2005 Reports

The Economic Prosperity of Nations: Prosperity Depends on Dynamism, Dynamism on Institutions

Phelps, Edmund S.

Selecting economic institutions, I will argue, may very well be, in most if not all countries, the most critical area of economic policy making and yet it has been decades since it held center stage. A surface cause is that our understanding of institutions is relatively meager. A deeper reason is that it has been hard even to get started: We cannot have a reasoned discussion of the performance of institutions and the selection among them – which institutions are working well, which must be altered, and which new ones brought in – until we are willing and able to specify (for the sake of argument at any rate) the kind of economy we desire to have. Here I want to propose a conception of the kind of economy that economic policy making would do well to aim for – a notion of the desirable economy. Such a conception can serve as the moral criterion for choosing among alternative structures of economic institutions. It also serves to put the whole discussion of economic policy in a somewhat new perspective.