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What Causes Monetary Growth? Establishments or Individuals Capital?

Sybren Dijkstra, Catello Alvino

Growth, Corporations and Business

  • Rijksuniversiteit Groningen


An increasing amount of empirical research has been focused on measuring and approximating the consequences of historical variables on the economies of today. There seems to be a rooster or the egg history in the books: Do politics institutions cause economical growth or does economic progress, through real human capital, lead to raised institutions? There seems to be a gap in the literature around the colonization period concerning individual capital and institutions. We wish to increase this debate by researching the period before the colonization, using empirical research. We wish to increase this debate by researching the period beforearound the colonization period: Could it be possible that the human capital people broughtbrought by visitors to the colonies was gained credited institutions in their native countries and that therefore institutions cause better human being capital and therefore growth? In this essay we provides across a simple message: you need institutions to generate human capital, in order to foster expansion. ? First we will lay the foundation in our theory by discussing empirical works that cover theperiod prior to the time of imperialism. Then we will discuss the empirical confirmation that institutions do cause progress, and we will analyze refute the human capital side debate. Finally, we will summarize our findings and offer suggestions for even more research.

Reversal of fortune and the value of institutions

Acemoglu et al. (2003) deliver a detailed evaluation on different outcomes of today's post-colonial countries. It had been found that the divergence in economic development that is observable among past colonies is induced by the way the settlers set up institutions in the area. Indeed, it is easily seen that parts like North America have shown to perform superior to countries situated in Central and Southern America and in other parts of Africa colonized by about the same populations. Essentially, in the areas where resources were relatively scarce and populace density was low, the pioneers established institutions pretty similar to the ones they had in their homeland, utilizing systems of property privileges protection that stimulated investments. In areas where resources and indigenous inhabitants were numerous, the settlers created "extracting institutions", where their goal had not been a long long-term development, but simply a depletion of resources. These establishments were based on property rights limited to a specific elite that contains the Western settlers, where the indigenous population was not included. not of indigenous people but that excluded the indigenous people. , who The indigenous peopley were obligated to work, mostly in conditions of slavery, to be able to yield the best profit possible. This explains why countries that have been prosperous before the colonization, are today executing much significantly worse than countries where companies were accessible to by all the inhabitants. Therefore, what these studies really show is that individual capital is not the ultimate deep cause of eof better institutionsconomic development, but that instead it's the proximate cause. , Indeed the real reason behind why some colonies thrived while others haven't ofare establishments and these organizations which provided the legal foundations, including property protection under the law being the best cause.

More proof on thisin favour of our thesis is given by Acemoglu et al. (2014), who accumulated data about the literacy of different settlers. They exhibited that the conquistadores that who colonized South and Central America where much moresubstantially better educated (at least speaking about literacyusing literacy as a proxy for the level of education) than the English settlers colonizing North America. Nevertheless, the latter turned out to be better developed in the foreseeable future. Acemoglu et al. (2014) sees again that the primethe reason forof this difference is into the type of institutions that were in place. Besides this description, you can find another key varying missing; the education these settlers received in their homeland. Organizations and human capital didn't come out of the blue, but the majority of the papers written promoting the individual capital argument expect everyone begins from square one, so to state, when they get to the colony. For example, a person educated as an engineer does not lose his executive knowledge, once s/he arrives in the colony, like the human capital discussion suggest. Furthermore, Acemoglu et al. (2014) show that there surely is no significant support for the real human capital argument that differences in the individual capital endowments of colonists have been an essential element in the institutional development of the institutions. Just how institutions were established by the colonists was deeply influenced by the institutions in their house countries. Especially before those colonies became unbiased they were lawfully reliant on their homeland, with approximately the same establishments, the difference being that these organizations were reshaped to be able to adhere to territorial needs. The new communities proven would bottom part their corporations on the people they were used to in their indigenous country. Naturally as time passes some turned to different systems, but the so-called seed that allow tree grow was coming from somewhere else. And this "someplace else" is indeed their country of source and its corporations.

