Supplementary resources by topic. Economic Institutions is one of 51 key economics concepts identified by the Council for Economic Education (CEE) for high school classes.

Economic Institutions

On this page:

Definitions and Basics
In the News and Examples
A Little History: Primary Sources and References
Advanced Resources
Related Topics

Definitions and Basics

Institution

    • , from Dictionary.com

institution:

  • 1. an organization, establishment, foundation, society, or the like, devoted to the promotion of a particular cause or program, esp. one of a public, educational, or charitable character: This college is the best institution of its kind….
  • 4.Sociology. a well-established and structured pattern of behavior or of relationships that is accepted as a fundamental part of a culture, as marriage: the institution of the family….

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?

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….

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….

Data, facts, statistics: 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 included in the Economic Statistics Briefing Room is maintained and updated by the statistical units of those agencies….

In the News and Examples

    • 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

…provides easy access to current Federal economic indicators. It provides links to information produced by a number of Federal agencies. All of the information included in the Economic Statistics Briefing Room is maintained and updated by the statistical units of those agencies. All the estimates for the indicators presented in the Federal Statistics Briefing Rooms are the most currently available values….

Included are links to U.S. data on employment, income, international, money, output, prices, production, etc.

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….

Eminent Domain, from Lalor’s Cyclopedia of Political Science

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]

Advanced Resources

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….

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.

Related Topics

Property Rights

Government Failures and Public Choice Analysis

Monetary Policy and the Federal Reserve

Roles of Government

Budget Deficits and Public Debt

Markets and Prices