Definitions and Basics
When economists use this term, they mean: property rights, honest government, political stability, dependable legal system, and competitive and open markets. Why are these considered important for an economy? They create the right environment to allocate scarce resources. What are Institutions?, at Marginal Revolution University.
Economic Institutions. Econlib College Guide.
The term “Economic Institutions” refers to two things:
- 1. Specific agencies or foundations, both government and private, devoted to collecting or studying economic data, or commissioned with the job of supplying a good or service that is important to the economy of a country. The Internal Revenue Service (the IRS—the government tax-collection agency), the U.S. Federal Reserve (the government producer of money), the National Bureau of Economic Research (a private research agency) are all examples of economic institutions.
- 2. Well-established arrangements and structures that are part of the culture or society, e.g., competitive markets, the banking system, kids’ allowances, customary tipping, and a system of property rights are examples of economic institutions.
Economists are interested not only in understanding specific existing institutional agencies, but also in the more exciting question of why some institutions evolve and others don’t. Why do institutions differ in one country to the next? Why do some institutions take centuries to get started while other spring up in a few years? Why do some institutions evolve spontaneously in general society? When does government get involved in supervising societal institutions? Does the wording of a Constitution or the structure of a country’s legal or religious background influence the economic institutions that arise in a country?
Property Rights, from the Concise Encyclopedia of Economics
A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism.
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. Political activity, however, is startlingly different from voluntary exchange in markets. In a democracy groups can accomplish many things in politics that they could not in the private sector. Some of these are vital to the broader community’s welfare, such as control of health-threatening air pollution from myriad sources affecting millions of individuals, or the provision of national defense. Other public-sector actions provide narrow benefits that fall far short of their costs….
Law and Economics, from the Concise Encyclopedia of Economics
A legal rule has two consequences. The most immediate is to determine who pays what penalty to whom if the rule is broken. Thus, one might describe a law against speeding as a rule providing that anyone caught driving more than fifty-five miles an hour on the Dan Ryan Expressway must pay fifty dollars to the city of Chicago. Viewed this way, a speeding law is simply a way of raising revenue and a speeding ticket a rather peculiar sort of tax bill….
Economics has made a substantial contribution to our understanding of the law, but the law has also contributed to our understanding of economics. Courts routinely deal with the reality of such economic abstractions as property and contract. The study of law thus gives economists an opportunity to improve their understanding of some of the concepts underlying economic theory. The most notable example is the work of University of Chicago economist Ronald Coase. Coase received the 1991 Nobel Prize in economics, in part for using ideas based on his study of the law of nuisance to revolutionize the corresponding area of economics—the theory of externalities.
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
The Federal Reserve System (the Fed) has been the central bank of the United States since it was created in 1913. The main purpose of a central bank is to regulate the supply of money and credit to the economy. The board of governors, the Fed’s principal policy-making organization, plays a key role in this process….
In the News and Examples
Does culture matter more than institutions to the economy. or vice-versa? Culture, Institutions, and Folkways, by Arnold Kling. June 3, 2019.
I suggest that we should stop trying to talk about culture and institutions as if they were separate. Instead, I propose that we think of culture as having two components: informal culture, which we can call folkways; and formal culture, which we can call institutions. In this framework, institutions are subsumed under culture, as an aspect of culture, a subset of culture, or a manifestation of culture.
The Institutions-Intensive Economy, by Arnold Kling. February 23, 2013.
…in an institutions-intensive economy, many jobs consist of attempting to improve institutions. Business process improvement, standards-setting, and negotiating arrangements with other firms all fit within this framework.
A Little History: Primary Sources and References
Corporations are economic institutions: Corporations, from the Concise Encyclopedia of Economics
Corporations are easy to create but hard to understand. Because corporations arose as an alternative to partnerships, they can best be understood by comparing these competing organizational structures…..
To differentiate it from a partnership, a corporation should be defined as a legal and contractual mechanism for creating and operating a business for profit, using capital from investors that will be managed on their behalf by directors and officers. To lawyers, however, the classic definition is Chief Justice John Marshall’s 1819 remark that “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.” But Marshall’s definition is useless because it is a metaphor….
Economists invariably declare limited liability to be the crucial corporate feature. According to this view the corporation, as an entity, contracts debts in “its” own name, not “theirs” (the shareholders), so they are not responsible for its debts. But there is no need for such mental gymnastics because limited liability actually involves an implied contract between shareholders and outside creditors. By incorporating (that is, complying with the registration procedure prescribed by state law) and then by using the symbols “Inc.” or “Corp.,” shareholders are warning potential creditors that they do not accept unlimited personal liability….
What happens when nations have weak institutions? Morten Jerven on African Economic Growth at EconTalk. June 22, 2015.
…poor countries or slow growing countries have bad institutions. I mean having institutions of low quality. One thing is we can think that institutions is important for economic growth and so forth, but how do you go about defining what good institutions are, and good governance–what is that and how do you go about measuring it?
How do institutions evolve, and how do institutions affect income inequality? Continuing Conversation: Daron Acemoglu on Inequality, Institutions, and Piketty, EconTalk Extra. November 5, 2014.
What does Acemoglu mean when he speaks of the “endogenous evolution” of institutions, and how does he claim that Thomas Piketty takes insufficient account of this in his analysis?
The Use of Knowledge in Society, by F. A. Hayek
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….
The price system is just one of those formations which man has learned to use….