Thursday, 3 May 2012

Why Nations Fail thoughts, part 4

[Don't worry, this series ends soon!]

What creates good political institutions? A&R answer: “critical junctures” in which “small differences become important”. Game theorists would call this transitions between different equilibria. In a sense this is not a very useful answer, because “small differences” is likely to mean “differences too small to detect a priori”. But it might be a true answer.

However there are some unconsidered candidates. For example, Gibbon thought that the Roman empire’s break-up was important because it created a set of competing states in Europe. In turn, competition between states limited their ability to extract rents and gave them incentives to innovate. (Historically, a lot of innovation has been driven by war.) This argument suggests a corrective to A&R’s praise of centralization as a necessary condition for the development of inclusive institutions.