Economics and institutions

Encouraged by my wife and curiosity related to an earlier post I just finished reading Douglass C. North's Institutions, institutional change and economic performance.

Since I'm not an economist I feel free to focus on most irrelevant details in the book, as usual. Some tidbits: (i) the Bank of England was established as an emergency agency to collect money to the crown for re-building the naval fleet after the previous fleet had been crushed by France. The bank did its job so well that lending to the crown became popular and England surpassed other nations (ii) the Spanish economy was ruined around the 17th/18th century by bad institutions that propped up useless bureaucracy and diminished the incentive to productive activities (iii) the souk (food/goods market in Arabic countries) was more or less unregulated. Even weights and measures were arbitrary and cheating was a rule. Still it prospered.

One of North's primary ideas is to show how institutions can lower the transaction cost and therefore encourage trade. Indeed, the proportion of the banking sector of all of economy has grown a lot and was about 30% in 1990, if I remember North's figures correctly. Likewise, inefficient and corrupted institutions can "poison" the economy, as demonstrated by the Spanish example.

Obvious parallel to Easterly's book: poor countries will not get richer because bad institutions keep them poor. To change institutions.. well, maybe more about that later.