In focusing on the transition problem, I have been struck by how simple the economics of transition are, and how, in contrast, difficult the political, legal and social aspects of the transition are. Private property, freedom of contract, monetary responsibility, fiscal restraint, and open trade provide the basic policy recipe. But saying that is much easier than achieving that, and the blocking point is not always the interest group logic of concentrated benefits and dispersed costs. Public choice analysis goes a long way to explain the selection and persistence of bad economic policies, but it doesn’t exhaust the explanation. Interests and ideology are equally part of the explanation. But once we open ourselves up to an analysis of ideology, we have to recognize that there are deeper issues such as deep beliefs that cannot be simply discard as easily as yesterdays newspaper.
To illustrate this point I have often told the following story to my students. Imagine that a friend of yours is in Peru and he has a bottle of soda in his hand, but it is not a twist off cap. He needs a can-opener to do the job but one is not available. He can call his friend in NJ, and that friend can ship him an old fashioned can-open that he can purchase for $1 at any local grocery store and ship it to his friend in Peru overnight express with UPS. The next day our thirsty Peruvian can open his package, take out the can-opener and utilize it and alleviate his thirst. The technology of the can-opener transfers simply and accomplishes it task of opening bottles of soda whether we are in NJ, Peru or Alaska.
Now consider that our Peruvian friend, rather than trying to open a bottle of soda is entrusted with running the political and economic situation in Peru. He once again calls his good friend in NJ and asks for help. His NJ friend sends him a copy of the original Declaration of Independence and the US Constitution and says that these ‘social contracts’ represent a contract technology that limits the power of the government but creates an economic environment conducive to entrepreneurial innovation and the expansion of the division of labor and thus the gains from trade among citizen within the system. Our Peruvian friend receives the package from UPS and stands in front of the national assembly that afternoon and announces these are now the rules governing Peru.
Do we expect that same results with the transfer of the constitution as we do with the transfer of the can-opener? I don’t think the empirical record can offer us much confidence in this regard. The transfer of deep beliefs seems much more difficult than the transfer of things. Why that is so, it is not obviously clear. Pete Leeson, Chris Coyne and I have a paper, “Institutional Stickiness and the New Development Economics” which tries to address this issue that is currently under review at a journal. This work develops themes I first addressed in my “Why Culture Matters” paper that was published in an Italian journal of political economy and then reprinted in English translation in my Calculation and Coordination. Chris Coyne’s work on the political economy of post-conflict reconstruction is grounded in this puzzle and he has made great strides in the theoretical underpinnings of this argument and the empirical illustration of the point.
Again in reading for my graduate seminar in Constitutional Economics that I start teaching in 2 weeks, I was struck once again by the wisdom of Adam Smith and how it relates precisely to this point. In his Lectures on Jurisprudence, the appendix includes Smith’s plan for The Wealth of Nations. On pages 578-579 of the Liberty Fund edition of this work, he has a section in his plan entitled “Concerning the causes of the slow progress of opulence.” Smith states that there are two reasons for why some countries are poor while others are rich. The first are natural impediments and the second are the policies of oppressive and injudicious government. Bad public policy render a countries agriculture and its arts and commerce underdeveloped. Bad public policy, the reader is told, increase the natural impediments to development.
What are the natural impediments?
The original poverty and ignorance of mankind the natural impediments to the progress of opulence. That it is easier for a nation, in the same manner as for an individual, to raise itself from a modern degree of wealth; money, according to the proverb, begetting money, among nations as among individuals. The extreme difficulty of beginning accumulation and the many accidents to which it is exposed. The slowness and difficulty with which those things, which now appear the most simple inventions, were originally found out. That a nation is not always in a condition to imitate and copy the inventions and improvements of its more wealthy neighbors; the application of these frequently requiring a stock with which it is not furnished. (emphasis mine)
And this stock need not refer to material accumulation, but as Chris is showing relates more to the stock of social capital that resides in the people of the nation under investigation.