Of all the competing explanations to ‘Institutions Rule’, the human capital one always struck me as the most plausible. Or, at least, on the basis of observations of Solomon Islands, I could be very easily convinced that education’s contribution to the world of ideas, and the re-fashioning of ties it also induced, was a deep(er still) determinant of growth. Working in part through its effects on institutions.
However A&R are here with a new NBER working paper, which aspires (on the basis of the abstract only) to lay waste to human capital’s claim to importance…
Institutions, Human Capital and Development
Daron Acemoglu, Francisco A. Gallego, James A. Robinson
NBER Working Paper No. 19933
Issued in February 2014
In this paper we revisit the relationship between institutions, human capital and development. We argue that empirical models that treat institutions and human capital as exogenous are misspecified both because of the usual omitted variable bias problems and because of differential measurement error in these variables, and that this misspecification is at the root of the very large returns of human capital, about 4 to 5 times greater than that implied by micro (Mincerian) estimates, found in some of the previous literature. Using cross-country and cross-regional regressions, we show that when we focus on historically-determined differences in human capital and control for the effect of institutions, the impact of institutions on long-run development is robust, while the estimates of the effect of human capital are much diminished and become consistent with micro estimates. Using historical and cross-country regression evidence, we also show that there is no support for the view that differences in the human capital endowments of early European colonists have been a major factor in the subsequent institutional development of these polities.