JF  AAS October 1998


Economic growth is a matter of how the interdependencies of  IUG, HEC, etc. are directed.
It is a matter choosing sides!

1. IUG

Contrary to the focus on stable property rights it is change in ownership toward those with new ideas that contributes to economic growth. Growth involves making those with new ideas the seller of any opportunity incompatible with other interests (rather than the buyer).

For example, to facilitate the industrial revolution, agrarian rights holders were often disregarded. Mill dam owners were given rights to buy out farmers whose land might be damaged by a mill pond. The building of road and bridges were facilitated by making the agrarian interests unable to act as sellers. Rights were redistributed.

2. HEC

 Development involves selectively unhorsing the free rider. Many infrastructure investments are HEC. Taxes were used to finance them, eliminating free riders but creating unwilling riders.

Organizations may be the engine of institutional change when they see opportunities for profit. But a change in the rules usually requires action by more than one organization. Organizations are tempted to be free riders and let others bear the cost of change. Some learned sense of community where organizations (firms) eschew free riding is essential. Here beliefs and culture are important.

3. Specific Assets

    Augustus Swift could innovate with refrigerated cars and did not have to compensate the owners of live cattle cars and eastern butchers who lost the value of specific assets. No rights to prevent selected pecuniary externalilties. (And some say we have no economic planning in the U.S.!)

4. MC=0 goods
    Make price = MC to users in growth sectors.

5. Transaction costs.
    Let some transactions remain costly so they do not happen if they don't favor development.

6. Economies of scale.
    Break the path dependence of certain products via collective action so new products can replace them.


If you have any questions or comments, please email schmid@pilot.msu.edu

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