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Tuesday, November 30, 2010

 

Wealth?

Olson dismisses the idea that differences in resource endowments, especially human capital or technology explain persistent poverty. Rather he argues that the institutions and economic policies – attributes that are mainly defined by national boundaries, affect the ability of the poor and others to “pick up their own big bills.” Olson took the debate a bit further concerning whether government was part of the solution or part of the problem. He asked what kind of government or what kind of arrangements of government led to economic growth. What types of services do governments provide to promote growth? What types of governments provide these more consistently?

There are two legal traditions in Western society: the Common Law tradition such as in the United States and the United Kingdom and the Civil Law tradition such as France. In using Olson’s questions above, I want to compare these two traditions, and see if one is better than the other in promoting growth and providing consistency.

Legal and political institutions are responsible for the growth in society. It seems as if Common Law is more successful than Civil Law in society in terms of economic growth. Compared to Civil Law, Common Law enables society to grow, provides political stability, secures private property and contract rights, and provides protection for these rights. Therefore, Common Law tradition can be considered is better than Civil Law tradition. There are significant differences in societal costs and benefits in comparing the two traditions. Common Law provides stronger property rights and contract rights which promotes economic activity and growth in society. Although there are costs in enforcing these rights, it gives society long term benefits and security in acquiring property and making investments. Civil Law has many societal costs in terms of economic growth. The law is unpredictable with property and contract rights, which makes society reluctant to acquire property and invest, unlike Common Law. This slows economic activity and growth and even lowers the standard of living. The two legal traditions in Western society of Common Law and Civil Law are quite different from each other. In a Common Law system, government and the Legislative and Executive branches have limited power. In a Civil Law system, the government is centralized and the Legislative and Executive branches have enough power to favor special interests. These political structures differ in that society will reap the benefits and costs imposed by government, and these costs and benefits are distinctly different from each other as explained above.

Olson says we know that an economy will generate its maximum income only if there is a high rate of investment and that much of the return on long term investments is received long after the investments are made. He also says that to reach the maximum income attainable at a given tax rate, a society must enforce contracts (including those involving long term loans) impartially, but the full gains are again reaped only in the long run. In Olson’s argument, Common Law also seems to satisfy these criteria as it helps society invest and has contract and property rights.

The mystery of wealth is not answered in the differences in the natural resource endowments of a nation, although it may have some impact. Rather, economic growth is affected by the political and legal institutions implemented in a nation. When political stability and secure private property rights exist, members of society will make long term investments and over time, the country will experience a higher standard of living.

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