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Introduction to Modern Economic Growth
in the book). For example, multiple equilibria can exist in technology adoption,
in models that focus on human capital or physical capital investments. Therefore,
explanations based on luck or multiple equilibria are theoretically well grounded
in the types of models we will study in this book. Whether they are empirically
plausible is another matter.
By geography, we refer to all factors that are imposed on individuals as part of
the physical, geographic and ecological environment in which they live. Geography
can affect economic growth through a variety of proximate causes.

Geographic

factors that can influence the growth process include soil quality, which can affect
agricultural productivity; natural resources, which directly contribute to the wealth
of a nation and may facilitate industrialization by providing certain key resources,
such as coal and iron ore during critical times; climate, which may affect productivity
and attitudes directly; topography, which can affect the costs of transportation
and communication; and disease environment, which can affect individual health,
productivity and incentives to accumulate physical and human capital. For example,
in terms of the aggregate production function of the Solow model, poor soil quality,
lack of natural resources or an inhospitable climate or topography may correspond
to a low level of A, that is, to a type of “inefficient technology”. As we will see
below, many philosophers and social scientists have suggested that climate also
affects preferences in a fundamental way, so perhaps those in certain climates have a
preference for earlier rather than later consumption, thus reducing their saving rates
both in physical and human capital. Finally, differences in the disease burden across
areas may affect the productivity of individuals and their willingness to accumulate
human capital. Thus geography-based explanations can easily be incorporated into
both the simple Solow model we have already studied and the more satisfactory
models we will see later in the book.
By institutions, we refer to rules, regulations, laws and policies that affect economic incentives and thus the incentives to invest in technology, physical capital and

human capital. It is a truism of economic analysis that individuals will only take
actions that are rewarded. Institutions, which shape these rewards, must therefore
be important in affecting all three of the proximate causes of economic growth we
have seen so far. What distinguishes institutions from geography and luck is that
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