Besides Institutions

I've been meaning to link this interview with Greg Clark, author of A Farewell to Alms, at GNXP:


What do you think are the weakest links in the now-conventional "Institutions Matter" chain of reasoning?


Clark
: The book challenges the modern orthodoxy of economics - that people are essentially the same everywhere, and with the right set of institutions, growth is inevitable - in three ways. First by showing that there were societies like medieval England where the institutional structure provided every incentive for growth, yet there was no growth. Second by pointing out that by objective measures the institutions of many highly successful modern economies, such as in Scandinavia, provide much poorer incentives to individuals than those of very poor economies. And lastly by showing that in the long run economic institutions that would prevent growth tend to get replaced endogenously by ones that are pro-growth.

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Endogenous Institutions?

I didn't really understand how endogenous institutions supported the argument. In reading the linked article, I suppose he reasoned that if people were the same everywhere, than it would be easy to transplant an institution from one culture to another and have it function. But I read it initially as saying that any (economically successful) culture could invent a pro-growth institution.

While reading the article, I also saw this:

Clark: Interest rates on safe assets like houses and land fell from 25% or more in Ancient Babylon, to 10% in Ancient Greece, Roman Egypt and medieval Western Europe, to 4% in the eighteenth century in the Netherlands and England. Most economic historians assume this just represents transaction costs. But I can show in cases such as medieval England that transaction costs have nothing to do with this - the real return on investments as safe as modern Treasury Bonds was 10% or more. So I am confident that something much more fundamental was changing over these years.

I'm not very well read in economics, but are falling interest rates really a mystery? I would have assumed that it was a simple matter of supply and demand--as wealth has grown (and been held by more competing lenders) through the ages, the value of capital on the open market has fallen.

I've even wondered about science fiction scenarios--as we live for centuries and are able to satisfy our food and housing needs ever more cheaply and grow more wealthy, would our individual wealth be worth much at all? Would there be enough capital intensive projects demanding our investment to make the interest rate anything more than negligible?