Puzzle of Growth

1. Factors of Production (immeditate)

2. Incentives (immediate)

3. Institutions (ultimate)

4. History/ Luck/ Ideas/ Culture/ Geography (ultimate)

Immediate = can change more rapidly, more directly involved

ultimate = long-lasting foundational influences that shape economic performance

1. Physical Capital (e.g. Machinery, Infrastructure)

2. Human Capital (e.g. skills, education)

3. Technological Knowledge (e.g. innovation)

4. Organization (all pieces brought together, e.g. by entrepreuners)

—> Why do countries have good FOP? —> Incentives

Incentives influence individual and collective economic behaviour

• China Great Lap, collective farms, farmers had no incentive/ goals to work at “maximum capacity”

Why do countries have good incentives? —> Good institutions

1. Property rights (allow to protect your investment)

2. Honest government (no bribe)

3. Dependable Legal System (borrowing or lend money)

4. Political Stability (no war, investors get confidence)

5. Competitive and Open Market (let farmers innovate and grow)

—> Why do some countries have good institutions? —> Mysterious combination of Luck, Geography, History, Culture and Ideas

• Ideas (US constitution when ideas of Adam Smith were popular)

• Geography (frontier, coastline, freedom to trade)

• Culture (entrepreuneurial mindset)

• Luck (George Washington stopped at second term)

• History