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


Each chapter contains only the examples I have deemed necessary to illustrate the thesis of that chapter. Many more historical and current citations are necessary to convince the skeptic that the power-diffusion process is credible; these are listed here, beginning with Appendix 2.1. Obviously, no number of examples will prove any point, but an abundance is necessary to be convincing.

In these appendixes, LDC refers to less-developed countries and MDC to more-developed countries.

Appendixes for Chapter 1

Appendix 1.1: Institution Theory in Modern Economics

The grandfather of institutional economics is John R. Commons, who in 1934 described the economic system in terms of the institutions through which it functioned. [1] His work was grounded in the history of economic thought. However, it did not make much impact on the mainstream, and later work on institutional economics takes off from a different point.

Two sets of authors have contributed to the more recent understanding of the institutions to be negotiated in a pluralist society. The first of these — public choice economists — tackled the question of which goods ought to be produced publicly and which privately. The second — theorists of transaction costs and the firm — engaged the question of criteria for the scale and shape of cooperative activity: What is the optimal size, construction, and composition of the firm, such that transaction costs will be minimized and resources used jointly will produce more than they would separately and individually.

Buchanan and Tullock [2] and others in public choice address these further questions: Under what contractual arrangements should public goods be produced? Who should benefit and who should pay the costs?

In a review of Buchanan's contributions, Thomas Romer [3] describes the problem as follows:

Imagine a group of persons gathered to enact rules to govern future collective decisions. They may foresee that different rules will have different distributional consequences, and so there will be conflicting interests about what rules to adopt. But suppose they recognize that the rules they are selecting are to apply far into the future — sufficiently so that everyone's expectations about future positions are essentially the same. Or alternatively, just assume directly that people at this stage make decisions under a "veil of ignorance" about their own future positions. Then it is more likely that there will be consensus on general rules for collective choice.

Public choice economists have criticized contemporary economic theory for assuming that the government is a "benevolent despot" acting in some "public interest" whose existence they do not accept. Rather, all interests are private, including those of government officials. In a context reminiscent of Rawls, [4] on how a "just" society is defined, they assume that individuals are capable of determining rules for the public sector totally apart from their own interests. But such a group of individuals may be as difficult to find as a "benevolent despot."

Williamson [5] set forth the kinds of contract, expected behavior, laws, and composition of the firm that make possible complex economic activity. In addition, a set of moral standards is required, which Alchian and Woodward [6] refer to as follows:

That contracts are not sufficiently well-enforced by resort to the law is emphasized by Williamson. Unique parties who would expropriate dependent quasi-rents resist the temptation, in part, because "it isn't right." Social opprobrium and the feeling of guilt may operate.

One does not assume from this that more-developed societies have "more" morality than less-developed. Every society has its own morality. Rather, the economic morality of more-developed societies, and the institutions of cooperation and corporate activity, are different from those of the less-developed, and presumably these differences have something to do with the degree of development.

The contributions of both sets of writers are stimulating and innovative. But neither intended to study the historical process by which a society may approach the capability that Buchanan and Tullock attribute to the "wise people" or that Coase, Williamson, and others attribute to those who form modern firms. Rather, they have sought theoretical constructs to specify the definition of an efficient and just public sector or private firm. [7] By contrast, this book purports to show how a society may allocate rights and responsibilities over time with the result that — given relative balance of power — durable development is promoted and incidentally an efficient and just public sector or private firm. Kaempfer and Lowenberg and Mueller [8] supply a good review of the literature on public choice.

In addition to these institutionalists, I am indebted to other authors who have preceded me. North, [9] North and Thomas, [10] and Weber [11] have written on the evolution of institutions. Their contributions are discussed in chapters 4 and 6. At the same time as this book was being written, North was writing his Institutions, Institutional Change, and Economic Performance (1990), with ideas overlapping those presented here. The relationship between that book and this one is discussed in Chapter 5.

Still others are Bauer, [12] whose advocacy of the free market as a means to development pre-dated the current mode in that direction, and Boulding, a wide-ranging institutionalist whose views do not conform to the modes of public choice or transaction cost. His The Three Faces of Power [13] follows lines that might have inspired parts of the power-diffusion process. Since he and I frequently conversed about these questions before his death in 1993, it is difficult to know exactly how much his thinking has influenced mine. In addition, Boulding broadened the field of economics far beyond any of our contemporaries; his general line of thought has inspired me immensely.

Reuven Brenner emphasized the role of trust in the modern economy. [14] E. L. Jones (1988) wrote about intense spurts of growth, such as the Industrial Revolution, occurring in the ancient world, Asia, and elsewhere. He also emphasized the centuries-long continuity of economic development. Furthermore, he recognized Japan as an independent progenitor of economic development even before the Meiji restoration. He describes the culture and manner of early Japanese growth. In recognizing the need for "relative interconnectedness of society," [15] Jones comes tantalizingly close to the concept of the interlocking society. His proposition that rent-seeking is one explanation of failure to grow is surely related to the distribution of power. But power is a consumption good as well as a rent-earning one.

Only after completing this manuscript did I read Singer and Wildavsky, The Real World Order (1993). Here I found some sympathetic overlap with my book. But their presentation is intuitive/political, while mine is more analytical/historical. Some of the historical grounding for the intuitions expressed in The Real World Order will be found in the present book.

Appendix 1.2: Game Theory [16]

Game theory presents in formal, rigorous (often mathematical) logic the manner in which people move from noncooperative to cooperative economic behavior. Prisoner's dilemma is the prototype. Noncooperative behavior leads to a mutually suboptimal outcome (see note 5 to Chapter 1). Although each prisoner would be better off if neither defected, nevertheless each fears that the other will do so. To avoid the "worst" outcome of being charged with both crimes, X and Y, each decides to report on the other. As a result, both are forgiven for the less serious crime, X, but they are both convicted of the more serious one, Y.

Extensions of this game move from this suboptimal outcome to an optimal one. They show how persons can achieve a cooperative solution that would leave each one better off than the uncooperative one. In repeated plays, each defecting player may be penalized in the next round. Predictions of these penalties provide each with a basis for trust that one's own cooperation will evoke the same from the other. Social conventions enshrine this behavior in ethical terms, making opportunistic deviations infrequent. Another variant allows monetary rewards for good behavior or penalties for defection. Institutions will be established to monitor compliance and administer the rewards and punishments.

Thus institutions become the key elements in establishing the trust necessary to move from individually rational (opportunistic) behavior with socially suboptimal results to a cooperative solution in which each party is, in the long run, better off than otherwise.


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.

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