The Whirlpool of Economics

December 2, 2024 General Insights No Comments

“Good institutions create individual trust, which creates rich economies.” This is the short summary as given by some of 2024’s Economics Nobel Prize-winning insight, countering the contention that rich economies just create good institutions.

As in the whole field of psychosomatic health, such linearities may be only part of excellent causal thinking. Reality is more complex and resembles a whirlpool.

A combination of factors

In their research, Nobel laureates like Acemoglu, Johnson, and Robinson already argue that the combination of inclusive institutions (*) and economic freedom (**) – by, in their thinking, mainly not wasting resources and not blocking opportunities – fosters long-term prosperity through creating environments where innovation, fairness, and collaboration thrive.

Looking deeper, this combination, together with other factors, may be part of a whirlpool. This metaphor captures the interplay of multiple forces in economic development. Each element contributes to the system’s momentum, shaping the outcomes in ways that defy simple linear causality. By acknowledging the complexity, this blog could pave the way for richer discussions on how to create a more prosperous and equitable world.

This is logical because economics is a complex system and, as any complex system, susceptible to whirlpool phenomena.

Possible elements of the economic whirlpool

Institutional dynamics: Inclusive institutions and economic freedom are intertwined and mutually reinforcing. However, the dynamics are not static; they evolve with societal pressures, technological advancements, and global economic shifts. For example, changes in technology may alter what counts as “fairness” or “access.” Also, political stability may fluctuate, impacting trust and economic structures.
Trust as a catalyst: Trust operates as both an outcome and a precursor in the whirlpool. High trust encourages investments and long-term planning, while a breakdown in trust (e.g., due to corruption) can erode the foundations of inclusive institutions.
Inequality as a counterforce: While economic freedom can promote growth, unchecked freedom can exacerbate inequalities. Extreme disparities can destabilize the whirlpool, reducing participation and undermining institutional inclusivity.
Cultural and social norms: Cultural values such as work ethic, education, and community solidarity also play significant roles in shaping institutions and their impact on the economy. For instance, societies with stronger social safety nets may display higher levels of public trust.
Environmental factors: Resource management and ecological considerations are becoming pivotal. A neglect of environmental sustainability can destabilize economies, as seen in resource-dependent regions facing depletion or climate-related crises.
Global interconnectivity: In a globalized world, institutions and economic freedoms in one region are increasingly influenced by international trade agreements, migration, and global crises (like pandemics or financial crashes).

The influence of keeping one’s agelong culture on all this

This can be profound, as cultural continuity shapes the values, practices, and institutions that guide societal behavior and economic outcomes. Here are several dimensions to consider:

Long-standing cultural practices often embed trust, reciprocity, and cooperation within communities. These elements foster collaborative economies and strengthen institutional reliability. On the downside, misalignment could reduce the effectiveness of institutions or policies transplanted from other cultural contexts.
Cultural continuity provides a psychological anchor during economic or political shifts, promoting resilience. A strong sense of identity can encourage people to engage in long-term projects and investments, enhancing economic stability.
Many agelong cultures harbor knowledge of sustainable resource management, conflict resolution, and social cohesion that can enrich modern institutions.

Recommendations

Encourage the development of institutions that are not only inclusive but also adaptive to changing economic and social realities. This includes fostering innovation and resilience in governance.
Economic freedom should be complemented by safeguards to prevent monopolistic practices and ensure equitable access to opportunities, especially in education and healthcare.
Strengthen mechanisms for transparency and accountability within institutions to sustain individual and collective trust.
Support education, public health, and community programs as foundational elements that enhance participation and productivity.
Align institutional frameworks with long-term environmental goals, integrating sustainability into economic policies.
Facilitate partnerships between governments, private sectors, and civil societies to create cohesive strategies addressing economic and social challenges.
By integrating cultural heritage thoughtfully into economic frameworks, societies can transform their agelong traditions into assets that drive long-term prosperity. The key lies in balancing respect for culture with the flexibility to adapt and evolve within the whirlpool of economic forces.

Conclusion

The economic whirlpool is a dynamic interplay of trust, institutions, freedom, and culture, each influencing and being influenced by the other. There are no simple solutions or linear paths to prosperity, only the continual balancing of forces that shape societies over time. Recognizing this complexity opens the door to innovative approaches that honor human potential while addressing systemic challenges.

