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I've thought the same; the focus on institutions is a great "in" for Austrians into an important, popular debate in economics.

One thing these back-and-forths between Sachs, Acemoglu & Robinson, Diamond, et cetera, remind me of is what I experienced when I read some of the immigration theory literature last year. There are a lot of theories out there which are compatible with each other, but since the scholars are interested mostly in defending their theory it seems as if they adopt a monocausal approach to their field. I feel that something similar happens in development economics, when everyone probably realizes that development is multicausal.

While there is little question that complex processes are multicausal, the fact remains that if we are going to understand complex processes, we are going to have to try to isolate out each of those causes to see their effects and to understand how they all interact with each other.

Sachs has been sounding this bell since the 1990s, but really ratcheted it up around 2004 when he, Rodrik, and Acemoglu had an ongoing research tiff about the primacy of institutions for growth (sample article title from Sachs: "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income"). As an Austrian/public choice/institutional economist who has done extensive work in this area (my book on institutions in transition economies is coming out with Palgrave Macmillan early next year), I lean much more towards the Acemoglu/Robinson explanations than Sachs, who posits geography as the be-all, end-all. But this is entirely an area ripe for Austrian analysis, mainly since the mainstream of economics is moving in this direction. It is actually rather sad that Austrians haven't engaged on this front, because institutional economics has all the hallmarks of Austrian analysis: problems of information, transaction costs, coordination, incentives and their mediation, translation of individual preferences into societal norms, etc. I hope to further develop the literature in this area, but I agree with Jonathan above - this is a place where Austrians should be jumping in with both feet.

Chris,

The researchers that I listed have in fact jumped with both feet into this institutional rules debate.

I look forward to reading your book.

Pete

I never have liked Sachs' econonomics and his response to A&R makes me dislike him even more.

Sachs: “Diffusion of technology (meaning the spread of innovations to more places) is also a key part of growth, indeed the main explanation for catch-up growth (rapid growth in economies not at the technology frontier).”

So why would diffusion not relate to institutions in the same way innovation does? If institutions stifle innovation, they will stifle diffusion as well. Sachs should understand that from his work in Russia.

Sachs: “Second, the kinds of institutions that foster innovation are not necessarily the same as the kind of institutions that foster diffusion. As much as one might prefer democracies for many reasons, authoritarian regimes can be quite proficient at speeding technological diffusion. This accounts, for example, for the rapid and effective economic development promoted by many authoritarian regimes in Asia during the past half century, and of course, most notably China.”

A&R have a chapter on China that addresses Sachs’ critique directly. They acknowledge that authoritarian regimes can cause development in very backward and poor nations, such as China, but the institutions in place limit the potential and will cause China to hit the middle development wall that so many other places have hit and stop development.

Sachs: “Economic development was shaped by the global location of major coal deposits.”

So how did Japan develop? And why do nations with large coal deposits not develop? Why do developmental economists speak of the curse of natural resources? Institutions matter.

Sachs: “According to Acemoglu, Robinson and co-author Simon Johnson (hence AJR), colonizers decided this on the basis of disease, migrating and settling in the healthier places and exploiting the less healthy ones from afar.”

I agree that is a weak area of the book. Development in the European country determined the pattern of settlement vs. exploitation. England and the Dutch Republic had sound institutions which gave the people the wealth they needed in order to immigrate. Spain had bad institutions so only the nobility and the Church had the wealth to migrate to the colonies.

Sachs: “Acemoglu and Robinson do more than assert that political institutions matter. They assert that only political institutions play a significant role in accounting for economic performance.”

That’s a straw man.

Sachs: “Such a mistaken conclusion would ignore the pertinent facts that the oil deposits had not yet been discovered 150 years ago…”

It seems like these child Harvard wonderkins always turn out to be duds.

The only one who didn't that I can think of was Nozick.

Roberto Unger, Alan Dershowitz .. embarrassments.

Sachs is another who thinks he's too brilliant to have to, you know, actually get anything right.

Straw man arguments? Bogus history of ideas. What, me worry? That's seems to be the Sachs attitude.

I cut my post off too soon. This

"Sachs: “Such a mistaken conclusion would ignore the pertinent facts that the oil deposits had not yet been discovered 150 years ago…”

should have been followed by this:

The ancient Greeks discovered oil in the Middle East. They just didn't know what to do with it except to launch it to set ablaze enemy ships. The Arabs didn't develop their known oil reserves, Western private companies operating in an environment with good institutions did the work and then the Arab/Iranian governments stole everything.

But the curse of natural resources has afflicted the oil states like Saudi Arabia and Iran. Their per capita income peaked in about 1973 and had slid downhill since, just as A&R wrote they would.

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