In my last post I addressed why I thought we need to return to assuming that poverty is the natural state of man. From that assumption we could explore wealth, its sources, and its distribution. This is not to dismiss poverty or to say that nothing can be done about it. Wealth and poverty are two extremes on the same scale. You often cannot talk of one without the other.
There is a lot of research done into the causes for both and after my last post I saw more articles in my RSS feeds related to the subject. One such article was posted by Greg Mankiw on his blog. It is by Daron Acemoglu who is an MIT economist and he seeks to explain the development gap between the first world and the third world countries.
He gives credit to where its due in the explanations given by Jeffery Sachs who argues for geographical and weather differences and to Jared Diamond who argues for technology. However, Acemoglu argues for the power of institutions. His prime example is the city of Nogales on the border between Arizona and Mexico. This city has the same geography and weather and the same access to technology yet the American side of the city sees 3 times the income per citizen as the Mexican side. The difference is the institutions found on each side of the border.
I interpret this as meaning that some institutions are better than others. This can be troubling for those who choose to weigh themselves down with political correctness. Institutions are born out of the surrounding culture so this must mean that some cultures are better at producing economic success than others.
History has shown this to be true. The countries that were former British colonies are on average better off than those who were formerly run by other countries such as Spain or France. Why? The British often instilled an appreciation for private property and trade as well as a legal system that supported such rights. Of course the prime example of this is the good ol’ United States.
So institutions matter and I wholeheartedly agree with Acemoglu. I also agree with him when he says that forcibly transplanting institutions may not always be the right thing to do. If the argument is true that institutions come from culture then you cannot change culture at the point of a gun like we are trying to do in Afghanistan or Iraq. As the saying goes you can lead a horse to water but you cannot force him to drink.
