Economic growth and economic development 189
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Introduction to Modern Economic Growth
Such a study will not only help us understand why some societies choose or end up
with institutions that do not encourage economic growth, but will also enable us
to make predictions about institutional change. After all, the fact that institutions
can and do change is a major difference between the institutions hypothesis and
the geography and culture hypotheses. Questions of equilibrium institutions and
endogenous institutional change are central for the institutions hypothesis, but we
have to postpone their discussion to Part 8. For now, however, we can note that the
endogeneity of institutions has another important implication; endogeneity of institutions makes empirical work on assessing the role of institutions more challenging,
because it implies that the standard “simultaneity” biases in econometrics will be
present when we look at the effect of institutions on economic outcomes.
In this chapter, we will focus on the empirical evidence in favor and against
the various different hypotheses. We will argue that this evidence, by and large,
suggests that institutional differences that societies choose and end up with are a
primary determinant of their economic fortunes. The further discussion below and
a summary of recent empirical work will try to bolster this case. Nevertheless, it is
important to emphasize that this does not mean that only institutions matter and
luck, geography and culture are not important. The four fundamental causes are
potentially complementary. The evidence we will provide suggests that institutions
are the most important one among these four causes, but does not deny the potential
role of other factors, such as cultural influences.
4.3.4. Culture. The final fundamental explanation for economic growth emphasizes the idea that different societies (or perhaps different races or ethnic groups)
have different cultures, because of different shared experiences or different religions.
Culture is viewed, by some social scientists, as a key determinant of the values,
preferences and beliefs of individuals and societies and, the argument goes, these
differences play a key role in shaping economic performance.
At some level, culture can be thought of as influencing equilibrium outcomes for
a given set of institutions. Recall that in the presence of multiple equilibria, there
is a central question of equilibrium selection. For example, in the simple game discussed above, will society coordinate on the high-investment or the low-investment
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