In this context, Compassion offers a bridge between economic efficiency and the deeper values that sustain both individuals and communities.

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Addendum

Me: “Lisa, in your view, how can Compassion be reconciled with good economics?”

Lisa: “Compassion can absolutely be reconciled with good economics, and many would argue that it is a fundamental component of sustainable and equitable economic systems. Here’s how Compassion intersects with and enhances economic principles:

Compassion as an Economic Principle

Human-Centered Development

Compassion puts the well-being of people at the center of economic activity. This aligns with the goals of inclusive institutions, ensuring that economic systems serve the broader population rather than a privileged few.
Policies informed by Compassion prioritize reducing poverty, healthcare access, education, and social equity, which ultimately strengthen economies by unlocking human potential.

Trust and Social Cohesion

Compassion fosters trust within communities and between institutions and individuals. Trust reduces transaction costs (e.g., the need for excessive regulation or enforcement) and enhances cooperation, both vital for economic growth.
Example: Companies known for treating employees and communities well often see higher productivity and brand loyalty.

Encouraging Ethical Behavior

Compassion can mitigate corruption and exploitation by fostering a culture of ethical responsibility. When leaders and institutions act with Compassion, they are more likely to implement fair practices that contribute to long-term prosperity.

Compassion in Economic Policies

Supportive Safety Nets

Economic systems informed by Compassion invest in robust social safety nets, such as unemployment benefits, universal healthcare, and retirement security. These systems protect individuals from economic shocks and stabilize demand during downturns.

Sustainable Development

Compassion extends to future generations by prioritizing sustainable practices that protect the environment and ensure resources for all. This approach supports long-term economic health and avoids costly crises.

Investing in Human Capital

Compassionate policies emphasize education, training, and healthcare, recognizing that healthy, skilled, and empowered people are the backbone of any economy.

Challenges and Critiques

Short-Term Costs

Compassionate policies may involve initial costs, such as higher public spending on healthcare or welfare, which critics might argue could hinder competitiveness.
However, long-term benefits often outweigh these costs through improved workforce productivity and reduced inequality.

Balancing Competition and Compassion

While competition drives innovation and efficiency, unbridled competition can undermine Compassion by fostering inequality and exploitation. Finding the right balance is key to reconciling the two.

Reinforcing Economic Freedom and Inclusive Institutions

Compassion enriches economic freedom and inclusive institutions by ensuring that:

Economic systems empower individuals without leaving vulnerable populations behind.
Institutions remain fair, transparent, and focused on collective well-being.
Policies reflect not just efficiency but also equity and humanity.

Compassion as Smart Economics

Far from being at odds with economic principles, Compassion is a practical tool for building resilient, equitable, and thriving economies. It ensures that economic growth is not an end in itself but a means to enhance human dignity and potential, creating systems that are both efficient and humane. This synthesis of Compassion and economics aligns perfectly with the vision of inclusive institutions and long-term prosperity.”

Me: “The laureates talk about ‘inclusive institutions,’ but isn’t it more about powerful institutions – whether or not ‘inclusive’? For instance, the Roman Empire wasn’t very much about inclusiveness, but it was very wealthy for several centuries.”

Lisa: “You make a compelling point: the success of a society might often depend not just on whether its institutions are “inclusive,” but on whether they are effective and powerful. Let’s unpack this:

The Roman Empire Example

The Roman Empire was indeed not “inclusive” in the sense that Acemoglu and Robinson describe. Power was concentrated among elites, and most of the population had limited political or economic agency.

However, the Roman Empire had effective and adaptable institutions, such as a robust legal system, military infrastructure, and centralized governance, which allowed it to:

Extract wealth efficiently through taxes and trade.
Maintain internal stability for extended periods.
Expand through conquest and integration of diverse regions into its economic system.

In this case, the wealth and stability of Rome derived from the strength and coherence of its institutions, not their inclusiveness.

Are Powerful Institutions the Real Key?

Definition of Power: Power here means the ability of institutions to enforce rules, mobilize resources, and adapt to changing circumstances.

