A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


Durable Economic Development


Why do Japan, western Europe, North America, and Australia and New Zealand lead the world in economic development, and why are their prosperity, infrastructure, and standards of living far, far greater than those of the less-developed zones?

This book offers an answer to this puzzle. Comparing the histories of Japan and northwestern Europe from the middle ages onward, it finds a startling parallel between the two, which has been relatively neglected in explanations of economic development. Then it contrasts the Japan/Europe pattern with the histories of Africa, Asia except Japan, Latin America, and eastern and southern Europe, where the parallel vanishes. Could this divergence explain why development occurred first in Japan and northwestern Europe (and Europe's cultural descendants in North America, Australia, and New Zealand) and less so or not at all elsewhere? Will it also help us understand economic development in general?

In both Japan and northwestern Europe, the methods, rules, and instruments of policy and exchange were fashioned primarily by bargaining among the parties concerned: farmers, landowners, producers, and traders. Money and banking, commercial law, rules of the market, corporate enterprise, government bureaucracies, and ultimately parliamentary democracy were created in this way. Let us call these — and others to be added — the institutions of economic development. As the parties negotiated with each other and with the sovereign, they built into their systems ways of holding each other accountable for performance and for efficient use of resources, both public and private. On these foundations, economic development took the form of millions upon millions of positive-sum transactions, agreed upon by thousands upon thousands of people and groups, acting separately, often independently of superior authority. While the sovereign attempted to interfere with economic endeavor at all times, for the most part the people resisted, and for the most part the people won.

In the rest of the world, by contrast, economic endeavor and its rules and instruments were conducted or fashioned primarily by the sovereign, using the weight of superior authority and military command. Here the people either could not resist, or they lost. These areas are now the less-developed zones.

Furthermore, in Japan and northwestern Europe, plus cultural descendants of the latter, the institutions of economic development are held in place by a balance of power among interest groups, which have created an interlocking society. The institutions so fit into each other, like pieces in a jigsaw puzzle, that none can be displaced without the whole society's unraveling. Because they have vested interests in many of the institutions, groups with a preponderance of power prevent the unraveling. This is why, for example, democratic government is well established in Europe, North America, and Japan. By contrast, in much of the rest of the world the analogous institutions are held together by the military or by elites ruling over a weakened citizenry. They do not interlock. Besides, an unraveling of society in these areas may not be viewed with much alarm by some groups with the power to make it happen.

It is often supposed that Japanese economic development "began" around the turn of the twentieth century and that Japan copied its economic system from the West. Recent scholarship demonstrates that neither of these assertions is completely true. Rather, Japanese economic development had been progressing strongly for almost three centuries before the Meiji Restoration of 1868. Indeed, the Japanese at that time may have been as far advanced as were the British just before their Industrial Revolution. Furthermore, the Japanese had developed sophisticated banking and exchange practices, commercial law, and bureaucracies capable of handling advanced economic policy. Their agrarian system had been modernized. Taking a cue from this scholarship, I will argue that Japan did not copy the West. Rather, the Japanese and Europeans were independent progenitors of economic development.

This perspective leads to another remarkable finding: that the common features of Japanese and Western histories, which distinguish them from other societies, date from early medieval times onward, even though Japan and the West are not known to have communicated with each other before the sixteenth century. While these common features have been recognized by some Japanese historians such as Asakawa and Takekoshi, and by a few Western Japanologists such as Hall and Mass, they have been largely ignored by economic historians and development economists in the West.

The initial question in this book, therefore, is why were northwestern Europe and Japan the historic leaders in economic development? The answer to this is of obvious importance to many current world problems. As well as addressing the general question of how to lift vast portions of the world population out of poverty, the argument developed in this book will enhance our understanding of some other crucial questions, to wit:

  • First, can we predict whether the liberalizing reforms currently undertaken in less-developed zones and the Soviet successor states will last over centuries, or whether they will crumble as have so many similar reforms in the past?
  • Second, when economists propose sound policies for economic development — such as inflation control, equitable taxes, and realistic exchange rates — why are these proposals so often not implemented by government officials in less-developed zones and eastern Europe, when economic development is presumably their goal?
  • Third, when sound policies have in fact been followed for a decade or more, as in Colombia in the 1950s, Guatemala in the 1960s, or Kenya in the 1970s, why are they reversed, when this reversal leads to excessive inflation, unemployment, economic slowdown, and other unwanted consequences?

