A Discussion of “Morality, Institutions and the Wealth of Nations: Some Lessons from ancient Greece”
When I teach macroeconomics, I know one question the students have is, “Why can’t we use all this economic knowledge to help poor countries grow?”
And the answer is, we can, to a point. But, really it goes beyond economics.
I use the Cowen and Tabarrok textbook in part because it has a great discussion on this very topic.
Essentially, a developing country needs a growing GDP per capita — GDP is the dollar amount of production of a country and per capita divides that by the population. If GDP per capita is rising, then there is more production per person, which generally means there is a rising standard of living.
To have a rising GDP per capita, the models says they need to have the incentives in place to organize the capital, labor and technological resources productively.
Early work in economic development thought the problem for poor countries was a lack of the resources so they injected capital (money or equipment) and waited for the magic that never came.
They also tried improving human capital, thinking that was the problem.
Ultimately, we have come to see that it is the lack of incentives to use the resources that is the problem.
Why Countries Rich with Resources can be so Poor and How to Prevent It
Where do incentives come from? The institutions.
Institutions are the “rules of the game” that structure the economic incentives.
Research shows that private property is a key institution for economic growth. The idea is entrepreneurs need to know they can keep the results of their investments if they are successful.
In general, institutions include laws, customs, practices, and social mores.
Thus, the answer to, “Why can’t we help poor countries grow?” is that they need to improve their institutions.
While laws are important and a poor country could adopt a successful country’s set of laws, they will only function if they fit the morality of the country — the habits and ethics of the people.
Thus, the answer to helping a poor country grow is for them to examine its morality to see what needs to change to support good institutions.
That said, there is not one good morality and one set of good institutions.
But as Bitros and Karayiannis (2010) show, good institutions need to support a market economy to have sustained growth, thus the morality of the people need to support individual freedom, innovation, and personal responsibility in a way that works for them.
We have a simple answer with a monumentally difficult execution.
Bitros and Karayiannis are adding to this conversation with a statistical look at how morality and institutional differences are revealed in ancient Greece.
Thus, for us it is fascination to add to this literature by looking at the difference that morality and institutions made to the distinctly disparate economic circumstances that classical Athens and Sparta experienced at the peak of their power. (p. 69)
The Analysis
The authors first apply a “difference-in-difference” econometric analysis. We have measures for the wealth outcomes for Athens and Sparta. The difference-in-difference approach tries to measure the extent the differences in morality and institutions is the source of the differences in wealth outcomes.
Ideally, such an approach includes controls for any other sources of the differences. The authors acknowledge the difficulty in this investigation.
Clearly, in view of the lack of quantitative data, we cannot conduct a formal statistical analysis that would enable us to control for the differences in other wealth-enhancing factors, Yet it may be possible to conduct a somewhat weaker test. This would require to establish that, if we were able to account in some way for the other influences that worked in the period under investigation, the level of wealth in the two city-states would have been essentially the same, had it not been for the differences in their moral norms and institutions. (p. 69)
The authors lay out the wealth data and institutional structure information they have for the two city-states and the resulting performance measures.
They postulate that Athens was wealthier than Sparta because Athens “adopted moral norms and institutions that resulted in a more efficient economy and more entrepreneurial society.” (p. 78)
The majority of people in Athens were citizens. The rest of society was either made up of metics — professional people who chose to live and work in Athens — and privately owned slaves. The private ownership incentivized the owner to take care of them.
As a result, Athens did not face a lot of civil unrest and thus did not need a strong state to enforce order.
They did face a shortage of fertile land and thus needed it to be as productive as possible. This led Athens to adopt institutions that constrained the power of the state and encouraged a strong market economy to incentivize food production.
Sparta, however, had a minority of citizens, a large group of people who did not want to assimilate into Spartan society, and public slaves. This combination caused internal security issues so that Sparta developed a strong state that centrally managed the economy and kept the peace rather than encouraging innovation and growth.
Thus, we see the challenges each city-state faced resulted in adopting different institutions. And the differences widened and deepened due to feedback.
Necessarily therefore the moral norms and institutions evolved in Athens continuously to accommodate the needs of the economy…On the other hand, in Sparta moral norms and institutions remained fossilized because path dependence and bounded rationality led her oligarchic authorities to discourage change. In our view then it was the flexibility of moral norms and institutions to adjust continuously to the needs of the economy that, ceteris paribus, gave Athens a comparative advantage over Sparta and enabled her to realize higher levels of wealth. (p. 79)
Thus, we can see how Athens developed institutions that resulted in it being a major economic power while Sparta developed institutions to be a major military power.
Conclusion
For our purposes, imagine if Sparta became focused on economic development. They adopt the institutions and laws of Athens to encourage economic growth, but their culture and morality are different and cannot support these adopted institutions.
In a nutshell, we see how difficult it is for a country to try to develop economically when its morality and institutions are not developed to support that goal.
Athens and Sparta faced different challenges, and the response of each led to different institutions as solutions. But then the morality of the culture develops to support the institutions,
…for the institutions that were put in place to operate efficiently, each city-state had to adopt a compatible set of moral norms. (p. 80)
Athens needed its citizens to adopt morality that supported property rights and individual freedom while Sparta needed its citizens to adopt a morality that respected authority and military might. It just so happens that economies flourish under the first morality and not under the second.
Does that mean modern day Spartas are doomed to stagnant economic growth? To some extent, I would say yes.
Economic growth requires individual freedoms and a weaker state so the economy can react to the market signals. While the exact way a country implements that should, and needs to, reflect their culture and history, the authors’ study does indicate a country needs to adjust its norms to support the institutions that we know are needed for economic development.
China is a modern day example of a country trying to achieve economic growth without yielding its state power. Only time will tell if they achieve it — they certainly have had remarkable economic progress in the past few decades. However, I think the lack of flexibility in their institutions will ultimately lead to an undesirable outcome for them economically.
I think the model detailed at the beginning of this article — good institutions create incentives to organize the means of production in a way that leads to a rising standard of living — means we need institutions that support a flourishing market system. Thus, the morality of the society needs to support the institutions that support a market system.
As I said at the beginning, we have a simple answer with a monumentally difficult execution.
Reference: Bitros, George and Anastassios Karayiannis 2010, “Morality, institutions and the wealth of nations: Some lessons from ancient Greece” European Journal of Political Economy, 26, 68–81.
By Ellen Clardy, PhD on .
Exported from Medium on December 15, 2022.
