New Theory of Economic Progress

1 ©Meir Kohn 2014 CHAPTER 1. A NEW THEORY OF ECONOMIC PROGRESS Discussion of the lack of economic development in much of the world often begins by asking, “Why can’t they be more like us?”—us being the developed nations. What is it they lack? A common answer is that they lack the necessary resources: if we just pour enough money into the underdeveloped world, it will develop. However, development projects based on this assumption have generally failed: Jeffrey Sachs’ Millennium Villages project is but a recent example. A different answer as that the underdeveloped world lacks good political institutions: without them, no amount of resources will make much difference. This has been argued most recently by Daron Acemoglu and James Robinson in their best-selling Why Nations Fail. We will see that there is much to be said for this answer. However, Acemoglu and Robinson are a little vague about what good political institutions are: they imply that the key is democracy. But even casual observation suggests that democracy is neither necessary nor sufficient for economic development. Moreover, democracy appears to be a major contributing factor to the problems of the developed world. Indeed, the whole idea of the developed world as a model for the underdeveloped is unjustifiably smug. The developed world has serious problems of its own—only partly a result of the recent financial crisis. These problems include unsustainable welfare states, mounting government debt, and slowing economic growth. In many ways, these problems are not so different from those of many less developed countries. It is said in Latin America that Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Cuba. One might add, with only a little exaggeration, that Italy is becoming Brazil, and the United States is becoming Italy!1 The two issues—the lack of development in much of the world and the increasing problems in those parts of the world that are developed—may seem unrelated. But they are in fact different expressions of the same fundamental problems of economic progress. To address those problems, we need to understand at a deeper level how economic progress works and the nature of the obstacles that stand in its way. In this book, I offer such an understanding, in the form of a new theory of economic progress.