Institutions Rule

Property rights• If you’re insecure in your property, why innovate? Why

accumulate?

Rule of law• Can contracts be enforced?• (Anglo) common law trumps (French) civil law?

Trust• Will contracts be honored?

Suffrage...and restrictions• Can elites be challenged?• Who rules for whom?

Institutions Rule

Education• Are citizens literate?• Does government promote productivity?

Finance• Can aspirations be funded?

Labor relations• Free or slave?• Individual on her own or union solidarity?

Land ownership and use• Large grants or small homesteads?• Plantations or farms/Proprietors or smallholders?

Institutions RuleTaxation and expenditure• Public or private enterprise?• Redistribution or status quo?

Patents• Are ideas protected?

Emigration/Immigration• Slave or free?• Open or restricted?• Integration or segregation?

Religion and culture• Belief or empiricism?• Fundamentalism or secularism?

Endowments Matter

Geography: Resource use/resource curse• Climate• Disease environment• Soil quality• Minerals: gold???• Access to markets: seas/rivers/landlocked

Demography• Population density• Human capital

Endowments – Institutions - Endowments

Inequality: cause and effect

Political power Economic powerReinforce status quo?

Promote progress?

Inequality MattersCountry Top to Bottom Gini Coefficient (Mid Decades/Year)

OECD, before tax 6.4 (20% in ‘90s) 34.8 (‘70s) 33.2 (‘80s) 33.8 (’90s) ----- (‘00s)

USA, before net taxes 15.9 (10%) 8.4 (20%) 40.6 (‘70s) 43.6 (‘80s) 47.7 (’90s) 48.6 (‘00s)

USA, after net taxes 31.6 (‘70s) 33.7 (‘80s) 36.1 (‘90s) 38.0 (‘00s)

UK, before net taxes 13.8 (10%) 7.2 (20%) 33.8 (‘70s) 41.9 (‘80s) 45.3 (‘90s) 44.5 (‘00s)

UK, after net taxes 26.8 (‘70s) 30.9 (‘80s) 33.6 (‘90s) 33.1 (‘00s)

CND, before net taxes 9.4 (10%) 5.5 (20%) 38.5 (‘70s) 39.5 (‘80s) 43.0 (‘90s) 43.6 (‘00s)

CND, after net taxes 30.4 (‘70s) 29.3 (‘80s) 28.9 (‘90s) 31.7 (‘00s)

SWD, before net taxes 6.2 (10%) 4.0 (20%) 38.9 (‘70s) 40.0 (‘80s) 43.8 (‘90s) 43.2 (‘00s)

SWD, after net taxes 21.2 (‘70s) 19.8 (‘80s) 21.1 (‘90s) 23.4 (‘00s)

Latin Am, before tax 11.7 (20% in ‘90s) 49.1 (‘70s) 49.8 (‘80s) 49.3 (‘90s) ----- (‘00s)

Mexico 21.6 (10%) 12.8 (20%) 48.3 (‘08)

Peru 26.1 (10%) 16.2 (20%) 48.1 (‘10)

Brazil 11.0 (10%) 12.0 (20%) 54.7 (‘09)

Chile 26.2 (10%) 15.7 (20%) 52.1 (‘09)

Panama 49.9 (10%) 23.9 (20%) 51.9 (10)

Haiti 54.4 (10%) 26.6 (20%) 59.2 (‘01)

Endowments – Institutions – Development Vignette I: The Conquistador Model

A. Mexico/Peru – Densely settled empires• Kidnap the ruler/Ransom the ruler/Kill the ruler• Displace the ruler Encomienda system

• Large land grants/Natives come with the land – the mita system

Inequality – Extractive institutions

Persistent inequality – Stagnation

B. Jamestown – sparsely settled tribal lands• Cagey chief...what, kidnap me?• Absence of gold...work or starve starve • Import colonists

• No incentives no product no gain• Create incentives Distribute land

Relative equality – Open institutions

Evolution – Progress

Endowments – Institutions – Development Vignette II: Finance

A. Latin America• Large native population conquest extractive institutions• Tropical soils plantation crops (sugar, tobacco, cotton) slavery• Minerals (gold, silver) encomiendas

Economic and political inequality

Bank charters to elites Lending to elites Reinforce status quo

B. Northeast and midwest United States• Rocky soils small-scale grain farming

Relative equality

Many small banks chartered* – intercommunity lending

“Democratic” credit Development and change

*States eager to charter banks as revenue source.

Inequality in the USA: The Top 10%

Source: Emmanuel Saez, Striking it Richer, 2010

USA’s Top 1% vs. the rest of the top 10%

USA: The Working Rich