Economia

Journal of Institutional Economics (2009), 5: 3, 259–288 Printed in the United Kingdom C The JOIE Foundation 2009 doi:10.1017/S1744137409990014

Economic growth related to mutually interdependent institutions and technology
RICHARD G. LIPSEY∗
Emeritus Professor of Economics at Simon Fraser University, Vancouver BC, Canada

Abstract: This paper argues that technological advance is anecessary condition for sustained economic growth. Technologies and institutions co-evolve in a system of mutual causation. Although some institutions inhibit growth while others encourage it, no single institution is either necessary or sufficient to produce sustained growth. However, some non-unique bundle of encouraging institutions is necessary. Sustained growth began with the Industrial Revolutionsthat did not just ‘fall out of the blue’ but were instead the culmination of three trajectories of technological advance in steam power, electric power, and the mechanization of textile manufacturing. These stretched over several centuries. Growth then became sustained when the West ‘invented how to invent’. A necessary condition for the Industrial Revolutions was Western science whose roots lie asfar back as the scholastic philosophers and the medieval universities. Its absence elsewhere is a sufficient reason why no other place developed its own indigenous industrial revolution.

1. Introduction In this paper, I consider relations among economic growth, institutions, and technological change. After introducing some definitions and a key behavioural assumption, I argue in Section 3 thatcapital accumulation with given technology could not produce sustained growth because it would sooner or later be constrained by diminishing returns to investment, diminishing marginal utility of income, resource exhaustion and increasing pollution. Similarly, scale economies made available by new technologies must sooner or later be exhausted. Thus, growth cannot be sustained in the long termwithout significant technological advance, which is brought about by the invention and innovation of new products, new processes, and new forms of organization.
∗ Email: rlipsey@sfu.ca This is a revision of a paper first presented to the 10th International Workshop on Institutional Economics held at the University of Hertfordshire, England, 17–18 June 2008. Many of the ideas in it are the commonproperty of myself and my two co-authors, Clifford Bekar and Kenneth Carlaw. I have reorganized and added to them in order to deal with the questions set to by the conference organisers. See Lipsey et al. (2005).

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In Section 4, I consider some aspects of the role of institutions in the growth process. Institutions have important influences on growth, some inhibitingit while others enable and/or encourage it. The existence of an effective subset of potentially helpful institutions is a necessary condition for sustained growth. However, the list of such institutions is long and there are many subsets that can be effective in encouraging growth. It follows that no single institution is either necessary or sufficient for sustained growth, although the existence ofsome favourable set is necessary. Thus, there is no paradox in finding in some non-growing economies one or more of the institutions that were part of the package that enabled the West’s growth. In Section 5, I consider the advent of sustained growth in the West. There have been periods of rapid growth in the past but these all petered out sooner or later. In contrast, the West’s rapid growth thatbegan with the two industrial revolutions was different from all that went before, not necessarily because of its speed, but because of institutional developments that made it self-sustaining. Although this sustained growth was a flower of the two industrial revolutions, its emergence cannot be understood unless one goes back to a series of developments in the Medieval and early modern periods....