REGIONS 3: NORTH AND OLSON ESSAYS DISCUSSION

NORTH:
Summary:
o It identifies institutions as formal rules, informal norms, and their enforcement characteristics, emphasizing their
role in structuring human interaction.

o Transaction costs play a crucial role, and institutions become essential in situations where transactions are costly,
impacting economic outcomes.

o Ronald Coase's work is cited, highlighting the connection between institutions, transaction costs, and neoclassical
theory.

o The essay stresses that efficient markets require stringent informational and institutional requirements, challenging
the assumption that institutions play no independent role in economic performance.

o The discipline-of-the-competitive-market model requires stringent conditions that are rarely met in reality, as
individuals often act with incomplete information and subjective models.

o The essay introduces the concept of "formal constraints" (rules, laws) and "informal constraints" (norms,
conventions) as components of institutions that shape societies and economies.

o Economic change is an incremental process influenced by choices made by individuals and organizations, and it
involves altering existing contracts and modifying norms.

o Organizations, comprising various groups with common purposes, evolve based on opportunities provided by the
institutional matrix.

o The interaction between institutions and organizations shapes the institutional evolution of an economy, with
entrepreneurs playing a crucial role.

o Learning is a continuous process influenced by competition, and the speed of economic change is tied to the rate of
learning and perceived payoffs.

o The essay argues for dismantling the rationality assumption in economic theory to understand human learning,
highlighting the role of ideas, ideologies, myths, and prejudices.

o Belief structures transform into societal and economic structures through institutions, emphasizing the intimate
relationship between mental models and institutions.

o Different societies develop diverse languages, mental models, and informal constraints, influencing their
institutional frameworks.

o The pace and direction of economic change vary throughout history, with some societies getting "stuck" in
institutional matrices that hinder efficient outcomes.

o The essay delves into the nature of political markets, arguing that bargaining strength affects efficiency outcomes,
especially in the presence of positive transaction costs.

o The author introduces the concept of "collective learning," emphasizing the transmission of accumulated
knowledge over time through culture.

o The essay touches on the rise and decline of civilizations, illustrating the uneven pattern of economic performance
over different historical periods.

o The institutional/cognitive approach is proposed as a means to understand economic history and the complex
interplay between institutions, technology, and demography.

o The conclusion points to the challenges of understanding economic change through time but expresses optimism
about ongoing research enriching economic theory.

Washintong consensus

Main ideas:
 o Institutions and Transaction Costs: Institutions, encompassing formal and informal constraints, are crucial in
shaping economic performance, especially under conditions of transaction costs.

o Evolution of Organizations: The interplay between institutions and organizations, led by entrepreneurs, influences
the institutional evolution of an economy.

o Learning and Economic Change: The speed of economic change is tied to the rate of learning, and the direction of
change is influenced by perceived payoffs, challenging the rationality assumption.

o Belief Structures and Institutions: Belief structures, originating from mental models, transform into societal and
economic structures through institutions, emphasizing their close relationship.

o Collective Learning and Cultural Heritage: The essay underscores the importance of collective learning,
transmitted through cultural heritage, in shaping the path dependence of societies and economies.

Conclusion
The essay provides a comprehensive exploration of the role of institutions and human cognition in economic performance
through different historical periods. It challenges traditional economic assumptions and advocates for an
institutional/cognitive approach to understand the complex interplay between formal rules, informal norms, and enforcement
characteristics. The recognition of the role of institutions, learning, and cultural heritage in shaping economic outcomes
opens avenues for future research and promises to enrich economic theory, providing insights into contemporary issues and
historical patterns of economic change.

OLSON:
Summary
Mancur Olson: Big bills left on the sidewalk: why some nations are rich, and others are poor.

 Efficient markets hypothesis: an investor can do as well with all the existing information than if choosing random
investments. Also, big bills are not often dropped on the sidewalk, and if they are they will be picked up rather
quickly.
 The market ensures that involuntarily unemployed labor is not left pacing the sidewalks.
 Mutually advantageous bargaining will obtain all gains that are worth obtaining, leads to the conclusion that we
are already in the best of all possible worlds.

The Boundaries of Wealth and Poverty:

 Evidence that people’s rationality makes society productively efficient? In the borders of countries.
 Income levels differ btwn countries.
 Poor countries do not have a structure of incentives that brings forth the productive cooperation that would pick up
the big bills, because these structures don’t come up from individual rationality.
 Consider separately the relative abundance or scarcity of capital, land and labor. Also consider the level of
technology separately.
 Diminishing returns to land and other natural resources cant explain the huge differences in income. Also examine
the implications of the huge differences between countries in capital intensity, this shows that countries are
nowhere near the frontires of aggregate neoclassical production functions.
 The most important explanation of the differences in income across countries is the difference in their economic
policies and institutions.
 Features of the institutions and policies nations need to achieve for the highest possible income levels.

