Economic growth and economic development 187

Introduction to Modern Economic Growth unexploited and resources are misallocated We therefore expect societies with economic institutions that facilitate and encourage factor accumulation, innovation and the efficient allocation of resources to prosper relative to societies that not have such institutions The hypothesis that differences in economic institutions are a fundamental cause of different patterns of economic growth is intimately linked to the models we will develop in this book In all of our models, especially in those that endogenize physical capital, human capital and technology accumulation, individuals will respond to (profit) incentives Economic institutions shape these incentives Therefore, we will see that the way that humans themselves decide to organize their societies determines whether or not incentives to improve productivity and increase output will be forthcoming Some ways of organizing societies encourage people to innovate, to take risks, to save for the future, to find better ways of doing things, to learn and educate themselves, to solve problems of collective action and to provide public goods Others not Our theoretical models will then pinpoint exactly what specific policy and institutional variables are important in retarding or encouraging economic growth We will see in Part of the book that theoretical analysis will be useful in helping us determine what are “good economic institutions” that encourage physical and human capital accumulation and the development and adoption of better technologies (though “good economic institutions” may change from environment to environment and from time to time) It should already be intuitive to the reader that economic institutions that tax productivity-enhancing activities will not encourage economic growth Economic institutions that ban innovation will not lead to technological improvements Therefore, enforcement of some basic property rights will be an indispensable element of good economic institutions But other aspects of economic institutions matter as well We will see, for example, that human capital is important both for increasing productivity and for technology adoption However, for a broad cross-section of society to be able to accumulate human capital we need some degree of equality of opportunity Economic institutions that only protect a rich elite or the already-privileged will not achieve such equality of opportunity and will often create other distortions, potentially retarding economic growth We will 173