Feb 25, 2013

Social Institutions and Economic Growth (China and England)

From a new paper by Greif, Iyigun, & Sasson (January 2013): 
In pre-modern China and England risk-sharing institutions were introduced for similar moral and political reasons. The forms of these institutions, however, were determined by pre-existing cultural, social, and institutional features. Clans were in China's social and cultural fabric and provided the state with such services as taxation and adjudication. It was optimal for the state to rely on clans also to provide social safety nets. The resulting clan-based risk-sharing institutions contributed to the influence of the elders on economic decisions. The stronger influence of the relatively more risk-averse elders had a negative effect on risk-taking, new knowledge and growth. Societies in which risk-sharing was provided by elder-dominated kinship groups were less likely to experience a transition to a modern economy.

In England, during the same time, there were no large kinship groups and non-kin based organizations, such as parishes provided the state with administrative services. It was optimal for the state to rely on parishes to provide insurance as made explicit in the Old Poor Law of 1601. This risk-sharing institution did not shift decision power to the relatively more-risk averse elders. The Poor Law had the unintended consequence of fostering risk-taking, new useful knowledge, higher rate of productivity growth and the transition to the modern economy. Better insurance to the poor reduced the risk from social unrest that the wealthy faced when implementing new knowledge.

Distinctions in functions and forms among social institutions were central to the first transition to a modern economy and, by analogy, social institutions have probably been important in fostering or forestalling subsequent ones. Clearly, social institutions protecting the poor were not the only distinction between China and England or the only factor contributing to the rise of the modern economy. These qualifications notwithstanding, the importance of social institutions highlights that favorable political and economic institutions are insufficient in bringing about modern economic growth. In order to better understand development and growth we have to bring society back in.

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