The surprising results of large migrations:

o The case of Ireland: lost population but the per capita income didn’t grow.
o It is not the ratio of land to labor which has determined per capita income.

Surprising evidence on density of population:

 There is a positive between the number of people per square km, and the per capita income. The greater the higher.
  It is a two way relationship, one affects the other and viceversa.
 There is no relation between natural resources per population ratio and per capita income.
 Diminishing returns to capital: The allocation of capital also contradicts the fact that countries are at their frontiers
of aggregate production.
 Countries with high per capita incomes have higher capital intensities.
 It is not rare for capital and labor to move in the same direction. Distinguishing private good and public good
human capital.
 Poor countries are alleged to be poor because they lack special traits of behaviour. But the cultural argument is
vague.

Migration as an experiment:

 Newly arrived migrants have the same marketable human capital than before. Migrants earn a 55% of what natives
earn.
 How much would have a western German produced if they had the same institutions and economic policies than
Haitians? Obviously it would be deteriorated.
 Differences in personal culture can explain only a part of the differences in per capita income.
 Example of North vs South Korea: same people, different institutions and policies.
 The overwhelming importance of institutions and economic policies: The great differences of wealth between
nations are the quality of institutions and policies.

Old Growth theory, new growth theory and the facts:

 Catch-up growth makes poor countries grow faster. However, this growth will be surpassed by high income
countries by the use of their human capital.
 However, the fastest growing countries are never the high income countries but always a subset of the lower
income countries. On average, they don t grow faster.
 Poor countries could adopt positive policies and institutions, and pay off their potential growth. South korea

Picking up the big bills:

 The quality of the institutions is not related with the size of the government.
 The structure of incentives has far more evidence in its favor.
 What kind of institutions and policies generate better economic performance?
 The really big bills cant be picked up by uncoordinated individual will. They can only be obtained if a vast array of
gains from specialization and trade are realized.
 Poor countries do not realize the big bills on the sidewalk of trade and specialization, and do not have the
institutions that enforce contracts impartially. Lack institutions to make property rights secure in the long run. And
misguided production and trade by policies by private and public predation.

Main Ideas

o Efficient Markets Hypothesis and Rationality in Society: The Efficient Markets Hypothesis suggests that investors
can perform as well with existing information as they would by choosing random investments. Analogously, the
metaphor of "big bills left on the sidewalk" implies that valuable opportunities are not left unexplored for long in
efficient markets. This idea extends to societal rationality, suggesting that individuals and markets operate
optimally based on available information.

o Institutions and Policies as Key Determinants of Economic Disparities: Mancur Olson emphasizes that the most
significant explanation for income disparities among countries lies in their economic policies and institutions. The
quality of institutions, rather than natural resources or individual traits, plays a crucial role in a nation's economic
prosperity. This underscores the importance of creating and maintaining effective institutions and policies to foster
economic growth.

o Population Density and Economic Performance: Surprisingly, there is a positive relationship between population
density and per capita income. This contradicts conventional wisdom about the negative effects of overpopulation.
The two-way relationship suggests that not only does population density influence economic outcomes, but
economic conditions also impact population density.
 o Migration as an Experiment and the Role of Institutions: Large migrations, such as the case of Ireland, reveal that
changes in population alone do not guarantee changes in per capita income. The focus shifts to the importance of
institutions and economic policies. The comparison of Western Germans and Haitians underscores that the same
people can have vastly different economic outcomes based on the quality of their institutions and policies.

o Institutions, Policies, and Economic Growth: Institutions and policies are crucial factors in determining economic
growth. The emphasis is on the enforcement of contracts, security of property rights, and avoiding misguided
production and trade policies. The inability of poor countries to realize the benefits of trade and specialization is
attributed to the lack of institutions that facilitate these processes and ensure fair and secure economic practices.

Conclusion:

Mancur Olson's analysis highlights the central role of institutions and policies in shaping the economic fortunes of nations.
While factors like population density and efficient markets contribute to the narrative, the overarching theme is that the
quality of a country's institutions and the effectiveness of its economic policies are paramount. The call to "pick up the big
bills" on the sidewalk of trade and specialization underscores the need for coordinated efforts, sound governance, and fair
economic structures to foster prosperity. The lessons from migrations, comparisons between countries like North and South
Korea, and the examination of growth theories collectively emphasize that sustainable economic development is intricately
tied to the presence of effective institutions and favorable policies.