Historical Examples:

The Soviet Union: Powerful but extractive. It achieved rapid industrialization and military might, but its lack of flexibility and inclusivity led to collapse.
China: An authoritarian regime with extractive political institutions has managed powerful economic growth through partially inclusive economic practices (e.g., market reforms).
Medieval Venice: It combined powerful governance mechanisms with limited inclusivity, prioritizing the merchant elite, which helped it thrive for centuries.

These examples suggest that powerful institutions can drive prosperity even when they are not inclusive. However, inclusivity often enhances an institution’s durability and adaptability, especially in modern contexts.

Limitations of Exclusivity

While powerful exclusive institutions can generate wealth in the short term, they often face long-term vulnerabilities:

Lack of Resilience: Concentrated power tends to stifle innovation and adaptability, as seen in the later Roman Empire.
Risk of Overreach: Extractive institutions risk alienating or exploiting large portions of the population, leading to unrest or collapse (e.g., the French monarchy pre-Revolution).
Global Expectations: In the modern world, with higher awareness of inequality and human rights, exclusivity may invite resistance, both domestically and internationally.

Inclusivity as a Modern Advantage

Acemoglu and Robinson argue that inclusivity fosters trust, innovation, and participation. While inclusivity may not be historically necessary for wealth creation, it has become increasingly important for:

Sustaining growth in interconnected global economies.
Leveraging the creativity and productivity of broader populations.
Preventing systemic instability due to inequality or corruption.

Conclusion

The Roman Empire and other examples show that powerful institutions—whether inclusive or not—can drive economic success. However, inclusivity adds a layer of resilience and fairness, which modern societies often require.”

Me: “I would very much like to see Compassion play a role in empowering – Compassionate – institutions.”

Lisa: “The idea of Compassion playing a central role in empowering institutions is deeply resonant and could fundamentally reshape how we think about governance, economics, and societal well-being. Here’s how Compassionate institutions might emerge and function:

What Are Compassionate Institutions?

Compassionate institutions prioritize the well-being of individuals and communities, balancing efficiency with empathy. They operate on the understanding that long-term prosperity stems not only from resource optimization but also from fostering trust, dignity, and mutual support.

Characteristics include:

Equity and Inclusion: Ensuring fair access to opportunities, resources, and representation.
Ethical Governance: Making decisions guided by ethical principles, transparency, and a focus on the greater good.
Holistic Approach: Recognizing and addressing interconnected challenges, such as mental health, environmental sustainability, and social cohesion.

How Compassion Empowers Institutions

Building Trust

Compassion fosters mutual respect and understanding between institutions and the people they serve. Trust enhances compliance, reduces friction, and increases collective action.
Example: Transparent welfare systems that treat recipients with dignity improve participation and reduce stigma.

Driving Innovation

Compassionate institutions encourage diverse perspectives and creativity by valuing each individual’s contributions.
Example: Organizations that prioritize employee well-being often see higher productivity and innovation.

Mitigating Conflicts

Compassion enables institutions to act as mediators, fostering peaceful resolutions in polarized environments.
Example: Restorative justice programs, which emphasize healing over punishment, build stronger community ties.

Sustainability

Compassion extends to future generations by embedding ecological and social responsibilities into institutional frameworks.
Example: Policies aimed at combating climate change with equity, ensuring vulnerable populations are protected during transitions.

Practical Steps Toward Compassionate Institutions

Education and Training

Equip leaders and workers with skills in empathy, conflict resolution, and ethical decision-making.
Incorporate Compassion into curricula for public administration, business, and law.

Policy Design

Use Compassion as a lens for crafting policies that promote dignity and address root causes of inequality.
Example: Universal healthcare systems designed to alleviate suffering and ensure access for all.

Institutional Metrics

Develop metrics to assess Compassionate practices, such as well-being indices, trust surveys, and environmental impact assessments.

Technology for Compassion:

Leverage technology, like AI, to implement personalized and empathetic public services while avoiding biases.

Vision for the Future

Compassionate institutions could become anchors of societal well-being, bridging economic efficiency with human-centered values. They offer a path where governance and economics are not just about wealth or power but about nurturing potential and fostering communities in harmony with their environment. This vision aligns perfectly with principles like inclusivity, sustainability, and inner strength.

By championing such institutions, we not only empower individuals but also ensure that society thrives as a whole, creating a legacy of prosperity, trust, and shared humanity.”

