What is the optimal economic arrangement to produce innovation and growth? And what is the optimal political arrangement needed to encourage and sustain such an economic order? I spend a lot of time thinking about these questions (as here in a paper on the rise of China). And so I’d recommend this thoughtful blog post by economist Scott Sumner. Sumner’s been blogging a lot on his recent trip to China and on the macroeconomics of the financial crisis/recession/rebound.
I disagree with a number of Sumner’s conclusions on the macro and political-economy fronts, but it’s insights like the one below that keep me reading Sumner.
Switzerland’s high level of democracy doesn’t just come from referenda, it also comes from its extreme decentralization. This makes it a highly successful multiethnic society, and not just when compared to places like Yugoslavia and Iraq, but even in comparison to Belgium or Canada. Another advantage of decentralization is that small places are less likely to be protectionist, as the gains from trade are much more obvious. In addition, it is much easier to monitor and root out rent seekers in a community where most people know each other.
