On January 1st, the world lost one of the greater – but perhaps under-appreciated (as always) in the mainstream circles – economists, John P. “Jack” Powelson. I came across his work while studying economics at George Mason University, but also organized his talk about global challenges of economic development here at CIPE, back in 2002.
His CIPE presentation was in a way a response to one question that drives many economists in the field of development: why some countries are rich while others remain poor? Much of this, Jack captured in his book on the history of wealth and poverty, a very good overview of which was done by John Sullivan.
While in the book Jack goes through specific regional and country examples, much of his arguments are laid out in the first chapter. His answer to the question of developmental challenges was the same he gave in his works the 1960s, ’70s, ’80s, and ’90s – and something that is widely accepted today – “its institutions.” Yet, although the overall notion that institutions are important is more or less widely accepted today, what institutional reform entails and how it should be done is still rarely understood completely. It is something that demands much research and, more importantly, successful practical application.
Personally, I particularly relate to two points that come out in Jack’s analysis on institutions. First, is that the field of economics has become a “mathematical exercise, manifesting itself in the plethora of growth models.” While such models are certainly useful, Jack Powelson, as other institutional economists, argued that developing aggregate trends based on individual situations is an interesting exercise, but it does not provide one with concrete solutions when faced with market development issues in various countries. Econometric models do not provide any concrete answers about the nature of reform and institutional change.
The second point is the one that links together both political and economic markets – the significance of which, to-date, continues to be misunderstood in development circles as there is a profound tendency to separate political reforms from economic reforms. That point is the importance of power diffusion.
One way in which power diffusion becomes relevant, as Jack shows well, is the development of civil society. When just a few interest groups dominate – or capture – the policymaking process, you get a much different outcome than in the case of civil society pluralism. In other words, Jack argued that one of the key factors underlying economic success of countries is the “balance of power among various economic groups.” One does not have to go far to find examples of what can happen when economic power is concentrated within a single group – whether its the current economic and social disaster in Zimbabwe or Marcos’ crony capitalist economy.
The point on power diffusion leads one to make several conclusion in regards to reform. While power diffusion does not constitute democracy, Powelson argues that it leads to democracy and democratic institutions. In the presence of power diffusion, the state takes the secondary role, responding to the interests of various interest groups, rather than driving through the agenda of several cronies (as it often happens in authoritarian countries). As he put it:
The sovereign’s role was secondary, often endorsing what the groups had decided or making decisions that might be countered or revised by the groups. Therefore, the interest groups had vested interests in the institutions, while the sovereign had only a limited ability to subvert them to his own advantage. This restraint upon concentrated power constitutes the principal difference, in the context of durable economic development, between Japan and northwestern Europe on the one hand and the rest of the world on the other.
In some way, through institutional analysis, Powelson laid out the conceptual linkages between economic development and democracy, something that is not that evident if one goes back to simple econometric studies (see point #1 above). In the same manner, he laid out a procedural definition of democracy as it relates to economic development – in that its not only the substance of economic policies that matters, but it is also how economic policy is created and put into place that’s important. In other words, its not just elections that define democracies, but also how policies are created and carried out.
Jack also shows that an open, transparent debate on economic policy has larger implications than better economic outcomes – it is also more durable due to the “interlocking” nature of institutional change.
Since each new institution in a free market is shaped around those already formed, they tend to interlock with each other: none can be changed without changes in many others. This is the interlocking society referred to previously. By contrast, institutions mandated by sovereign powers or by elitist governments tend to be imposed suddenly with little respect for existing institutions. Therefore, they tend not to become interlocking and hence not durable.
Such gradual institutional change may not be as attractive as some countries desire, but it may be the key to sustainable economic development. In fact, it helps countries to achieve sustainable growth and to avoid falling into the traps of chronic growth (growth that will happen regardless), command growth (driven by governments or insiders), or reflected growth (copied from someone else) as Powelson called it.
Jack Powelson left us with many ideas that provide quite a few insights into political and economic processes that are taking place today and certainly need practical application in many countries around the world. (For more ideas on ridding the world of poverty, I also suggest taking a look at the Moral Economy.) Its up to the practitioners to put these ideas to use.
Published Date: January 29, 2009