now lives on an average incomeabout equal to average incomes inthe United States in 1945. His NorthKorean cousin, if he manages to sur-vive, exists by eating roots and grass.My colleague Nick Eberstadt pointsout how much diet and living stan-dards matter: seven-year-old SouthKorean boys are 8 inches taller thanNorth Korean boys.
Actual, historical economic developmentof countries cannot be explained by the pres-ence or absence of natural resources. Re-sources are neither necessary nor sufficient fordevelopment. Development has occurred ininhospitable circumstances, and
devel-opment has occurred in countries rich in nat-ural resources. Oil’s “curse” is well known.
Real per-capita income in Saudi Arabia is afraction of what it once was. Nigeria, an oilproducer, is categorized as a highly indebtedpoor country. And, Argentina, rich in naturalresources including oil, has recently experi-enced a long recession due to its bad policiesand defective institutions.
In their empirical studies, economists cor-relate output with investment capital,human capital, and productivity.
Empiricalrelevance aside, there is a fatal conceptualflaw in this approach. Both sides of the equa-tion are measuring the same thing:The left side measures a flow fromwealth, while the physical andhuman capital variables on the rightside measure the stock of wealth.Obviously, if one regresses wealth onwealth plus some “true” determinantof wealth, the latter doesn’t havemuch opportunity to be detected assignificant.
It is no wonder then that institutionaldeterminants of growth have been neglected.Even when included in empirical studies,they compete against wealth in explainingeconomic growth. The modeling of thegrowth process has obscured it.Our paper is not intended to be a review of the empirical development literature. Rolland Talbott do a nice job of that.
Our focusis on what does matter for growth: privateproperty. We do take note of the empiricalresults in Roll and Talbott, however.Roll and Talbott find that nine institu-tional variables explain over 80 percent of theinternational variation in per-capita grossnational income, with property rights (+) andblack market activity (-) having the highestlevels of significance. The other variables areregulation (-), inflation (-), civil liberties (+),political rights (+), press freedom (+), govern-ment expenditures (+), and trade barriers (-).We commend their paper to the reader whowants more details on the empirical findings.Before turning to the conceptual case forproperty rights as the primary determinant of economic growth and development, we ask why property rights had come to be neglectedin the economic literature. We cannot simplyblame economists’ models, but must examinetheir theoretical underpinning.
The Economists’ Oversight
In his book on the history of property rights,Tom Bethell examines the neglect of propertyrights in the economic literature. He concludesthat the existence of private property was a pre-sumption that underlay the work of the classicaleconomists. Its absence was unthinkable, so itsimportance went undefended. As he put it, “inthe Great Britain of Adam Smith’s day, criticismof private property hardly ever found its wayinto print.”
Richard Pipes agrees: “If the glori-fication of private property reached its apogee inEngland, where it enjoyed the support of a largebody of private owners, it first came underfrontal assault in
Adam Smith did not neglect propertyrights in his legal work. The first lecture in hisfirst series of lectures on jurisprudence began:The first and chief design of everysystem of government is to maintain justice: to prevent the members of
By the middle of the 19th century,private propertywas underintellectualattack.