On this page:
In the News and Examples
A Little History: Primary Sources and References
Definitions and Basics
institution:The term "Economic Institutions" refers to two things:
Political Behavior, from the Concise Encyclopedia of Economics
The fact of scarcity, which exists everywhere, guarantees that people will compete for resources. Markets are one way to organize and channel this competition. Politics is another. People use both markets and politics to get resources allocated to the ends they favor. Even in a democracy, however, political activity is startlingly different from voluntary exchange in markets.Law and Economics, from the Concise Encyclopedia of Economics
A legal system should provide clear definitions of property rights. That is, for any asset, it is important that parties be able to determine unambiguously who owns the asset and exactly what set of rights this ownership entails. Ideally, efficiency implies that, in a dispute regarding the ownership of a right, the right should go to the party who values it the most. But if exchanges of rights are allowed, the efficiency of the initial allocation is of secondary importance. The Coase theorem--the most fundamental result in the economic study of law--states that if rights are transferable and if transactions costs are not too large, then the exact definition of property rights is not important because parties can trade rights, and rights will move to their highest-valued uses.Free Market, from the Concise Encyclopedia of Economics
The market, then, is not simply an array, but a highly complex, interacting latticework of exchanges. In primitive societies, exchanges are all barter or direct exchange. Two people trade two directly useful goods, such as horses for cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-step process of mutual benefit creates a situation in which one or two broadly useful and valuable commodities are chosen on the market as a medium of indirect exchange. This money-commodity, generally but not always gold or silver, is then demanded not only for its own sake, but even more to facilitate a reexchange for another desired commodity. It is much easier to pay steelworkers not in steel bars, but in money, with which the workers can then buy whatever they desire. They are willing to accept money because they know from experience and insight that everyone else in the society will also accept that money in payment....Federal Reserve System, from the Concise Encyclopedia of Economics
Several monetary institutions appeared in the United States prior to the formation of the Federal Reserve System, or Fed. These were, in order: the constitutional gold (and bimetallic) standard, the First and Second Banks of the United States, the Independent Treasury, the National Banking System, clearinghouse associations, and the National Reserve Association. The Fed was the last such institution founded. Although it has endured, the present-day Fed would be unrecognizable to its founders....Council of Economic Advisers (CEA), from the official government website
The CEA was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues....Corporations are economic institutions: Corporations, from the Concise Encyclopedia of Economics
Corporations are easier to create than to understand. Because corporations arose as an alternative to partnerships, they can best be understood by comparing these competing organizational structures.
In the News and Examples
Peter Leeson of George Mason University and author of The Invisible Hook talks with EconTalk host Russ Roberts about the economics of 18th century pirates and what we can learn from their behavior. Leeson argues that pirates pioneered a number of important voluntary institutions such as constitutions as a way to increase the profitability of their enterprises. He shows how pirates used democracy and a separation of powers between the captain and the quartermaster to limit the potential for predation or abuse on the part of the captain. He explains the role of the Jolly Roger in limiting damages from conflict with victims. The conversation closes with a discussion of the lessons for modern management.Arnold Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market. Podcast on EconTalk. Sep. 29, 2008.
Arnold Kling of EconLog talks with host Russ Roberts about the economics of the housing market with a focus on the role of Fannie Mae and Freddie Mac. The conversation closes with a postscript on the current financial crisis.Eminent Domain: Debate Pits Private Property Against Powers of the State, from Econoblog at the Wall Street Journal
The closely watched case centers on a New London, Conn., economic development plan. The city wants to use eminent domain to build offices, a hotel, condominiums and parking where houses now stand, arguing that its plan has economic benefits in new jobs and property-tax revenue. But opponents maintain that the project isn't a legitimate public use, saying it unjustly takes private property for a project that will benefit other private interests....Government agencies (that is, institutions) collect and provide a variety of economic data: Economic Statistics Briefing Room, from the official government website
The purpose of this service is to provide easy access to current Federal economic indicators. It provides links to information produced by a number of Federal agencies. All of the information is maintained and updated by the statistical units of those agencies.
A Little History: Primary Sources and References
EMINENT DOMAIN, an original ownership retained by the sovereign, or remaining in the state, whereby land or other private property can be taken for the public benefit. This is the most definite principle of fundamental power of the government with regard to property, and the most striking example of the sovereignty of the people as a corporate body to resume original possession of the soil, where its use is essential to their mutual advantage and the welfare of society....Philosophy of Law, from Lalor's Cyclopedia of Political Science
We shall now briefly touch on one of the most important questions regarding the nature and character of the state. It was in keeping with the entire Kantian conception of morals, law and the state, that it considered the latter merely as a great institution for the enforcement of the law. The state, according to that conception, established courts, and, if necessary, carried out their judgments by force.... [par. III.55.61]
We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up....Sunstein on Infotopia, Information and Decision-Making. Podcast on EconTalk.
Cass Sunstein of the University of Chicago talks about the ideas in his latest book, Infotopia: How Many Minds Produce Knowledge. What are the best ways to get the information needed to make wise decisions when that information is spread out among an organization's members or a society's citizens? He argues that prediction markets can help both politicians and business leaders make better decisions and discusses the surprising ways they're already being used today. Deliberation, the standard way we often gather information at various kinds of meetings, has some unpleasant biases that hamper its usefulness relative to surveys and incentive-based alternatives.George Selgin on Free Banking. Podcast on EconTalk.
George Selgin of West Virginia University talks with EconTalk host Russ Roberts about free banking, where government treats banks as no different from other firms in the economy. Rather than rely on government guarantees to protect depositors (coupled with regulation), banks would compete with each other in offering security and return on deposits. Selgin draws on historical episodes of free banking, particularly in Scotland, to show that such a world need not be unduly hazardous or filled with bank runs. He also talks about Gresham's Law and an episode in British history when banks successfully issued their own currency.
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