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Introduction to Modern Economic Growth population, which initially reduces capital-to-labor and land-to-labor ratios, depressing income per capita This initial decline is later compensated by higher output as more people enter the labor force However, there is no reason to expect either a complete offset of the initial decline in income per capita or a large significant increase, especially when many of the effect countries are heavily vested in agriculture, so that land-to-labor ratios may change permanently Consequently, small beneficial effects of health on productivity may not be sufficient to offset or reverse the negative effects of population pressures on income per capita 4.7 Political Economy of Institutions: First Thoughts The evidence presented in this chapter suggests that institutions are the most important fundamental cause of economic growth We must therefore think about why institutions and policies differ across countries in order to understand why some countries are poor and some are rich We will also argue below that understanding institutional changes holds clues about why the process of world economic growth started 200 years ago or so However, an explanation of differences in income across countries and over time in terms of institutional differences is also incomplete If, as this chapter has documented, some institutions are conducive to rapid economic growth and others to stagnation, why would any society collectively choose institutions that condemn them to stagnation? The answer to this question relates to the nature of collective choices in societies Institutions and policies, like other collective choices, are not taken for the good of the society at large, but are a result of a political equilibrium In order to understand such political equilibria, we need to understand the conflicting interests of different individuals and groups in societies, and how they will be mediated by different political institutions Thus, a proper understanding of how institutions affect economic outcomes and why institutions differ across countries (and why they sometimes change and pave the way for growth miracles) requires models of political economy, which explicitly studies how the conflicting interests of different individuals are aggregated into collective choices Models of political economy also specify why certain individuals and groups may be opposed to economic growth or prefer institutions that eschew growth opportunities 206