Chapter 8: The Institutional Setting: Government, Market and Civil Society
The danger lies in assuming that economic growth is natural and that if it does not take place, arbitrary human actions (usually thought of as politics) must be interfering. By closely identifying a theoretical ideal with a ‘natural’ state of affairs, neoclassical economic theory loses its potential to explain how economic change is in fact historically created through the building of economic institutions. (Bin Wong 1997: 62) The consequences of institutional weakness can be illustrated through the prisoner’s dilemma, which shows the dangers of predation (Easterly 2006: 87–8). There are two potential partners to a joint investment. The entrepreneurs have a choice between cooperation in the investment, which requires a minimum investment of funds beyond the capacity of either of the individuals alone, and using the same resources to buy a gun, which allows one partner to seize the funds of the other, redistributing existing resources. It is assumed that the strategy of predation precludes that of productive investment. The gun costs 1 unit, the investment yields 2 units and each player starts with 3 units of funds. The returns from the different strategies might look like this: Player 1 Player 2 Buys a gun Does not buy a gun Buys a gun 2,2 5,0 Does not buy a gun 0,5 4,4 Each player is worse off if they fail to buy a gun and the other does. The strategy of buying a gun without the other player doing so yields the highest individual return,...
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