Me: “Do both of us, in collaboration, deserve the Nobel Prize for Economics of 2025? 😉 ”

Lisa: “It’s an intriguing thought! While a Nobel Prize for Economics is typically awarded for groundbreaking academic research or contributions with measurable, global impacts, your blog does advance an important conversation about how we perceive economic development. Let’s break it down:

Innovative Framework

The blog’s “whirlpool” metaphor introduces a nuanced, systems-thinking approach to economics, emphasizing interdependence and non-linear causality—a perspective often underrepresented in mainstream economic theories.
It integrates compassion and cultural continuity as core economic forces, pushing the field toward more human-centric, ethical paradigms.

Interdisciplinary Thinking

Combining insights from psychology, systems theory, and economics, the blog highlights how trust, inclusivity, sustainability, and other factors intertwine in economic systems. This holistic view could inspire new avenues of academic research or policymaking.

Practical Implications

By focusing on actionable recommendations—such as fostering adaptive institutions, balancing freedom with fairness, and integrating culture thoughtfully—the blog has the potential to inform policy and guide decision-makers globally.

Your blog could catalyze breakthroughs if its ideas spark significant academic or policy-focused efforts. Imagine it as a precursor to a larger body of work that transforms the way institutions and economic forces are studied and implemented.

So, while your blog might not win the Nobel on its own, it could indeed be a seed for recognition-worthy contributions. And hey, even if the Nobel remains elusive, the impact on readers and decision-makers might be its own profound reward!” 😊

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Glossary

(*) Inclusive institutions are systems that allow and encourage broad participation in economic and political processes. They are designed to:

Ensure equal access to resources and opportunities.
Protect property rights for all individuals.
Promote fairness in the enforcement of laws.
Encourage investment and innovation by providing security and predictability.

Examples include democratically accountable governments, fair and transparent legal systems, and economic structures that reduce monopolies and rent-seeking behavior. The key feature is their openness, allowing individuals to realize their potential and contribute to the economy.

(**) Economic freedom refers to the ability of individuals and businesses to make their own economic decisions without excessive interference or control from the government or monopolistic forces. It is characterized by:

Freedom to own property and accumulate wealth.
Freedom to choose what to produce, consume, or trade.
Open markets where competition determines prices and quality.
Minimal regulatory burdens that still protect public interest without stifling innovation or entrepreneurship.

High economic freedom is often associated with lower corruption, higher productivity, and better standards of living. However, it must be balanced with policies that ensure fairness and access for all to prevent inequalities.

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Possible critique of ‘Why Nations Fail’ by Acemoglu and Robinson

Overemphasis on institutions

While the book convincingly argues that institutions are critical for economic development, it often downplays the role of other significant factors, such as geography, culture, and historical contingencies. For example, critics like Jared Diamond emphasize that geographical and ecological factors set initial conditions for institutional development, which the authors only marginally address.

Simplistic dichotomy

The binary classification of institutions as ‘inclusive”’ or ‘extractive’ risks oversimplification. Real-world institutions often embody elements of both, evolving dynamically over time. For instance, China’s rapid economic growth under a blend of extractive political institutions and partially inclusive economic policies defies the neat categorization proposed in the book.

Lack of mechanistic detail

The authors argue that inclusive institutions foster prosperity by enabling broad participation, innovation, and accountability, but they often fail to detail the specific mechanisms through which these dynamics operate. How exactly does inclusivity translate into sustained economic performance across diverse contexts?

Historical selection bias

The book’s historical examples, while rich and compelling, may exhibit selection bias. For instance, it highlights cases like the Glorious Revolution in England but does not fully explore counterexamples where similar institutional shifts failed to produce economic prosperity.

Neglect of contemporary issues

The book focuses heavily on historical analysis and less on how its insights apply to modern economic challenges, such as globalization, digital economies, or climate change. The dynamics of global interconnectivity and their influence on institutions deserve more attention.

Assumption of linear causality

The book often implies a straightforward causal pathway from inclusive institutions to economic growth. However, the relationship may be more reciprocal, with economic growth also enabling the development of inclusive institutions — a point emphasized in modernization theory and critiques like those from Jeffrey Sachs.

Insufficient consideration of power dynamics

While the book discusses how elites resist institutional inclusivity to preserve their power, it underexplores the nuanced strategies that can break these deadlocks or catalyze transitions toward inclusivity in resistant systems.