition. As power is increasingly centralized, the result is less responsive policy that becomes increasingly controlled by oligarchs."
Historically, economic development has been greatest where the private sector has made the rules, rather than the nobility, autocratic rulers, or religious leaders. These rules stem predominantly from the economic transactions of individuals making agreements with each other. These agreements are respected and repeated over and over, and after many years they become "rules" that may then be adopted into law. …