Tuesday, June 23, 2009

Ideas and Institutions

Charles Jones and Paul Romer write (via Arnold Kling):
The interaction between institutions and idea flows is easy to illustrate in familiar contexts. For example, until 1996, opponents successfully used the local permit process to keep Wal-Mart from building stores or distribution centers in Vermont. This kept powerful logistics ideas like cross-docking that Wal-Mart pioneered from being used to raise productivity in retailing in the state. Such nonrival ideas must have been at least partly excludable. This is why Wal-Mart was willing to spend resources developing them and why competitors were not able to copy them. All this fits comfortably in the default model of endogenous discovery of ideas as partially excludable nonrival goods.
The pure public good approach also makes it very difficult to address one of the most striking episodes in modern history. By something like 1300 A.D., China was the most technologically advanced country in the world, with a large integrated population. According to the Lee model, it should have persisted indefinitely as the worldtechnology leader. The explosive dynamics of the virtuous circle between population and ideas suggests that such technological leads should never be lost. Only a remarkable and persistent failure of institutions can explain how China fell so far behind Europe. A model in which institutions can stifle innovation could explain why China lost the lead, but it takes a model in which institutions can also stop inflows of ideas from the rest of the world to explain why, for more than 500 years, ideas developed in the west were not more systematically adopted in China.

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