Harvard economist Melissa Dell recently won the 2020 John Bates Clark medal, which is given to outstanding economists younger than 40. Dell’s most famous research concerns the importance of institutions in a country’s long-term political and economic development. It carries a dire warning for the US as well as other nations.
What is an institution? To most people it means well-established organizations, such as big businesses or the civil service. Economists use the word more generally to mean the rules of the game that govern human society. These can be official rules such as laws, electoral systems and property rights, or informal ones such as social customs, corruption or selective enforcement of laws. That’s an incredibly broad definition. But the key idea is that institutions of both the formal and informal kind last for a long time and govern human behavior in ways that can’t easily be explained by rational individual action.
For many years, economists such as Daron Acemoglu and James A. Robinson have advanced the theory that differences in institutions cause big differences in national long-term growth and prosperity. According to Acemoglu and Robinson, places with a tradition of inclusion -- democracy, property rights, free labor and so on -- become richer in the long run, while places that abuse workers and citizens to extract maximum short-term value from them become poorer.
It’s a sweeping and interesting theory of the wealth and poverty of nations, but it’s very hard to prove with historical evidence. That’s where Dell’s research comes in. In a 2010 paper, she analyzed the long-run impact of a forced labor system called mita that was used in Peru and Bolivia from the 1500s through the 1800s. Today, regions that had the mita system are poorer and less connected to road networks.
The implication is that the extractive culture created by forced labor systems led to reduced public investment over time. Some of Dell’s other papers have found similar long-term results of labor exploitation in Indonesia, Mexico and elsewhere. Though no argument in economic history will ever be a slam dunk -- the past is too complicated and poorly measured to ever offer definitive answers -- it’s telling that the institutional theory of development keeps finding empirical support.
This has important implications for the US. The US is a big and diverse country, with many different examples of both good and bad institutions. Slavery, for example, was probably the most extractive institution ever devised. Sharecropping -- a form of tenant farming -- was only marginally less exploitative. In industrial regions, violent attacks on labor unions were common in the late 19th and early 20th centuries. Exploitation of immigrant farm labor in the Southwest was also common.
These systems, designed to extract the maximum possible value from laborers, continue to haunt the political economy of the US. They probably contribute to a general unwillingness on the political right to implement education and infrastructure programs that benefit racial minorities and low-income workers, leaving certain groups and regions poorer than they could be.
The current pandemic and economic crisis have put those negative impulses on full display. Gov. Kim Reynolds of Iowa, for example has stated that workers who refuse to work after business reopenings -- even if the coronavirus has not been suppressed and continues to rampage through workplaces -- will be ineligible for unemployment benefits. A desire to stop paying benefits appears to be a big part of the motivation behind other states like Georgia that want to defy federal advice and reopen early.
Forcing people back to work will spread the coronavirus and lead to increased deaths. It’s also unlikely to save state economies because the lack of customers is being driven much more by fear of getting sick than by shelter-in-place orders. Chances are high that the workers who get forced back to work will soon find themselves jobless again, and the economy will suffer more long-term damage from both the virus and the start-and-stop nature of business closures. It will be one more example of the harm that can result from a long-standing disdain for workers and the poor.
Fortunately, the US has other, more inclusive institutional traditions that it can draw upon. The free labor system that prevailed in the North before the Civil War, and the strong labor protections implemented in the New Deal, can serve as examples for how to rebuild a society that’s effective from top to bottom. In the decades to come, the US needs to burnish its most inclusive institutions -- rebuild its unions, make voting rights universal and crack down on various ways that employers exploit their workers. Besides benefiting beleaguered American workers and voters in the short term, this inclusive approach will allow the US to remain in the top rank of developed nations in the coming decades.
Noah Smith
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion. -- Ed.
(Bloomberg)
