29 July, 2012

What are the Origins of Power, Prosperity, and Poverty? Acemoglu again

Lots of people would like to know the answer to that and many answers have been proposed. Daron Acemoglu dismisses the most popular explanations and proposes a contrast between societies run on extractive and inclusive lines. He says that societies are usually run on extractive lines but it is the inclusive societies that are the runaway successes. Below are his illustrative case-studies. I am not persuaded but will add my doubts at the foot of the extract below:

CASE STUDY: SOUTH AMERICA

There is no better laboratory that demonstrates how extractive institutions emerge and persist than the New World. The Americas provide a brilliant example for understanding how different institutions form, how they become supported within different political frameworks, and how that, in turn, leads to huge economic divergences.

The economic and political institutions in the New World have been largely shaped by their colonization experience starting at the beginning of the 16th century. While the tales of Francisco Pizarro and Hernán Cortés are quite familiar, I'd like to start with Juan Díaz de Solís — a Spaniard who in 1516 initiated the colonization of the southern cone of South America, in what is today Argentina and Uruguay. Under de Solís's leadership, three ships and a crew of 70 men founded the city of Buenos Aires, meaning "good airs." Argentina and Uruguay have very fertile lands, with a climate that would later become the basis of nearly a century of very high income per capita because of the productivity of these areas.

The colonization of these areas itself, however, was a total failure — and the reason was that the Spaniards arrived with a given model of colonization. This model was to find gold and silver and, perhaps most importantly, to capture and enslave the Indians so that they could work for them. Unfortunately, from the colonists' point of view, the native populations of the area, known as the Charrúas and the Querandí, consisted of small bands of mobile huntergatherers.

Their sparse population density made it difficult for the Spaniards to capture them. They also did not have an established hierarchy, which made it difficult to coerce them into working. Instead, the Indians fought back — capturing de Solís and clubbing him to death before he could make it into the history books as one of the famous conquistadors. For those that remained, there were not enough Indians to act as workhorses, and one by one the Spaniards began to die as starvation set in.

The rest of the crew moved up the perimeter to what is now known as Asunción, Paraguay. There the conquistadors encountered another band of Indians, who on the surface looked similar to the Charrúas and the Querandí. The Guaraní, however, were a little different. They were more densely settled and already sedentary. They had also established a hierarchical society with an elite class of princes and princesses, while the rest of the population worked for the benefit of the elite.

The conquistadors immediately took over this hierarchy, setting themselves up as the elite. Some of them married the princesses. They put the Guaraní to work producing food, and ultimately the remainder of de Solís's original crew led a successful colonization effort that survived for many centuries to come.

The institutions established among the Guaraní were the same types of institutions that were established throughout other parts of Latin America: forced labor institutions with land grants for the elite Spaniards. The Indians were forced to work for whatever wages the elites would pay them. They were under constant coercive pressure — forced not only to work but also to buy what the elites offered up for sale. It is no surprise that these economic institutions did not promote economic growth. Yet it's also no surprise that the political institutions underpinning this system persisted — establishing and continuously recreating a ruling class of elites that did not encourage economic development in Latin America.

Yet, the question still remains: Could it have been geography, culture, or enlightened leadership — rather than institutional factors — that played a critical role in the distinct fates of the two teams of explorers?

CASE STUDY: NORTH AMERICA

Roughly a thousand miles north, at the beginning of the 17th century, the model of the Virginia Company — made up of the elite captains and aristocrats who were sent to North America — was actually remarkably similar to the model of the conquistadors. The Virginia Company also wanted gold. They also thought that they would be able to capture the Indians and put them to work. But unfortunately for them, the situation they encountered was also quite similar to what the conquistadors witnessed in Argentina and Uruguay.

The joint stock companies found a sparsely populated, very mobile band of Indians who were, once again, unwilling to work in order to provide food for the settlers. The settlers therefore went through a period of starvation. However, while the Spaniards had the option of moving up north, the captains of the Virginia Company did not have this option. No such civilization existed.

They therefore came up with a second strategy. Without the ability to enslave the Indians and put them to work, they decided to import their own lower strata of society, which they brought to the New World under a system of indentured servitude. To give you a sense of this, let me quote directly from the laws of the Jamestown colony, promulgated by the governor Sir Thomas Gates and his deputy Sir Thomas Dale:

No man or woman shall run away from the colony to the Indians upon pain of death. Anyone who robs a garden, public or private or a vineyard or who steals ears of corn shall be punished with death. No member of the colony will sell or give any commodity of this country to a captain, mariner, master, or sailor to transport out of the colony or for his own private use upon pain of death.

Two things become immediately apparent in reading these laws. First, contrary to the image that English colonies sometimes garner, the Jamestown colony that the Virginia Company was chartered to establish was not a happy, consensual place. Pretty much anything the settlers could do would be punished by death. Second, the company encountered real problems that were cause for concern — namely, that it was extraordinarily difficult to prevent the settlers they brought to form the lower strata of society from running away or engaging in outside trade. The Virginia Company therefore fought to enforce this system for a few more years, but in the end they decided that there was no practical way to inject this lower stratum into their society.

Finally, they devised a third strategy — a very radical one in which the only option left was to offer economic incentives to the settlers. This led to what is known as the headright system, which was established in Jamestown in 1618. In essence, each settler was given a legal grant of land, which they were then required to work in exchange for secure property rights to that plot. But there was still one problem. How could the settlers be sure that they had secure rights to that property, particularly in an environment in which a stolen ear of corn was punishable by death?

The very next year, in order to make these economic incentives credible, the General Assembly offered the settlers political rights as well. This, in effect, allowed them to advance above the lower strata of society, to a position in which they would be making their own decisions through more inclusive political institutions.

SOURCE

The above examples seem to me to offer no insight into the two runaway economic and political successes of the 19th century: Britain and Germany. Britain inherited a system of individual liberty from way back which was emphasized by the governments of the day, notably by both the Liberals under Gladstone and the Conservatives under Disraeli.

Germany, however, was created by Bismarck in 1872 and flourished under his authoritarian rule. And the systems which he set in place survived his term in office and led to continued economic advance in Germany. And by 1914, Germany was arguably more powerful and prosperous than Britain. It was only a tenuous lead in naval strength that gave Britain any headway over Germany. Compared to the German army, the British army was of course laughable. It took the combined might of France, Britain, Russia and the USA to bring Germany to heel.

So how does Germany fit the Acemoglu model? I cannot see that it does. Both Prussia before 1872 and Germany after 1872 had parliaments with varying degrees of influence but both Prussia and Germany remained substantially under the control of political strongmen, first Bismarck and then Kaiser Bill. One of the most famous episodes in his career was when Bismarck ran Prussia for four years in the name of the Kaiser alone -- completely ignoring the Prussian parliament.

So it seems to me that the Acemoglu model gives us no insight into the ORIGIN of powerful and prosperous societies. It does however give a reasonable DESCRIPTION of powerful and prosperous societies -- secure property rights etc. But we already knew that. It is the origin question that we want answered.

And I do have an answer -- but it is so politically incorrect and will initially be seen as so improbable that I hesitate to say much about it. Briefly, I think that a tradition of respecting the individual is the key and that such an orientation was historically basic among Teutonic peoples and is still alive (though gasping) today. I think it is that tradition which led to both British and German eminence in the 19th century. I set out some of the history behind my thinking on the matter here



NOTE: I have had some comments on the Acemoglu nonsense previously



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