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The persistence of historical influences on current economic freedom

Economic freedom and prosperity: The origins and maintenance of liberalization. November 1, 2018

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In Fatal Conceit, Hayek (1988, p. 9) says that “our values and institutions are determined not simply by preceding causes, but as part of a process of unconscious self-organization of a structure or pattern.” This long and slow evolutionary process results in diverse institutions across countries. The diversity of and path dependency from these historic institutions play a role in the current institutions that influence economic freedom and economic growth. In his examination of the influence of institutions on historical development, North (1990, 1991, 1994) finds that the “rules of the game” that develop in a region change the incentives for investment in human capital, increased productivity, and rent-seeking. In other words, institutions change the cost and benefits for individuals to engage in productive, unproductive, or destructive entrepreneurship (Baumol 1990). Through these incentives, institutions influence economic growth.