An institution is a way of organizing social behaviour, and explanations of wealth and poverty, evolution and revolution, often return to ways in which people’s behaviour is organized. This week we will finish Polanyi, relate his conclusions to the contemporary world, and consider two other economic perspectives on the institutional foundations of wealth and poverty before we move on to consider the changing role of the state and political institutions in Part III.
Polanyi has established by Chapter 17 that there is a fundamental contradiction inherent in the concept of the self-regulating market. Markets for commodities are unstable unless they include market mechanisms for land, labour and capital, but these are not real commodities, and constraining them to markets results in destruction of the institutions that sustain life, production, and trade. There is, in short, no such thing as a natural market; all markets are socially constructed, and depend on political regulation and social interaction to function. In short, they are institutions – ways of organizing social behaviour.
We saw in our introduction to development thinking in Meier and Stiglitz that economists have become increasingly seized with institutions over time, and that they have become more sophisticated in attempting to include social and political factors in models of development. As we read the last four chapters of Polanyi, we can see how political and economic factors interact within and between states to create the crises Polanyi lived through at the beginning of the 20th century; has the world changed a great deal over the course of the twentieth century, or do the pressures described by Polanyi have direct parallels in our contemporary experience?
Polanyi was writing during the Second World War, and finished the book as the Bretton Woods system went into action to prevent the pressures that gave Polanyi claims gave rise to the great depression and to fascism and communism. Moyo’s history of development aid (Chapter 2) describes that as the beginning of the modern history of development aid, which remains a powerful idea:
“Official development assistance for poor countries is a necessary condition for progress towards the MDGs. When funding is inadequate or unsustainable, due to a lack of ODA, the process of implementation and monitoring practical strategies towards the MDGs falters. Reliable and predictable funding is essential for sustainable development.” United Nations Development Group, Thematic Papers on Millennium Development Goals (2011), 41.
But in the case of Africa, Dambisa Moyo argues that aid is counterproductive. On what institutions does she focus? Is she advocating market liberalism, or something else? If genuine democracy permits people to control their governments, then are governments likely to implement pure market liberalism? On the other hand, if democratic institutions tend to favour the rich and powerful who are likely to benefit from market institutions, are we back to the tensions that produced communism and fascism in the early 20th century?
As we turn to Acemoglu and Robinson, it’s interesting to understand that the co-authors disagree on several key points, although they have continued to collaborate. Acemoglu is more ardently enthusiastic about markets, while Robinson refers to himself as a recovering economist.
Polanyi, Ch 18-21.
James Robinson, Acemoglu co-author summarizing the argument, and the future role of the World Bank and implications for aid, about which Acemoglu and Robinson disagree. Robinson describes himself as a “recovering economist”.
Acemoglu and Robinson, Why Aid Fails (extract from Chapter 15).
United Nations Development Group, Thematic Papers on Millennium Development Goals (2011), particularly MDG1 papers. Search “aid” and “ODA”.
Gerald M. Meier, “The old generation of development economists and the new,” Frontiers of Development Economics, ed. G. Meier and J. Stiglitz, pp. 22-59.
Moyo, D. (2009). Dead aid: Why aid is not working and how there is a better way for Africa. Macmillan. Chapter 2, “A brief history of aid,”
Acemoglu, D., Robinson, J. A., & Woren, D. (2012). Why nations fail: the origins of power, prosperity, and poverty (Vol. 4). New York: Crown Business.
In response to questions about the Gold Standard, consider:
Prepare a plan to complete review essay (assignment 1).
Prepare notes to answer the self-assessment questions.
1. Polanyi identifies four main strains that seem to be consistent across all major states regardless of local differences at the end of the 19th Century, and these were intimately related to the world wars and depression of the 20th Century. Try to explain each of the arrows in the diagram below, and relate them to both 19th and late 20th century phenomena. For example, is the “Occupy” movement evidence of class conflict? Is unemployment related to trade rivalry and international trade agreements? How are Sino-American relations affected by exchange pressures?
2. How did development aid become a central theme in development economics, and why is it now under attack?
3. What are “inclusive institutions”? Can they help reconcile the contradictions inherent in market economies?
Our seminar will focus first on the links in the figure above, and then on the nature of inclusive institutions.
We will discuss Assignment 1.