Considerations on the real human capital theory

In this section we are going to better explain why we consider the claim that individual capital is the primary cause of financial development is wrongeconomic expansion causes better establishments is inconsistent. Within a prominent individuals capital debate article by Glaeser et al. (2004) the relation between individual capital and expansion is the point of dialogue. The authors declare that countries possessing more human capital before performed much better than others, independently by which institutions they were established prior to the introduction of human being capital. They affirm that human capital is not triggered by institutions, but that instead it triggers themhuman capital causes growth and for that reason better institutions. Awarded, Glaeser et al. (2004) gets the same requirement even as propose for development; property rights. However, We firmly disagree start view. A inhabitants can have just as much individuals capital as they can gather, but if it's not pushed to its real potential, it does not improve a society's economical situation. we then question how a contemporary society can gain human capital, without well-functioning companies that provide property privileges. If that population does not protect property protection under the law or does not give to all its components roughly equal rights, growth will be slower, if not completely absent. people will not invest in individuals or physical capital, since the payoff of the investment is uncertain. Think about a generic example: when a society will not protect anyone's property but just the property of a finished elite, outsiders who might have groundbreaking ideas, will most likely not reach develop their ideas, considering that in this way they might not have the means to achieve this task or they might just not get the incentive to fulfill their potential. This is just what we think has occurred in the extracting societies: even if the conquistadores were better (according to the literacy measurements made by Acemoglu et al. ) were rather educated typically, the indigenous inhabitants wereas prohibited to participate in the modern culture improvement process or to keep property; instead these were required to work in conditions of slavery. The contrary happened in THE UNITED STATES and we can see how ithistory says how it proved: most of the population was made up by emigrants from the Old Continent, whom wereto whom were given the same privileges, and even if there have been some minorities like the African American who were granted less rights, there were still more folks enjoying the benefits associated with the companies than in the countriesthe countries where extracting institutions persisted.

Further evidence in support of our argumenton this subject matter is given by Weil (2013): when you compare a country's prosperity with its amount of real human capital seen as education, he shows that there is no direct relationship. The difference in wealth is not completely explained by education. If this is the truth, for example, Mozambique would have acquired 43% of the U. S. GDP (Gross Domestic Product) per worker, but in certainty it produces only one 1. 9% than it. Weil points out this discrepancy using the grade of education, which changes the effect of education on prosperity drastically. These differences in quality of schooling are immediately related to the companies present; the students of richer countries learn faster and more effectively, because they're provided better educational facilities and method of learning.


As we have shown in this brief essay, to be able to foster development potential in the first place, one needs institutions that create and protect property rights. Indeed, we have shown, using empirical research, that individuals capital is triggered by institutions in the first place, which then indirectly causes growth. However, we do not say that human capital cannot feed into the quality of institutions at a later level, the relation is far more elegant and complex than that, we simply wanted to show that the institutions are the beginning of the report. Furthermore, we feel that institutions positioned in colonial countries didn't directly originate there, but that they were produced from the institutions that were within the indigenous countries. As your final remark, we highly desire that more research should be done on the development of institutions and real human capital and exactly how they compare to their native country about the colonization period, which includes only been treated superficially in the literature.


Acemoglu, D. , Johnson, S. and Robinson, J. (2002). 'Reversal of Bundle of money: Geography and Institutions in the Making of today's world Income Circulation'. The Quarterly Journal of Economics, 117(4), pp. 1231-1294. Acemoglu, D. , Gallego, F. , and Robinson, J. A. (2014). 'Organizations, real human capital and development'. Unpublished working newspaper. University of Harvard, Cambridge.

Glaeser, E. , La Porta, R. , Lopez-de-Silanes, F. and Shleifer, A. (2004). 'Do Corporations Cause Development?'. Journal of Economic Growth, 9(3), pp. 271-303. Weil, D. (2013). Financial development. Boston: Pearson, pp. 170-197.

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