By North, Douglass C.
Reason , Vol. 32, No. 7
We live in a world where some countries enjoy a material abundance beyond the wildest dreams of cur forefathers. Such countries are rich because they are productive. The sources of that productivity--growing markets, technological improvement, and investment in human beings (human capital)--all play an important part in increasing productivity. The new growth economics literature has formalized some of these findings, but economic historians, development economists, and specialists in growth accounting have broadly understood them for some time.
By any standard of measurement much of the world's population is still poor, with individuals subsisting on less than two dollars a day. The disparity between the well-being of the average person in the developed world, where per capita annual income may exceed $20,000, and that in low-income countries such as Haiti or most of sub-Saharan Africa, where it may be under $500 a year, is striking, especially when one sees up close the living conditions associated with such poverty.
How do we account for the persistence of poverty in the midst of plenty? If we know the sources of plenty, why don't poor countries simply adopt policies that make for plenty? The answer is straightforward. We just don't know how to get there. We must create incentives for people to invest in more efficient technology, increase their skills, and organize efficient markets. Such incentives are embodied in institutions. Thus we must understand the nature of institutions and how they evolve.
Douglass C. North is a senior fellow, Hoover Institution; Spencer T. …