The ultimate explanation of economic development — I will argue — lies not in economic factors, such as land, labor, and capital, or even in social forces, such as education, religion, and entrepreneurship. Rather, all these will be added when most people learn, as the Japanese and northwestern Europeans did, that it is good business to be just and considerate toward one's neighbors; to solve quarrels peacefully; to be held accountable for the efficient use of resources (both public and private); and to abide by modes of behavior — hereafter called institutions — that have been negotiated and agreed by interested parties. [1] Our purpose is to understand a phenomenon — economic development — not to display its economic aspects separately from its historical, sociological, or other aspects.

This book coordinates history with economics. Leaving the other social sciences to others, I do not claim the total picture. But I do argue that the histories of the more-developed zones explain much about how development occurs, and why it has happened more in some places than in others. I address the lay public in addition to my colleagues. Technical jargon will be kept to a minimum and explained.


Economic History and Economic Development

Economic history and economic development are deemed separate subfields of economics. In part, the reason for this paradox is itself historical: economic history was there first. Although classical economists (Smith, Malthus, Mill, Ricardo) did write about development, and although Schumpeter based his business-cycle theory upon it, nevertheless not until after World War II did development rank alongside theory, international trade, money and banking, and others as a recognized subfield.

But surely a more cogent reason why development is not merged with history is that many leaders in less-developed countries, being strongly nationalist, think that the history of more-developed zones has little to say to them. This belief has been seconded by diplomats seeking the support of Third World governments in the cold war; by international agencies lending them money; by economists advising them; and by professors teaching and researching in their universities. All these professionals (I among them) have had reasons to pretend that development was not history.

Two unfortunate results have followed. One is that economic development has become treated largely as a mathematical exercise, manifesting itself in the plethora of growth models whose popularity peaked two decades ago. Underdevelopment was attributed to forces beyond the control of Third World peoples, since it was not diplomatic to blame it on culture. Most models cited lack of capital, both physical and human. President Mobutu of Zaire referred to his country as "underequipped," denying that it was "underdeveloped." The other, more serious, result is that lessons from the historical experiences of the more-developed zones have been neglected. Especially has this been so in policy-making toward eastern Europe and the Third World. Of course, it is not at all certain that history, which occurs over centuries, would influence politicians, whose time span may be until the next election. But there is no excuse for its neglect by all except a few scholars.


The Power-Diffusion Process

The historic contrast between Japan and northwestern Europe on the one hand and the rest of the world on the other lies primarily in the concentration or diffusion of power. In this book, power means the ability to influence or direct the behavior of others.

Power is an economic good, either capital (capable of yielding other products for its possessor) or consumer (enjoyed for its own sake). It has costs and benefits. The costs may be monetary, but they may also lie in other sacrifices, such as the number of companions killed to obtain it. Power is tradable for money or for other goods, and one may hold more or less of it. Thus power shares the major attributes of other economic goods and services. In the less-developed zones today, the power of the central authorities over economic decisions — on production, prices, the money supply, interest and exchange rates, and others — is far more concentrated than is that of their counterparts in the more-developed zones. It is also subject to fewer checks and balances. Therefore, the answer to questions two and three is already hinted. Powerholders may be unwilling to take socially advantageous measures because these would diminish their power.

Durable economic development is defined as economic growth lasting for a century or more, along with the formation of institutions to sustain the growth. It requires a mechanism by which powerholders either trade their power for other goods or are deprived of it by other persons. The common elements found in the histories of Japan and northwestern Europe both illustrate that process and will help us predict whether current policy toward eastern Europe and the less-developed zones will result in enduring development. Up to medieval times, power was concentrated everywhere in the world, in ways similar to those found in less-developed zones today. But in northwestern Europe and Japan, over time it became diffused among more and more persons and organized groups. The pertinent question becomes not why power is still concentrated in less-developed zones today but why it became less concentrated in today's more-developed zones.

