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Fredrik Gustafsson
4.0 out of 5 stars

Institutions as the fundamental cause
Reviewed in the United States 🇺🇸 on March 21, 2006
Monographs dealing with West's rise from a backward feudal society to
the most technologically advanced and wealthiest civilization this world
has ever seen, seem to come a dime a dozen nowadays. Given the large
amounts of books available on this topic, and the fact that it was
published twenty years ago, what reasons are there for reading How the
West Grew Rich? Quite a few I would argue.

The main question of the book is of course: how, or rather why, did the
West (as opposed to the South or the East) achieve modern economic
growth? The authors come to the correct conclusion that standard growth
models can only provide the proximate causes of growth. Innovation and
accumulation of capital, labour and natural resources is growth, it does
not explain growth.

So what, according to R&B, are the fundamental causes of growth? The
answer lies in favourable institutions and freedom from political
restrictions - more specifically, secure property rights and the freedom
to engage in any line of business and to acquire and sell goods at an
unregulated price. This meant that the process of innovation was
delegated to private firms and that individuals themselves were forced
to bear full responsibility for their failures and reap the full
benefits of their successes.

Why then did such favourable institutions and political and economic
freedoms arise in the West? The answer according to R&B is political
fragmentation and competition between different territories in Europe.
Investments and the merchant class were drawn to areas were property
rights were respected and where they could carry out their business
without too much political interference. There was no single empire in
Europe. The growth of markets - especially that of cities and
long-distance trade - further spurred this development.

The arguments in How the West Grew Rich are, which should be apparent by
now, very similar to those found in The Rise of the Western World by
North and Thomas, although they focus a lot less on population growth.
As they should, R&B refer to this book on several occasions. Despite
this fact, How the West Grew Rich proves to be an interesting read: the
familiar arguments are explored further and the book includes several
interesting examples of how institutional innovations lowered
transaction costs and facilitated further development.

There are a number of objections one could raise against R&B's account
of the rise of the Western world - their account of the middle ages and
alternative explanations behind West's success are far from
satisfactory, to name a few. There are however a few things speaking in
favour of this book. First of all, it has a clear message. It does not,
like some other books on the same topic, name hundreds of different
reasons for why the West grew rich. Rather, it presents a clear
hypothesis that is present throughout the book and it also provides very
clear policy recommendations to current developing countries wanting to
emulate West's success. Secondly, and perhaps because it has such a
clear message, it is fun to read!
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5.0 out of 5 stars How the West Grew Rich
Reviewed in the United States 🇺🇸 on September 25, 2015
Verified Purchase
Excelent analysis of how to create wealth. The book provides a very
realistic theoretical framework of how wealth can be created in any
place of the world.
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komyathy
4.0 out of 5 stars "adaptation takes place through the formation of
enterprises that are, at least initially, small," ie.,
decentralization=growth.
Reviewed in the United States 🇺🇸 on December 27, 2006
It is entirely safe to generalize: innovation is more likely to occur in
a society that is open to the formation of new enterprises than in a
society that relies on its existing organizations for innovation."
Feudalism thus had to be eclipsed for serious change to occur since it
"was a society which dealt with the risks of life by legislating
rigidity. Economic growth is inherently a byproduct of change, and the
political and religious ideology of the Middle Ages guarded against the
heresies of change in every way it could," argues the authors herein as
they set out to explain "how the West generated the organizational and
technological skills required to produce and exploit" its wealth. A
"decentralization of authority," thus was crucial...and this was greatly
spurred by the Protestant Reformation, the long term effect of which,
economically, "was the progressive removal of religion from intimate
involvement in the sphere of business activity." "In the course of the
sixteenth and seventeenth centuries , the business sphere was, in a
word, secularized." "Protestantism sanctioned a high degree of
individual responsibility for moral conduct and reduced the authority of
the clergy." Under these circumstances, it would have been too much to
expect the Catholic clergy to continue to stress doctrines which could
only turn prosperous parishioners toward Protestantism." The authors
argue moreover that this "was not wholly a question of the theological
content of either Catholicism or Protestantism. It was partly a question
of the competition inherent in the existence of several rival religions,
which, like the existence of competition inherent in the existence of
several rival national states, enabled a rising merchant class chafing
under the restraints of one authority to take refuge with another more
congenial" as trade & exchange, both domestic and foreign, became ever
more prevalent in the prevailing economy of the day. But how did such a
merchant class even gain a foothold in the first place since feudalism
was already petering out during the 15th century, ie., before the
Protestant Reformation and the later rise of capitalism. As the authors
remark: "the decline of feudalism is complete a century before the
beginnings of capitalism."

