Causes of Economic Prosperity

Flashcards covering key theories of economic prosperity, geographic luck, culture, institutional framework, game theory models, colonial history, and political feedback loops.

According to the lecture notes, what do capital accumulation, investment, saving, and education represent in the Solow growth model?

They are not the fundamental causes of economic growth; rather, they are growth itself.

What are the three primary hypotheses proposed to explain international differences in wealth?

1. Geography
2. Culture
3. Institutions

According to Jared Diamond in Guns, Germs, and Steel, what four factors of geographical luck enabled early development?

1. A Mediterranean climate (rapid plant growth, mild wet winters, hot summers)
2. Seed availability (the Fertile Crescent)
3. Domesticable mammals (sheep, goat, cow, pig, horse in Eurasia)
4. Horizontal spread of food packages across similar latitudes

What is the primary flaw of the geography hypothesis?

It cannot explain wild swings in economic development over time, as income levels across latitudes were relatively similar until divergence began after the Industrial Revolution.

How did Nobel Prize winner Douglass North define institutions?

Institutions are the humanly devised constraints that shape human interaction, effectively serving as "the rules of the game."

Why is the Korean Experiment cited as strong evidence for the institutional hypothesis over geography or culture?

North and South Korea share the exact same geography, climate, resources, ethnicity, and language, yet diverged drastically after 1948 because South Korea adopted market-based inclusive institutions while North Korea abolished private property and capital under state command.

What five aspects define inclusive economic institutions under the SUPPA framework?

1. Secure property rights
2. Unbiased system of law
3. Provision of public services to level the playing field
4. Permit entry of new businesses
5. Allow people to choose their careers

In the provided payoff matrix between a buyer and a seller, what is the Nash equilibrium outcome?

The $(0,0)$ outcome, where both the buyer and the seller act dishonestly because neither player has an incentive to unilaterally change their strategy.

How does the grim trigger strategy sustain cooperation in an infinitely repeated transaction game?

Both players agree to act honestly as long as the other does; if either player acts dishonestly, both default to dishonest play forever, replacing infinite $(10,10)$ payoffs with $(0,0)$ payoffs.

What is expropriation, and how does its risk impact a country's economic standing?

Expropriation is the seizure of property or goods by a powerful actor (such as a government or local elite). Countries with a higher risk of expropriation tend to have a lower GDP per capita.

What is creative destruction, and why do powerful political elites often resist it?

Creative destruction is the process by which innovative, productive firms replace and destroy old firms. Elites resist it because it creates economic losers and threatens their political power.

What historical phenomenon is described by the "Reversal of Fortunes" thesis?

Former European colonies that were relatively rich and urbanized in 1500 are poor today, whereas colonies that were poor and sparsely populated in 1500 are rich today.

Based on Figure 10, when did former colonies with low urbanization in 1500 experience a rapid rise in urbanization?

Around 1850, as a result of the Industrial Revolution.

How did colonial settler mortality rates affect long-run institutional development?

High settler mortality led colonizers to establish short-run extractive institutions to siphon resources, causing these regions to miss the Industrial Revolution. Low mortality allowed settlers to settle and create inclusive institutions.

According to Why Nations Fail, what two conditions must a state meet to supply inclusive economic institutions?

1. The state must be strong and centralized.
2. The state must be pluralistic (power held by a broad cross-section of society).

How do political and economic institutions influence each other through feedback loops?

Inclusive political institutions pair with inclusive economic institutions to create a virtuous cycle (positive feedback loop), while extractive political institutions pair with extractive economic institutions to create a vicious cycle (negative feedback loop).

In terms of institutional sequencing, do economic institutions or political institutions come first?

Political institutions come first because those with political power decide the nature of political institutions, which subsequently shape economic institutions.

How did the absence of a royal monopoly on Atlantic trade in England lead to a different political outcome than in Spain?

In England, Atlantic trade enriched a broad class of merchants who funded a civil war leading to the Glorious Revolution of 1688 and an inclusive parliamentary system. In Spain, a royal monopoly funneled wealth directly to the king, reinforcing autocratic rule.

What is Amartya Sen's perspective on democracy and political rights in developing societies?

Amartya Sen posits that political rights and freedom of participation are an end of development, not merely a means, and that dismissing democracy as a purely Western concept serves as a justification for autocracy.