Power diffusion in Japan and northwestern Europe was initiated in similar ways, and it continued in matching ways for at least seven centuries. In the next five chapters I will show examples of how both societies developed a growing balance of power among economic interest groups and how this balance led toward institutions that were both equitable and growth-promoting. Power diffusion also fostered liberal economic attitudes, along with parliamentary democracy, widespread ownership of assets, and decentralized decision making. These are what led to durable economic development.

More than in other regions, as far back as the twelfth and thirteenth centuries many corporate economic interest groups were being formed in northwestern Europe and Japan. At first these included guilds, religious organizations, village assemblies, military bands, and peasant associations. Over the centuries political associations, labor unions, consumer cooperatives, lobbies for industries, farmers' unions, and more were added. Each interest group possessed a structure by which it might negotiate as a body with other interest groups. (By contrast, a corporate category is a loose configuration of persons with similar interests but without bargaining capabilities. Definitions of M.G. Smith are used.) [2] A society of many corporate interest groups, possessing the capacity to negotiate with each other, will be called a pluralist society in this book. Other types of pluralism — such as many educational systems, religions, and ethnic groups — followed. Therefore, my economic construct for pluralism is consistent with the wider, more popular definition. Corporate interest groups did exist in other parts of the world, but they did not achieve the critical mass necessary for power diffusion.

I have distilled the common features of the Japanese and northwestern European experiences into what I call the power-diffusion process, which operated as follows: Beginning in medieval times, lower-level (as perceived by contemporary cultures) interest groups allied themselves with upper-level groups, exacting power in return. For example, as nobility, kings, or church competed with one another, peasant groups might join forces with either side, demanding greater power or freedom if their side won. If their side lost, they would bide their time until the next occasion. These arrangements, across social clusters, will be called vertical alliances. Reference will also be made to vertical communication, contracts, negotiation, bargaining, and the like. The application of vertical alliances to enhance power is referred to as leverage. The power-diffusion process consists in repeated instances of vertical alliances with leverage, hundreds and thousands of times over centuries, with power becoming incrementally more balanced each time. "More" balanced means that lower-level groups gained in their ability to promote or thwart the goals of upper-level groups. In no society has this process led to a complete balance of power, nor would one even know what "complete" would be.

In Japan and northwestern Europe, rather than rely on the sovereign, the interest groups themselves negotiated the institutions to implement new arrangements. These included a monetary system, a legal system, corporations, trading practices, education, and parliamentary democracy. The sovereign's role was secondary, often endorsing what the groups had decided or making decisions that might be countered or revised by the groups. Therefore, the interest groups had vested interests in the institutions, while the sovereign had only a limited ability to subvert them to his own advantage. This restraint upon concentrated power constitutes the principal difference, in the context of durable economic development, between Japan and northwestern Europe on the one hand and the rest of the world on the other.

Curiously, the industrialized powers are now supporting in eastern Europe and the Third World authoritarian methods that they gave up a century or more ago in their own territories. They are encouraging — even bribing — authoritarian governments to impose upon their peoples economic liberalism, modern monetary structures, and private markets, all of which are governed by rules that defy the norms of millions of their citizens. Since these reforms are ahistorical, they may not last for centuries. But more than that, this book will show that all of them have been attempted in authoritarian ways many times, often in the same areas. Why must they be tried again?



Institutions that sustain economic development are created slowly in the power-diffusion process. An institution is an accepted mode of behavior protected by the culture; it contrasts with an organization. The international monetary system is an institution, but the International Monetary Fund is an organization. An organization can be formally established, but an institution comes about only as patterns are repeated so many times that they become respected, trusted, and even demanded. The monetary systems of two countries (or laws, parliaments, and the like) may be organizationally identical but institutionally different. What are those particular institutions that most promote durable economic development, and what causes them to be formed?

Imagine an institution as a balloon floating in many-dimensional space, sustained in its position and shape by interest groups blowing on it from all sides. Some breaths are stronger, some weaker. An institution is durable if, with many groups blowing upon it, the breath of any one or small combination is too weak to affect its location or shape very much. Durable economic development requires durable institutions. But even a durable institution may change character gradually as the groups or their relative powers change.

