What is the role of institutions according to North How far does this theory go towards explaining the contours of world development in the pre-modern growth era Essay Example

What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? Essay What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? By Justifiedcause What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? Maddison (2006) stated that he would characterise the whole period 1000-1820 as protocapitalist. He believes the transition from pre-modern to modern economic growth took place at around 1820. This will set the stage for this discussion. Within that period, there were two groups of countries which were differentiated by their deviation in economic growth. They were the Group A nations, which included Western Europe, Western Offshootsl and Japan, while the rest of the world made up the Group B nations. The contours of world development in this era, largely shaped by Douglass Norths theory of institutions, can be categorise into two main subsets which are Gross Domestic Product (GDP) per capita and population demographics, for the purpose of this essay. North (1990) defines institutions as the rules of the game n a society or, more formally, are the humanly devised constraints that shape human action. Institutions exist in every economy, in the form of either formal or informal constraints, developed to define the choice sets, within which individuals and organisations make their decisions. Economic growth is heavily dependent on the productivity of an economy, which in turn is affected by the costs involved. We will write a custom essay sample on What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? specifically for you FOR ONLY $16.38 $13.9/page Hire Writer In the neoclassical world of complete information, the gains of trade are only negated by the costs of production, also known as the transformation costs. Norths theory of xchange takes into account the transaction costs, which are the costs of exchange that will also reduce the benefits of trade. Institutions affect these costs which determine the profitability and feasibility of economic activities. The role of the theory of institution is to deal with the issue of cooperation. In the real world of incomplete information and uncertainty, institutions are devised to create conducive conditions, where there are incentives and disincentives, to facilitate cooperative behaviour. In order to maximise private benefit, individuals and organisations will seek to cooperate. As a result, the behaviour of the community will become predictable and certain, since the behaviour of the community is the sum of the behaviour of parties within it. In other words, institutions establish a stable structure for economic, political and social interactions. With increased certainty, and therefore, lower costs of exchange, gains of trade can be reaped at a higher margin which would foster economic growth. The diagram below shows the dead-weight loss, represented by Area ABC, in a situation where there is a price increase in real terms, due to the risks involved, and decrease in quantity traded because of the ncertainty on the arrival of the goods. This highlights the importance of efficient institutions in reducing the costs of exchange. Prlvate, Instead 0T soclal, DeneTlts are oTten tne Tocus wnen aevlslng sucn rules, formal institutions in particular. Coupled with the fact that the relative bargaining power of different parties is a major determinant of the structure of the rules, it explains the persistence of inefficient institutions, a distinctive characteristic of Group B nations. It is precisely the form of institutional framework that determines the path of development a particular economy will take, either towards growth, ecline or stagnation which eventually shaped the contours of world development. Maddison (2006) noted that Group A nations had their average per capita income grew nearly four times as fast as the average for the rest of the world. Nations Annual Average Compound Growth Rate Average Group A 0. 13 Average Group B 0. 03 World 0. 05 Table : Rate of Growth of GDP Per Capita, 1000-1820 A. D. Different forms of institutions developed in areas like trade, scientific learning and social behaviour resulted in the divergence of the rate of growth of GDP per capita. During the 1200s, he Venetian Republic experienced sharp economic growth through institutional frameworks which promoted merchant capitalism and fostered entrepreneurism. Legal and political institutions were devised to protect property rights. In addition, the development of accountancy assisted in enforcing contracts and financial institutions gave access to credit and insurance. These greatly reduced the uncertainty of transactions and incentivise productive-enhancing activities like large scale international trade, which led to increased income per capita and economic growth. Contrastingly, in Morocco, the tribal chiefs found it profitable to protect merchant caravans but they lack the military might and political structure to devise and enforce property rights. The lack of development of informal rules into permanent institutional framework to cater for a larger market forestalled the expansion of any form of credible trade and this halted any increase in GDP per capita and economic growth. Institutions of intellectual tolerance played a significant role in Western Europe in setting a foundation for the educational system which was alrectea Dy sclentlTlc learning. By 1 500, tnere were approxlmately seventy acaaemles and universities of secular learning. The productivity of these learning centres and their willingness to accept new ideas were amplified after Johannes Gutenberg first developed printing for Europe in 1455. Techniques in book production were then revolutionised and, by 1483, productivity had increased by two hundred folds. In addition, European publishing was competitive and there was a presence of international trade in books which led to easy access to new ideas to a larger proportion of the population. These