Wednesday, July 30, 2014

Creative destruction

Mancur Olson pointed out many years ago that economies seem to grow much faster after major wars or other societal revolutions. That were the case of Japan, Germany, and France after World War II. Olson's story was that wartime destruction and revolution dissolved the old vested interests and let new leaders come to the fore. War and revolutions remove the older generations and bring in new generations and technologies.

Another XX century economist, Joseph Schumpeter, argued that the process by which economic growth occurs is the so called “creative destruction”, the replacement or destruction of old technologies and methods by new and more efficient ones. Understandably, this process is always confronted by the old establishment and their opposition is likely to be successful because they tend to have a structured and strong lobby. Economist such as William Easterly argue that institutions that defend economic freedom and protect individual economic liberties are the key for that “creative destruction” to succeed. Daron Acemoglu goes one step further, though, his point in his new book “Why nations fail” is that freedom and individual liberties don’t happen spontaneously, they stem from inclusive institutions, i.e. institutions that embody a broad majority of the society and where political power is not owned by just a few. In other words, the political contest between levelled groups of interest end up reaching the lowest common denominator: individual liberty.

Therefore, from Acemoglu’s point of view, Olson’s observation about war regeneration is a process that only occur IF “inclusive institutions” are in place, otherwise the new generations will just supplant and replicate the previous extractive groups and the protected old technologies just as black American slaves did in Liberia or Mugabe did in Zimbabwe to name a few.