Arnold Kling cites economist Douglass North on Adaptation and the Economy to emphasize that economics isn’t just about allocation:
[Textbook] economics applied to economic development or economic history may account well for the performance of an economy at a moment of time or … contrasts in the performance of an economy over time; but it does not and cannot explain the dynamics of change. The major source of changes in an economy over time is structural change in the parameters held constant by the economist — technology, population, property rights, and government control over resources.
“[T]he two most significant changes in economic history were the adoption of settled agriculture around 10,000 BC and the marriage of science and business starting in the 19th century”:
The First Economic Revolution created agriculture and “civilization”; the Second created an elastic supply curve of new knowledge which built economic growth into the system. Both entailed substantial institutional reorganization.
What did these revolutions mean?
Both revolutions overthrew the law of diminishing returns. Hunter-gatherers encountered diminishing returns, because there was nothing to stop over-hunting over over-foraging a heavily populated area. Agriculture could feed much larger populations. Labor and capital (such as farm implements) also were subject to diminishing returns, but scientific advances broke those constraints.Both revolutions solved problems of dealing with the physical environment but created new problems for dealing with the social environment. For agriculture to work well, property rights must be defined. To reach the stage that we call modern economic development, rules need to cover trading rather than basic sharing.
Sometimes we forget how much the rules have changed:
In short, what is required is a shift from a status-based and coercive society that relies on mutual control, respect of ranks, and strictly enforced codes of generosity, to an open society where free entry and exit, democratic governance (including acceptance of dissent), competence criteria, and socioeconomic differentiation are used as guiding principles or expressly allowed to operate.