Douglass North, recipient of the 1993 Nobel Prize in Economics, with co-authors John Wallis and Barry Weingast:
Modern economic development is the outcome of the second economic revolution, development defined as sustained, long-term growth generated by stable, thriving, and competitive markets over multiple generations. A competitive market economy is central to economic development, and competition requires free entry...
What we call “open access orders,” began to develop around 1700. These societies are characterized by open political and economic competition, rather than the limited political a and economic privileges enjoyed solely by elites in natural states. Open access state provide the basis for thriving markets and hence sustaining long-term economic development over many generations.
Daron Acemoglu, winner of the 2005 John Bates Clark medal, writing in the latest edition of The Wall Street Journal Online's Econoblog feature:
Sustained economic growth requires secure property rights and a level playing field for generating new technologies and entry by new firms. Democracy is the best guarantor for such sustained economic growth. Economic growth generates various vested interests, ranging from landed elites to businessmen in declining industries to privileged workers. These vested interests will try to block the introduction of new technologies and stop the entry of new firms. Democracy is not perfect, but with its more egalitarian distribution of political power, it will have greater resistance against vested interests than autocracy.
It is worth noting that Daron is invoking a particular understanding of "democracy":
Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination...
So, why haven't democracies been more successful? I believe the answer lies in recognizing two things. First, there are different kinds of democracies. And second, it's important to consider that economic growth and democracy have a very different relationship over the long term -- that is for periods as long as 100 years -- than over the short or medium term.
... it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.
Compare this with North et al:
Both Barzel (2000) and Olson (2000) argue that rulers maximizing their take will create and enforce general property rights associated with the market: a larger economic pie implies more for the ruler. These models predict that all states should be developed, so they obviously fail to explain the striking fact that most states fail miserably at economic development...
... A natural state is a specific way of structuring political and economic systems so that the economic rents created by limited entry are available to secure credible commitments among politically powerful groups... Natural states limit economic entry to create rents and then use those rents to credibly commit powerful groups to support the state. In other words, natural states use the economic system as a tool to solidify the stability of the ruling coalition.
... the natural state is self-limiting with respect to the economy. Natural states represented an important advance at the time of the first economic revolution, and remained important for centuries. But in the modern world, they have a wide range of negative economic consequences. First, the drive to create rents means that the natural state restricts markets. Indeed, the search for political stability leads the state to control as many markets as possible. The natural state’s systematic “market intervention” is not the result of mis-guided policymaking, but fundamental to how they create political order and stability. Natural states therefore cannot support competitive markets based on open entry.
Read the whole thing -- both of them.