Institutions for Pro-Growth Conduct in the Knowledge Economy

Abstract

The private sector is an important engine of growth and innovation. Yet, a private sector without an accordingly performant and developed public sector would it develop? In a thought experiment, let us imagine a market place where all land and water-surface is privately owned, and where the right of way for consumers and producers of goods and services must be negotiated with landowners. With all private individuals seeking maximal utility and minimal risk, decision problems and transaction costs would prohibit the emergence of an economic system beyond barter trade among neighbours producing goods within enclosed resource endowments. Under the conditions in the thought-experiment, mankind's discovery journey (Boorstin, 1983) would have been precluded, and so would have the agricultural, industrial and knowledge revolutions. History has taken a different course. Commons regimes have been gradually complemented with private property regimes, and subjects and those in power alike have been gradually disciplined by fit institutions. And indeed, those institutions have had a considerable impact on economic performance (North, 1990). Ill-designed institutions may lock-in an economy, and public sector enacted barriers are rightly feared by reformers. Yet, also private sector principals may derive rents from positions that act as barriers to others, as recognized by the Essential Facilities Doctrine. Looking at the knowledge economy and the technology and content uses that differentiate it from the industrial economy, it is not evident what exactly are the essential facilities that help or prevent principals exploiting the interdependencies among the division of labour, competence and market size. This essay questions the fitness of industrial-age institutions for the globalizing and knowledge-intensifying economy. Particularly in the software and content sectors it identifies abuses of essential facilities and proposes enabling environment reforms to curb these abuses so as to spur learning and private sector development. For some institutional choice options, a pro-growth cause-effect chain is projected.