Academic journal article Atlantic Economic Journal

Institutions and the Origins of the Great Enrichment

Academic journal article Atlantic Economic Journal

Institutions and the Origins of the Great Enrichment

Article excerpt

The origins of modern economic growth or "the Great Enrichment," as Deirdre McCloskey (2016) has recently called it, continues to fascinate scholars. As Robert Lucas has noted, once we start to think about it, it is difficult to think of anything else (Lucas, 1988, p. 5). But while it has been described and debated no end, answers remain elusive. Why did it start in the eighteenth century? Why in Western Europe? Why did the historical forces that stopped and blocked continuous economic progress before fail to do so this time?

My approach simultaneously resolves two difficulties in the "Great Enrichment" literature, one historical and one economic. The historical riddle is what might be called the great dilemma of the new institutional economic history: much of the literature in economic history that is trying to explain differences in economic performance and living standards, both by economists and historians, has accepted in one way or another Douglass North's call for the integration of institutions into our narrative of economic growth (Acemoglu and Robinson 2012; Sened and Galiani 2014). An economy that grows as a result of favorable institutions requires a world of well-delineated and respected property rights, enforceable contracts, law and order, a low level of opportunism and rent-seeking, a high degree of inclusion in political decision-making and the benefits of growth, and a political organization in which power and wealth are as separate as is humanly possible. Such institutions, whether part of the formal political structure (as embodied, for example, in a constitution) or based on private-order institutions, are credited with many positive economic developments in the past: the rise of more effective product- and factor markets (and thus more efficient allocations), the growth of international and interregional trade, and the accumulation of capital to name a few. But, as other scholars (Vries 2013, p. 433; McCloskey 2016, passim) have argued, the puzzle is that better markets, more cooperative behavior, and more efficient allocations simply do not in themselves account for modern economic growth. They cannot really explain the growth of technological creativity and innovation in Europe and especially the surge following the middle of the eighteenth century (Mokyr 1990). At first blush, the Industrial Revolution, in the sense of an acceleration of technological progress, does not seem to have been a response to any obvious institutional stimulus. We actually know remarkably little about the kind of institutions that foster and stimulate technological progress and more widely, intellectual innovation.

The second riddle is closely related but looks at the problem from a different, more economic, point of view. If the generation and continuous improvement of new "useful knowledge," both scientific and technological, is at the core of modern economic growth, the riddle is one of motivation or incentives. Knowledge, as has long been understood, is an unusual commodity, subject to rather serious public good properties: it is very hard to exclude others from using it, and the cost to the owner from sharing it is negligible or zero. As a result, economists suspect that knowledge tends to be chronically underproduced, because those who spend resources, time, and effort generating it have difficulty appropriating any returns. As far as technology or prescriptive knowledge is concerned, the existence of a patent system or other ways to reward inventors has provided a (very) partial solution. (1) But advances in natural philosophy and propositional knowledge could not be patented.

This is especially problematic because the growth of technological knowledge by itself, without the constant interaction with some form of formal or informal science, would not have been able to generate growth and development at the rates observed. The issue of the exact role of science in the Industrial Revolution is still debated, but there can be no doubt that as growth accelerated, the input from science increased and became the dominant motive power at some point after 1830. …

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