factors significantly incentivise the Europeans owards literacy and education, cultivating creativity and innovation. Although printing was available five centuries earlier in China than in Europe, the access to new information for the Chinese population was nothing close to that of the Europeans. China was a centralised state and its bureaucracy was able to exercise thought control by means of censorship and restriction of books available to the general population. This difference in intellectual institutions had significant implications, particularly on knowledge diffusion, which steered the Western Europeans towards scientific empirical research and experiment, making possible echnological process and human capital development through education; they in turn increased income per capita and economic growth. Social behaviour was also shaped by the highly contrasting political and religious institutional framework put in place in different regions of the world in the pre-modern growth era. In Europe, Christianity was adopted as a state religion as early as 380 AD. This resulted in contrasting characteristic of marriages, kinship and inheritance, especially that of the Islamic World. The Church broke down past links to tribes and clans and encouraged individualism and wealth accumulation. This promoted entrepreneurism which became founding steps towards more productive activities and exchange, increasing the standard of living in the long-run. On the other hand, Kuran (1996, 2003) suggested that the ethical and charitable requirements in Islamic law bind potentially productive resources into unproductive social-service organisations. In this case where redistributive, rather than productive, behaviour was incentivise, the economy stunted. Such behaviour would allocate labour resources inefficiently and increase the price of labour in productive sectors, which eventually led to an increase n transformation costs that would negate the gains of trade. This had adverse effect on per capita income and economic growth. Population demographics are another contour of world development. During the pre-modern growth era, the difference in life expectancy stood out between the Group A and B nations. Maddison (2001) also pointed out that deviation in life expectancy, as depicted in the following table. Nations Average Life Expectation (years at birth; average for both sexes) 1000 A. D. 1820 A. D. 24 Average Group 26 Table 2: Average Life Expectation, 1000-1820 A. D. Education institutions which facilitate technological advancement in Netherlands, for example, introduced inventions like water and canal management for agriculture. Additionally, electrical power generation was made possible by windmills which intensify productivity in the sector. The improvements, albeit slow, in agriculture increased food availability and led to a decrease in hunger crises, which were one of the key factors of high mortality before this era. This increase in human welfare, which in turn helped to lower the mortality rate, contributed to the climb in average life expectation in the Group A nations by 12 years. However, the same cannot be said for the Group B nations. The Europeans implemented extractive institutions in their colonies in Latin America while Africans were forced into slavery. In Asia, Indias state did little to educate its people to boost the agriculture sector, epitomised by the lack of use of their sacred cows dung as manure. Coupled with its social institutions like the caste system, there was little incentive and ability to produce food to curb shortages. Group B nations experienced little improvements in human welfare, which provides an explanation for the stagnation in life expectancy. Cameron and Neal (2003) said that The interrelationship of population, resources, and technology in the economy is conditioned by social interactions, including values and attitudes. While we cannot undermine the roles that the other three factors play in shaping the contours of world development, it is evident, from the examples given throughout the essay, that it is the underlying institutions applied that determined their growth, utilisation, and eventually, impact on the societies. Cameron and Neal (2003) summed up the importance of institutions by, coming into ag reement with North, uggesting that institutional change is perhaps the most dynamic source of change in the whole economy. The sum of the impacts coming from population growth, resources management and technological advancement, which are heavily influenced by the nations institutional structure, determined the contours of world development in the pre-modern growth era. (1484 words) ReTerences Cameron, R. , Neal, L. (2003). A Concise Economic History Of The World: From Paleolithic Times To The Present. New York: Oxford University Press. Carden, A. (2007). Christian Ethics, Formal Instiutions, and Economic Growth. American Review of Political Economy, 34-53. Harreld, D. J. (2010, February 4). The Dutch Economy in the Golden Age (16th-17th Centuries). Retrieved January 5, 2012, from EH. Net Encyclopedia: http://eh. net/encyclopedia/article/Harreld. Dutch Hodgso, G. M. (2006). What are Institutions? Jornal of Economic Issues, Vol. 40, No. 1. Kuran, T. (1996). The Discontents of Islamic Economic Morality. Economic Review Papers and Proceedings 86(2), 438-442. Kuran, T. (2003). Why the Middle East is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation. Working Paper: Mercatus Center and University of Southern California. Maddison, A. 2005). Growth Interaction in the World Economy: The Roots of Modernity. Washington, D. C. : The American Enterprise Institute Press. Maddison, A. (2006). The Contours of World Development. In A. Maddison, The World Economy: Volume 1: A Millennial Perspective Volume 2: Historical Statistics (pp. 29-50). Paris: Development Centre Studies, Organisation for Economic Co-operaton and Development (OECD). North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. North, D. C. (1991). Institutions. The Journal of Economic Perspectives, Vol. 5, NO. 1. ,97-112.