Question

Please read S. Engerman and K. Sokoloff’s paper named as:

“History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World.” Journal of Economic Perspectives, Volume 14, No 3, Summer 2000.  Pages: 217-232.

1. Please summarize the authors’ main argument by using your own words in a short paragraph, by relying on the data that the writers’ used.
2. If you compare Engerman and Sokoloff’s argument with Marx’s and Acemoglu’s arguments that we studied, in what way their argument resembles Marxist argument and in what way it resembles Acemoglu’s argument?  Compare clearly with your own words.  
3. What is the main history lesson(s) that writers underline from past to today’s South American countries that economic and social turmoil haven’t been settled down? Explain clearly with your own words.

Answer 1

A.

Summary: By observing factor endowments and land & immigration policies that promoted higher levels of equality, higher levels of economic equality led to higher standards of living [(Y/L=F(K,L,E)] in the U.S./Canada. Engerman and Sokoloff strongly suggest that rises in Y/L came from E, with E being the level of organizational efficiency. Wealth/social/political equality ultimately drives organizational innovation.

The Southern U.S. region was a powerful point and the most convincing part in their argument. The Southern U.S. region had factor endowments viable for a plantation economy and this showed up (exactly as Engerman and Sokoloff says it should have) with a more unequal and slower growing economy than that of the north. Yet, when abolition came and the plantation model died (as it did in Argentina when large numbers of European immigrants arrived), rather than adopting large-scale enterprises again as Argentina and Peru did (i.e. contract workers from China/Japan), the Southern U.S. turned towards smaller, family-orientated modes of production, such as share-cropping, which in turn led to more equality which in time led to higher standards of living (whereas Argentina stalled).

Re: B. Pennington
"The paper notes that upon European arrival in the New World there was a higher concentration of Native Americans in South America than in the North. Thus I wonder, if the Native Americans could use the land and other natural features to form prosperous societies why couldn’t the Europeans prosper in the same geographic areas?"

I'm sorry, but this romanticized image of these native Americans living on top of beautiful mountain peaks and plateaus and occasionally coming down to take a nice afternoon nap in the valley below next to his llama is downright absurd. A group of people who had access to nothing but the most rudimentary of clothing at all times and access to almost no type of machinery (the wheel wasn't invented yet!) was somehow a prosperous place before Europeans came is ridiculous. The transition from being part of a stone-age, slave-based civilization was infinitely better. The Spanish colonies might seem poor to us especially in light of what’s happened since then (in the rest of the world), but as the authors point out, right after most of the native-american population was wiped out, it was one of the most prosperous places in the world judged by both Native Americans and Europeans.

Anyways, what I think is romantic and should (properly and deservingly) be romanticized is the United States. People came and still come here in search of a “promised land” (religiously and economically). A young country fights for independence, wins, and ultimately creates a form of government the world has never before seen. The country grows and grows and manages to span a continent. The country wins a civil war, a couple world wars and a cold war and in the process democratic ideals the world over just by her sheer success. Even today, with the “rise” of countries in East and South Asia as well as Brazil and such, America still remains exceptional (growing population, high rates of productivity growth, and also probably single-handedly dominates the field of economics).

Re: S. Shen
“I feel that the authors have OVERLY discounted cultural factors such as "democratic" and "absolutist" values.”

Economic equality (or inequality) would be there anyway (with democratic values or not) to test their argument (that it leads to higher standards of living) or if it was that significant it could’ve and probably would’ve been tested out. Anyways, look at the Southern U.S. region as a counterexample.

B. Overall Engerman and Sokoloff's theories of explanation are very accurate and applicable. I agree completely that equality in wealth, capital, and factor endowments create more stable economic and institutional growth. The part that is really interesting to me is that if institutions are created that do not just favor one elite group in society, they will be more equipped to adapt to the ever changing forces of the economy that constantly test how well institutions can adapt and reinvent themselves to meet changing landscapes. Many theorists today support the idea that institutions, whether cultural, political, law, or economic, are the guiding factors in how successful a state or economy is. Douglass North, for instance says, that even a slight difference in institutions will create a completely different set of outcomes. All these ideas put together work to shed light on where the world is going in terms of economics, poverty, growth, and politics.

C.

Sokoloff and Engerman's article talks about the divergence in the economic development of North America and Latin America. In Professor Delong’s lecture today, he mentioned that back in 1700’s, North American and Latin America equaled in wealth. So what happened between then and now that North America developed so quicker than Latin America?

One reason that the authors discussed was that due to the vast amount of resources in North America, the people in these lands developed technology that helped them be more efficient. This then leads to faster economic growth. Another factor that might have affected the difference is that there were abundant British settlers in North America while the Spanish limited entrance to their colonies. The more people you let into a new colony, the more competition can occur and competition leads to efficiency. On the other hand, the Spanish colonies controlled how many people they allowed in their colonies. As a result, those people who were able to move to the colonies had monopolies of their industry and led to greater discrepancy between the rich and the poor.

The argument of Sokoloff and Engerman that factor endowments do not tell the whole story about North America’s economic growth being greater than that of Latin America is interesting because the initial interest was in Latin America. When these areas were first being colonized, Latin America was the “get rich quick” fix for the explorers looking for bullion, while the North American colonies and Canada were inferior in this regard. What happened then was that political institutions were never created in Latin America because they were too busy fighting the natives for gold and silver. Meanwhile, the American colonies were fighting for survival trying to establish themselves in the New World. To take a modern day look at this situation, the Latin American countries are similar to rentier states in that they were expected to grow due to their natural resource wealth. This obviously didn’t happen because nobody laid the foundations for institutions nor was political stability ever instilled. Interesting article and the way it dissects the differences in growth, especially since the Latin American “colonies” were expected to be more economically sustainable.

Latin America on the other hand spawned large plantations, that were supposed to be significantly larger than those in the southern US. A large non-killed-off Indian population and easy access to slave market made labor easily available, and discouraged emigration from Spain. England on the other hand, encourage emigration to its new colonies. There was not enough competition, and the plantation mentality emerged - the wealthy elite were satisfied with their holdings and more concerned with protecting their wealth rather than developing the economy.

The south is a unique situation, because it developed much like Latin America but also was a part of the United States, and therefore, the trade and commercial rules were determined at a federal level. Also, competition between the states encouraged the evolution of a network of markets, which would include the labor market.