Any institution is, therefore, a compromise among interest groups weighted by their respective powers. The general rule is: In an institutional vacuum, a conflict is resolved by a relative show of power among interest groups and individuals. If the event is repeated many times, the manner of resolution becomes an institution, to which future behavior tends to conform. If, however, relative power shifts over time, so also does the institution. Thus, if the power-diffusion process operates successfully, economic institutions become negotiated by many interest groups whose powers become more diffuse over time. [3]

In any society, each corporate group tries to shape institutions to promote its interests. Organized labor may want not only one set of laws, but also a certain way of lawmaking, management guilds another, and the presidential bureaucracy still another. Efficiency and justice are secondary criteria. In the United States, anti-abortion or pro-choice groups would select judges of the Supreme Court primarily according to the ideologies of the candidates and only secondarily by their general qualifications as jurists. [4] If, however, the pro- and anti- sides are evenly balanced, then the qualifications and integrity of the candidate may swing the vote. Thus the secondary criterion becomes the decisive one in a system of relatively even balance of power. By analogy, all sides, wishing monopolies for their own products, may retreat to a free market for goods and services when power is so dispersed that monopolies for all are impossible. The efficiency of the market — and with it economic development — creeps in serendipitously as everyone's second choice.

If the power-diffusion process progresses, two or more groups may freely negotiate a mode of behavior that does not harm others. If it should harm others, presumably these would exert their power to object. The institution is slowly formed as the mode of behavior is repeated many times. The repetition of this process for many institutions will be called a free market in institutions. Such a market is delayed if a powerful third party repeatedly abuses the negotiating parties for its own gain.

Since each new institution in a free market is shaped around those already formed, they tend to interlock with each other: none can be changed without changes in many others. This is the interlocking society referred to previously. By contrast, institutions mandated by sovereign powers or by elitist governments tend to be imposed suddenly with little respect for existing institutions. Therefore, they tend not to become interlocking and hence not durable.

Institutions not evolving through balance of power are likely to waste resources in two ways:

First, when power is grossly unbalanced, the dominant group consumes resources extravagantly, either for its own enjoyment or to retain its power. Even with relatively well-balanced power, groups consume resources to retain their influence on institutions, for example by lobbying. But the relatively mild expenditures of lobbies are nothing compared with the egregious waste caused by military repression of opposition groups and violations of their human rights, which are cruel as well. The line between "normal" and "excessive" power is, of course, subjective, often depending on comparisons with social norms elsewhere.

Second, rules that do not reflect the real balance of power will not be fully honored. For example, price controls that defy supply-demand realities may not be enforceable. But evasion is always at some cost, which wastes resources.

This book addresses not only how and why institutions evolved through greater balance of power in Japan and northwestern Europe, but also how and why institutions and morality change with development; how and why institutions promoting development spread from northwestern Europe toward southern and eastern Europe but slowed down as they approached the southern and eastern extremities; how and why they have been less well formed in other parts of the world; but also how and why some of them have begun to appear in the less-developed world today.

Explanations by some institutional economists, such as Buchanan and Tullock, Williamson, and Coase generally refer to events that follow those of the present book historically, rather than precede them. These authors deal with the benefits and costs of deriving optimal institutions such as a firm of a certain size and shape. But that process can take place only after the evolution of cultural attributes such as to compromise rather than to confront, to resolve conflicts peacefully rather than with violence, and so on. This book explains how those cultural attributes are acquired. Because the contributions of these authors, with whom I do not disagree, fall subsequent to the continuum of my argument rather than upon it, it would be a digression to explain them in this text. Rather, they are summarized in Appendix 1.1.

Game theory has been another avenue toward understanding cooperative economic behavior. Through the amplification of games derived originally from prisoner's dilemma, [5] economists have pointed out how persons may discover that their own welfares become maximized not through selfishness but through cooperation and altruism, given their expectations concerning the responses of others to their actions. [6] Concerned with game theory per se only to the extent that repeated plays give rise to institutions, [7] this book suggests that the repetition of successful strategies leads to the expectation that others (even non-players) will behave as the game-players do. Social constraints — institutions — cause them to do so.

Rabin finds that persons are motivated to improve the welfare of those others who do the same for them. [8] (Not "do as you would be done by" but "do unto others as they actually do unto you.") But this leaves the crucial question: Who starts such a virtuous circle, and why? Using the abstract language of game theory, one might expect that a game played in one territory is as good as one played in another. But this is obviously not so. Stripped of the mathematical language, this book explores why games played in some societies are more successful than those in others, leading to greater economic development in the former than in the latter. A further note on game theory is found in Appendix 1.2.

