Our second too-quickly-accepted notion is that the capitalist economy lives in a institution-less vacuum, where markets miraculously monitor opportunistic behaviour. Forgetting institutional foundations of markets, we mistakenly equated free markets with unregulated markets. Although we understand that even unfettered competitive markets are based on a set of laws and institutions that secure property rights, ensure enforcement of contracts, and regulate firm behaviour and product and service quality, we increasingly abstracted from the role of institutions and regulations supporting market transactions in our conceptualization of markets. Sure enough institutions have received more attention over the past 15 years or so than before, but the thinking was that we had to study the role of institutions to understand why poor nations were poor, not to probe the nature of the institutions that ensured continued prosperity in the advanced nations and how they should change in face of ever evolving economic relations. In our obliviousness to the importance of market-supporting institutions we were in sync with policymakers. They were lured by ideological notions derived from Ayn Rand novels rather than economic theory. And we let their policies and rhetoric set the agenda for our thinking about the world, and worse perhaps, even for our policy advice. In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose.
A note of context... Acemoglu is the emerging expert on economic growth. He was the recipient of the 2005 John Bates Clark Medal for the best economist under 40, and his new book Introduction to Modern Economic Growth (2009), has already established itself as the seminal textbook in the subject through advanced availability of electronic copies.
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