"For if one thing is clearer than another, it is that the merchant class
did not get its economic power from the feudal nobility, or by
displacing or super-ceding the feudal nobility in agricultural or other
economic activities. The merchant class gained economic power by
expanding the trading activities in which it had always engaged." That's
the key herein, trade and exchange; or rather, the ability of people to
be able to engage in such. So the authors argument herein is not that
democratization shall necessarily lead to an economic boom, but that the
reverse is far more likely; that "economic growth was [and remains, I'd
add] a force for democratization." Marx was thus, the authors assert,
wrong yet again: Capitalism wasn't a natural stage progressing out of
feudalism, and capitalism doesn't inherently lead to monopolistic
centralization of wealth; nor can monopolistic control of the economy
(under the banner of communism or socialism) drive continued economic
growth. After all, "one must keep in mind that growth implies change and
adaptation, and that much of the adaptation takes place through the
formation of enterprises that are, at least initially, small." Hence the
authors' view that "the strength of the tendency to decentralization in
Western economies is chronically underestimated."

You may bemoan the influence of such mega companies as Microsoft, Exxon,
& Walmart now and worry how much influence they may have in 20 years,
but such is but a parlor game of sorts. (Look at the once great US
Steel, or General Motors, or IBM, or any one of a dozen railroad
companies, and you can see the futility of simple extrapolation.) Such
high fliers now are not hurting the American economy. Such companies are
stimulating it. That's the point, after all, is it not? Not to penalize
success, but to focus on "the value of advancing the material welfare of
human beings as measured by the means available to THE GREAT MAJORITY of
individuals to choose and shape the quality of the lives they
lead"(emphasis added). And as long as the Microsofts and Walmarts of our
economy continue to add to the growth of such they shall be secure as
entities, but there shall come a time when innovations (think Linux,
Google, Apple multimedia platforms to come, home grocery delivery and
internet shopping---you name it) will seek to dethrone them. To wit, the
authors point out that a "seldom praised function of competition in
economic growth is that it eliminates obsolete forms of economic
activity." (Contrast this to "the difficulty experienced by the
political sphere in getting rid of programs that are obsolete or that
have simply failed.") Hence "the real point...essential to understanding
why the benefits of Western growth were so widely diffused is that the
West's system of economic growth offered its largest financial rewards
to innovators who improved the life-style not of the wealthy few, but of
the less-wealthy many. This is a point that bodes ill for 3rd world
ever-developing disappointments (ie., Russia, Venezuela, slews of
countries in Africa/The Middle East) who are hopelessly (or so it seems)
overly centralized and concerned only with enhancing the riches of the
elites in such societies. Corrupt self-interested cliques are simply
instinctively hostile to bottom-up anything. Regarding most African and
Middle Eastern states, some would say that the Western economic path
"involves a diffusion of power and a degree of individualism which is
incompatible with many modes of social life" in such parts of the world,
but the authors herein suggest that such could have been once said about
European peoples, too...until power diffused within such societies to an
extent made possible by trade-generated economic growth. Nothing is
guaranteed, of course, but as long as power remains centralized in
backwater states the chance of real sustainable economic growth and
seriously better lives for the average citizens of such societies will
remain but a hopeful wish. (Interestingly, many European economies have
begun to grow rather sluggishly since the European Union has been
increasingly taking power back from individual states and localities
with them.) Thanks for reading my words of review of this worthy book.
Cheers
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