Concurrently with the preparation of this book, Douglass North was writing Institutions, Institutional Change, and Economic Performance (1990), whose subject matter overlaps with this work. However, institution building by the power-diffusion process differs significantly from North's theory, as will be explained in Chapter 5.

A vast literature exists on economic development, covering not only the evolution of institutions but also long waves, why the Industrial Revolution occurred when and where it did, the roles of capital, labor, education, technology, and entrepreneurship, econometric models, and so on. [9] For the most part, these theories and models will not be discussed in this book, whose only subject is why and how the power-diffusion process has generated accountability, efficiency, and other institutions of development more in some regions than in others. Apart from that, I have nothing to add to these theories, and any disagreements I may have with them do not impinge on what I have written here.

Since I respect those theories, I do not say: "Pluralism . . . leverage . . . hey presto, economic development!" Nor do I maintain that when power diffusion is added to any or all of these theories economic development is fully explained. The field is much too vast and complex for that. But I do assert that power diffusion is critical to economic development. Development will soon or later fail in all societies where power is concentrated at the center, in an elite that can make economic policies affecting the lives of thousands or millions of citizens, with little input or assent from the large masses of those citizens.


Power Diffusion and Other Ways of Economic Growth

So I argue that the power-diffusion process is essential to durable economic development. Other ways of economic growth, which will be mentioned in this book, are either of limited geographic relevance or are not sufficiently robust to be long-lasting. Three of these ways are the following:

First is chronic growth, or growth from the gradual accumulation of capital and knowledge. Virtually all societies experience this type. E. L. Jones argues that economic growth is the natural state of humankind, which lapses when it is over-ridden by officeholders who suck income from their positions of power, quite apart from their productive contributions (if any). He avers (and I agree) that this "rent seeking" occurs most of the time. [10] Powerholders do more than seek rent, however. They often believe that by their very positions they understand more about the normal functioning of the detailed economy than do those working on the line. For example, the minister of education — who may be a political appointee with little background in schools — may believe that because of his exalted position he knows more about how to teach third grade than does the elementary school teacher with a lifetime of experience, so he dictates the curriculum. The same will be so for the minister of agriculture vis-à-vis the farmer, the minister of industry vis-à-vis the factory owner, and so on down the line. When these forces coalesce, along with rent seeking, they dampen the chronic growth, which becomes neither as great, nor as consistent, as durable economic development with power diffusion. Zones experiencing only chronic growth have long periods of stagnation — such as Le Roy Ladurie's longue durée (for France) — or very slow growth, plodding along for centuries (as in China).

Second is command growth, which occurs when a small elite, controlling resources, decrees policies such as forced saving and direct allocation of resources to infrastructure and heavy industry. The erstwhile Soviet Union grew by command for many decades (see Chapter 14), as did many less-developed countries. But command growth is inefficient because the commanders do not always make the right choices. As their errors accumulate, growth begins to fail.

Third is reflected growth, in which a society copies the institutions of a close geographical neighbor with which it shares a cultural affinity. Spain and Portugal may be examples; they are discussed in Chapter 16. Reflected growth dies out the farther it moves, geographically and culturally, from its source, and its possibilities are not widely extended. Only with power diffusion will economic development — however it was caused — become durable.


Plan for the Remainder of this Book

In summary, durable economic development requires institutions — modes of behavior — established through long-term negotiations among many interest groups, none of which is powerful enough to dominate the others entirely. These institutions were brought about over centuries in northwestern Europe and Japan through the power-diffusion process, involving pluralism, vertical alliances, leverage, negotiations, and compromise. In thousands upon thousands of conflicts, no group could impose its will; each learned to settle for some positive sum short of its ideal. Thus were the rules of market, corporate enterprise, parliamentary government, financial system, and commercial laws fashioned and endowed with sustaining power. More important, the various groups came to value long-term ends more than short-term ones, and they learned that negotiation and compromise, not confrontation and violence, would best achieve them. Checks and balances to limit abuse were agreed upon. Elsewhere in the world, by contrast, institutions that did not contain the necessary checks and balances were imposed by governments upon unwilling subjects, or by victors in war, or in other authoritarian ways. The short term continued to be the imperative time span. Confrontation and violence remained first-choice means of resolving disputes long after they had become obsolete in the more-developed zones. This book will posit that these differences constitute a significant, though not exclusive, reason why our world today is divided between rich and poor.

