SOCIAL INFRASTRUCTURE AND LONG-RUN ECONOMIC
7.7 THE CHOICE OF SOCIAL INFRASTRUCTURE
Why is the social infrastructure in some economies so much better than in others? Our questions about the determinants of long-run eco- nomic success are starting to resemble the beautiful matrioshka dolls of Russia in which each fi gurine contains another inside it. Each of our answers to the question of what determines long-run economic success seems to raise another question.
The questions also become increasingly diffi cult, and economists do not yet have fi rm answers about the determinants of social infra- structure. In the history of economic thought, the answers range far and wide. Max Weber argued in The Protestant Ethic and the Spirit of Capi- talism (1976 [1920]) that belief systems were important and emphasized Protestantism’s teachings regarding the individual. Other answers that have been proposed include culture or even climate and geography.
The question of what determines social infrastructure is one that has greatly concerned economic historian and 1993 Nobel Prize win- ner Douglass North in much of his research. A principle that has served North well is that individuals in power will pursue actions that maxi- mize their own utility. Far from leaders being “benevolent social plan- ners” who seek to maximize the welfare of the individuals in society, government offi cials are self-interested, utility-maximizing agents just like the rest of us. In order to understand why certain laws, rules, and institutions are put in place in an economy, we need to understand what the governors and the governees have to gain and lose and how easy it is for the governees to replace the governor. Applying this rea- soning to the broad sweep of economic history, North (1981) states,
From the redistributive societies of ancient Egyptian dynasties through the slavery system of the Greek and Roman world to the medieval manor, there was a persistent tension between the ownership structure which maximized the rents to the ruler (and his group) and an effi cient system that reduced transaction costs and encouraged economic growth. This fundamental dichotomy is the root cause of the failure of societies to experience sus- tained economic growth. (p. 25)
A new question is raised by North’s (1981) analysis. If the benefi t of a good social infrastructure for investment and productivity is so obvious, why don’t rulers implement good policies and enjoy a smaller slice (in terms of the rents they extract) of a larger economic pie? Recent work by Daron Acemoglu and James Robinson (2005, 2012) has addressed exactly this question, and shows why poor social infrastructure might persist even though everyone could conceivably benefi t from a better set of insti- tutions. The problem is one of commitment. The ruling elite cannot cred- ibly commit to the promotion of production versus diversion, because once output has risen they would have an incentive to return to diversion and extract a large fraction of the larger output available. On the other hand, the people could promise to make some sort of payoff to the ruling elite if the elite agreed to step down. However, the people cannot cred- ibly commit to making the payoff after they have removed the elite from power. There is a stand-off, the social infrastructure favoring production versus diversion is never put into place, and the economy remains poor.
This line of reasoning can help us to understand what Joel Mokyr (1990, p. 209) calls the “greatest enigma in the history of technology”:
173 TH E C H O I C E O F S O C I A L I N F R A STR U CTU R E
why China was unable to sustain its technological lead after the four- teenth century. For several hundred years during the Middle Ages and culminating in the fourteenth century, China was the most techno- logically advanced society in the world. Paper, the shoulder-collar for harnessing horses, moveable type for printing, the compass, the clock, gunpowder, shipbuilding, the spinning wheel, and iron casting were all invented in China centuries before they became known in the West.
Yet by the sixteenth century many of these inventions had been either forgotten completely or simply left unimproved. It was the countries of western Europe rather than China that settled the New World and initiated the Industrial Revolution. Why? Historians disagree about the complete explanation, but a key factor is likely the lack of institutions supporting entrepreneurship.
What changed around the fourteenth century and led to the sup- pression of innovation and the demise of China’s technological lead?
One answer is the dynasty ruling China: the Ming dynasty replaced the Mongol dynasty in 1368. Mokyr, summarizing a plausible explanation advanced by several economic historians, writes,
China was and remained an empire, under tight bureaucratic control. Euro- pean-style wars between internal political units became rare in China after 960 A.D. The absence of political competition did not mean that techno- logical progress could not take place, but it did mean that one decision maker could deal it a mortal blow. Interested and enlightened emperors encouraged technological progress, but the reactionary rulers of the later Ming period clearly preferred a stable and controllable environment. Inno- vators and purveyors of foreign ideas were regarded as troublemakers and were suppressed. Such rulers existed in Europe as well, but because no one controlled the entire continent, they did no more than switch the center of economic gravity from one area to another. (1990, p. 231)
China appears to have become stuck in the standoff between elites and potential entrepreneurs. This standoff led to economic stagnation com- pared to Europe, and eventually it was European ships that forced open trade and imposed favorable economic treaties on China in the nine- teenth century, rather than the other way around.
The situation in China illustrates a signifi cant aspect of social infra- structure: it tends to be highly persistent. There are numerous examples of how historical experiences that shaped this infrastructure have continued
to infl uence economic outcomes even centuries later. Acemoglu, Johnson, and Robinson (2002) document a “reversal of fortune” in former colonies.
A number of places that were relatively rich around the year 1500, such as Egypt and the rest of North Africa, were colonized by Europeans and are relatively poor now. However, places that were relatively poor in the year 1500, such as North America, were also colonized by Europeans and are now relatively rich. The authors propose that it was the social infrastruc- ture imposed by the colonizers that differed in the two areas. In Africa and much of Asia, the Europeans favored diversionary activities to extract wealth, while in North America, Australia, and New Zealand they copied their own institutions favoring production.
We previously mentioned Dell’s (2010) paper on the effect of the mita in Peru and Bolivia. Those areas that were part of the mita continue to be economically disadvantaged today, even though it was abolished two hun- dred years ago, and this is due to a legacy of poor property rights and few public goods. This specifi c episode echoes the work of Kenneth Sokoloff and Stanley Engerman (2000) who focus on the differences in social infra- structure between the United States and Canada on the one hand, and Bra- zil and the Caribbean nations on the other. In the latter, the possibility of sugar production made large plantations desirable, and the inequality that resulted entrenched an elite that focused more on diversion than or pro- moting production. The United States and Canada escaped this partly by having conditions that favored family farming and allowed a (relatively) broad cross-section of the population to participate in the political system.
The slave trade in Africa demonstrates a similarly persistent infl u- ence on current economic outcomes. Nathan Nunn (2008) fi nds that the poorest countries in Africa today are the ones from which the most slaves were taken. Nunn shows that the places supplying the most slaves are now more fragmented into separate ethnic groups, and this may limit their ability to reach a consensus on implementing production- promoting policies.