It's generally considered that good institutions, like body of law, courts, constitution, make for a wealthy society. This is supposedly why the USA, UK, Denmark, Australia, Japan, France are wealthy countries. Although they have different laws and constitutions, they have functioning institutions.
This suggests that it should be easy to make a south american country prosperous. In fact as someone once said, if you ever need to check something in the US Constitution and don't have one to hand, you can go to practically any Latam country and borrow theirs, since it will be virtually a xerox copy of the US one, just as the Japanese one is.
But Japan is wealthy and Ecuador is poor. It is argued that the missing ingredient is trust. As a guy from Africa once said to me "you guys are incredible: you actually pay your taxes and expect the government not to steal them all, but to use them to build hospitals and run schools to teach your children - do you realise how implausible that outcome seems to a typical African?"
Large organisations are really important to get productivity improvements, and as I've blogged before, great productivity is the only thing that matters when it comes to enjoying a wealthy society. With large organisations, and great division of labour, productivity becomes enormously greater. Not just a bit, but unbelievably. In the past, Kings with wealth beyond the dreams of avarice would not have enough to pay for the production of a car which is remotely comparable with the most basic runabout as churned out by Korean factories today.
But large corporations, and other institutions in society, can exist only with a large element of trust. To an extent once the institutions have 'got going' it's easier to keep them going than to start them from scratch. But still, individuals have to risk a lot, and trust a lot, to keep the show on the road.
This is similar to the problem with the firm - why, in practice, most of us work for large corporations, rather than entering into contracts with others for the supply of our labour. The legal contract lacks a lot when it comes to the selling and buying of labour. The 'old fashioned' feudal system, which requires a lot of trust, is alive and kicking and embodied in the modern corporation and is currently surviving even the extremes of inequality of income that we're seeing and the progressive erosion of the position of the employee, particularly in terms of what are usually called 'pension rights' but which many long-standing employees are discovering are not really rights at all when the profitability of the firm is at stake.
The problem with trust, in the context of Economics, is that it's very hard to model quantitatively, and therefore it's not really part of mainstream theory. Somehow I think it needs to be incorporated, because Economics is failing, both to explain how the economy will evolve, and what poor countries need to do to get richer.
This suggests that it should be easy to make a south american country prosperous. In fact as someone once said, if you ever need to check something in the US Constitution and don't have one to hand, you can go to practically any Latam country and borrow theirs, since it will be virtually a xerox copy of the US one, just as the Japanese one is.
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But Japan is wealthy and Ecuador is poor. It is argued that the missing ingredient is trust. As a guy from Africa once said to me "you guys are incredible: you actually pay your taxes and expect the government not to steal them all, but to use them to build hospitals and run schools to teach your children - do you realise how implausible that outcome seems to a typical African?"
Large organisations are really important to get productivity improvements, and as I've blogged before, great productivity is the only thing that matters when it comes to enjoying a wealthy society. With large organisations, and great division of labour, productivity becomes enormously greater. Not just a bit, but unbelievably. In the past, Kings with wealth beyond the dreams of avarice would not have enough to pay for the production of a car which is remotely comparable with the most basic runabout as churned out by Korean factories today.
But large corporations, and other institutions in society, can exist only with a large element of trust. To an extent once the institutions have 'got going' it's easier to keep them going than to start them from scratch. But still, individuals have to risk a lot, and trust a lot, to keep the show on the road.
This is similar to the problem with the firm - why, in practice, most of us work for large corporations, rather than entering into contracts with others for the supply of our labour. The legal contract lacks a lot when it comes to the selling and buying of labour. The 'old fashioned' feudal system, which requires a lot of trust, is alive and kicking and embodied in the modern corporation and is currently surviving even the extremes of inequality of income that we're seeing and the progressive erosion of the position of the employee, particularly in terms of what are usually called 'pension rights' but which many long-standing employees are discovering are not really rights at all when the profitability of the firm is at stake.
The problem with trust, in the context of Economics, is that it's very hard to model quantitatively, and therefore it's not really part of mainstream theory. Somehow I think it needs to be incorporated, because Economics is failing, both to explain how the economy will evolve, and what poor countries need to do to get richer.
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