ABSTRACT The financial crisis is, in part, an embarrassment for economic theory. Economists tended to think that severe business cycles had been conquered; that free markets require no regulations to constrain self‐interest; and that large, established companies could be trusted to monitor their own behavior so as to preserve their reputational capital. These three beliefs have proved to be inaccurate. On the other hand, economists justifiably believe that as a process of creative destruction, capitalism requires institutions that allow for innovation (...) and the reallocation of resources toward firms that have successfully innovated. This suggests that we should not condemn wholesale even the financial innovations that played a role in the crisis, which have been remarkably productive and will continue to be, given the right regulations. Nor should economists hesitate to say that political reactions to the crisis that hamper such innovation and reallocation may do far more harm than good. (shrink)

Daron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

Daron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

This article seeks to provide a comprehensive re-evaluation of the redistributive models of democracy advanced by Carles Boix, and Daron Acemoglu and James Robinson, their reception within the democratization literature, and the subsequent trajectories of their authors. Contrary to the existing literature, which commonly envisions RMDs as a unified framework, this article argues that Boix and Acemoglu and Robinson’s models should be understood as divergent theories of democratic transitions. In the aftermath of numerous criticisms, both authors have (...) developed sharply different understandings of democratization. We argue that Acemoglu and Robinson have backtracked from their original formulation toward a “Whiggish” history of the rise of liberty, while Boix has increasingly reverted to the core propositions of classical modernization theory. In the process, this article argues that RMDs have lost, and reneged on, much of their apparent explanatory power regarding transitions to and reversions from democracy. (shrink)

ReviewDaron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

This paper outlines the methodological and empirical limitations of analysing the potential relationship between complex social phenomena such as democracy and inequality. It shows that the means to assess how they may be related is much more limited than recognised in the existing literature that is laden with contradictory hypotheses and findings. Better understanding our scientific limitations in studying this potential relationship is important for research and policy because many leading economists and other social scientists such as Acemoglu and (...) Robinson mistakenly claim to identify causal linkages between inequality and democracy but at times still inform policy. In contrast to the existing literature, the paper argues that ‘structural’ or ‘causal’ mechanisms that may potentially link the distribution of economic wealth and different political regimes will remain unknown given reasons such as their highly complex and idiosyncratic characteristics, fundamental econometric constraints and analysis at the macro-level. Neither new data sources, different analysed time periods nor new data analysis techniques can resolve this question and provide robust, general conclusions about this potential relationship across countries. Researchers are thus restricted to exploring rough correlations over specific time periods and geographic contexts with imperfect data that are very limited for cross-country comparisons. (shrink)

In the past few years, a body of ideas based on political economy theory has been built up by North and Weingast, Olson, Przeworski, and Acemoglu and Robinson. One theme that emerges from this literature concerns the transition to democracy: why would dominant elites give up oligarchic power? This article addresses this question by considering a formal model of an authoritarian regime, and then examining three historical regimes: the Argentine junta of 1976—83; Francoist Spain, 1938—75; the Soviet system, 1924—91. (...) We argue that these historical analyses suggest that party dictatorships are more institutionally durable than military or fascist ones. Key Words: democratic transition • authoritarian regimes • rational choice theory. (shrink)