A Few Thoughts About "Why Nations Fail"
Before I start up and offer my bland thoughts, for those of you who are good readers, I suggest that you read Fukuyama's review of this book. His review is the most subtle of the numerous ones that are being rolled out.
A few thoughts:
1. How will representative agent macro economists such as Prescott respond to this book? It seems intuitive that the representative agent framework simply assumes away politics. If there is 1 person who represents an economy then he is likely to agree with himself about "optimal" policies at any point in time.
2. The book poses a challenge to classical growth theory. In retrospect, growth theory appears to be a giant accounting exercise. If all nations have access to the same one sector production function then differences in output per-capita must be tied to differences in accumulated inputs and hard to measure technological change. But, why do different nations have different levels of human capital and physical capital? How did the early "rules of the game" affect the dynamic accumulation of such capital?
3. When I was taught growth theory, there was a unique steady state that nations were converging to. If I'm reading this book correctly, the authors view growth as a multiple equilibria game where the U.S and England lucked out due to a variety of early conditions (that extraction of resources in the Jamestown colonies was not profitable) and thus inclusive institutions and high powered incentives were needed to lure men to devote effort to developing these areas. This book highlights that macro models are unlikely to be "markovian" and simply to depend on last period's key state variables. In contrast, small differences initial conditions hundreds of years ago snowball to give us the Mining Mita today.
4. Regression discontinuities and borders such as the North Korea/South Korea and the Mexico/U.S border yield sharp tests of the role of institutions.
5. Why not a "political Coase Theorem"? This has always been my question about Daron's work on the broad subject of institutions. As a Chicago Ph.D., we took the Coase theorem very seriously. Societies figure out how to use resources efficiently. The authors reject this claim and argue that the incumbent elites may choose to lower growth that could be achieved under inclusive institutions because they are growing so rich under the "extractive institutions regime" of simply enslaving people or treating them like serfs.
If the elite believe they have secure property rights to the "pie" over time then they should have strong incentives to create rules to allow the pie to grow. I recognize that if the elites believe that their property rights are tenuous and will be weakened by allowing the pie to grow (i.e the people will grow confident as their wealth grows and create their own army using their own $), then the elites may not open the door a crack and will choose to avoid "inclusive institutions". So this is a time consistency issue and Prescott and Daron can work on this.
The Acemoglu and Robinson book's key themes are relevant for my work on environmental quality dynamics in growing cities in the developing world. Do the elites desire "green cities"? If the elites want these for themselves, must they provide them for everyone in the city because pollution is a local public bad? This argument is similar to Werner Troesken's 2004 book on lead and water pollution that argued that in the U.S past that wealthy whites provided clean water for nearby black neighborhoods not due to altruism but to minimize the likelihood of a pollution spillover effect.
UPDATE: As I think back to my education at the University of Chicago from 1988 to 1993, we rarely discussed "politics". I would like to ask Daron a "history of economic thought" question. What was going on in macro in the late 1980s such that politics was ignored? Was this due to the embrace of the representative agent and working out the human capital augmented models? What convinced Daron that we can't study macro without focusing on politics?