Chapters 2 and 3 illustrate the power-diffusion process in Japan, showing how it tended toward liberal institutions. Chapters 4 and 5 will do the same for northwestern Europe, with comparisons with Japan. In these chapters only enough examples are presented to show the process in operation. Skeptics will find more in the appendixes. At the end of Chapter 5, the power-diffusion process is summarized. Then the questions are posed: "Why Japan and northwestern Europe? Why not the rest of the world?"

Chapter 6 will show how commercial law was negotiated more by the interest groups in northwestern Europe than imposed by the sovereign, despite the historic centralization of law in England and France. It will make comparisons with Japan.

Chapters 7 through 21 turn to the rest of the world, showing how the power-diffusion process did not take hold in most areas, or at least how it was attenuated, in comparison with northwestern Europe and Japan. Something of an exception is made for Spain and Portugal, and possibly for Mexico, whose economic institutions have been influenced by their neighbors to the north. Germany is postponed until Chapter 22, since its history has been a mosaic of features from both worlds, more- and less-developed, which have given it a unique character today. These can best be expressed by contrast with all earlier chapters.

Chapter 23 returns to the critical issue. Is the power-diffusion process essential to the less-developed zones and eastern Europe in the twenty-first century? Or will current attempts to institute liberal and efficient institutions by government direction be successful? Is durable economic development a matter for centuries, of which the twenty-first will be only another way station, or can it be made secure in a decade or two? We will sum up what has been learned from our worldwide examination of economic development and look at possible scenarios for the future.


  1. It should not be supposed that these lessons have been learned completely anywhere in the world. It is only that some areas are more advanced than others.
  2. Smith 1966:123-25.
  3. We cannot and do not need to define balance of power absolutely. We need only note, intuitively, that weaker groups are gaining relative to stronger ones, for example labor unions compared to management, or ethnic minorities compared with ethnic majorities.
  4. An "activist" and a "constructionist" Supreme Court are the archetypes, although neither is specifically defined.
  5. Two persons, A and B, are caught in the act of committing a minor crime, X, but are both suspected of a major crime, Y, of which the authorities have no proof. They are put in separate cells, unable to communicate with each other. The police make an offer: If A supplies evidence that B committed Y, A will not be charged with X. A suspects that B has been given the same offer. There are three possible outcomes: (1) Neither tells on the other, so they both receive light punishment for X only; (2) Each tells on the other, and they both serve heavier sentences for Y; and (3) A talks but B does not (or vice-versa): A goes scot free, while B is punished for both X and Y. The dilemma lies in each not knowing what the other will do. However, if the game is played many times, and especially if each can choose one's partner, so that A and B trust each other not to talk, then the outcome will be (1), the best in the long run for each. Economists have expanded prisoner's dilemma to many circumstances, in which individuals in their own interests restrain themselves from ambitious undertakings that, if successful, will lead to gains for themselves but losses for others.
  6. Economists would refer to this as a Nash equilibrium.
  7. A brief description of game theory and its relationship to cooperation in economic ventures is found in "Evo-Economics," The Economist, 12/25/93-1/7/94, pp. 93-95.
  8. Rabin 1993:1281-1302.
  9. For example, this literature includes works by Adelman and Morris; Domar; Etzioni and Etzioni; Fei and Ranis; Harrod; Gillis, Perkins, Roemer, and Snodgrass; Herrick and Kindleberger; Landes; Le Roy Ladurie; Arthur Lewis; Postan; Ricardo; Paul Romer; Rostow; Schumpeter; Maurice Scott; Solow; and Todaro. All these works are cited in the bibliography.
  10. Jones, E.L., 1988, especially chapter 3.

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

Published on the World Wide Web by The Quaker Economist with permission from the University of Michigan Press, 2005.

Creative Commons License This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 2.5 License.