Economic Analysis of Institutions and Systems

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Banerjee and Duflo recount the finding by Abhijit and Lakshmi Iyer that in India the coexistence of two systems of land-revenue collection under the British colonization caused very different outcomes; under one system, the landlord was responsible for collecting taxes, and this strengthened his role, while under the other farmers themselves were responsible for the taxes. The regions where the second system was dominant, years later with the tax system long gone exhibit higher agricultural yield, more schools and more hospitals, due to the development of more horizontal and cooperative social relationships among the inhabitants.

Institutions which are conducive to development ensure greater self-expression, allow the free flow of information and encourage the formation of associations and clubs. These form prosperous social relationships, which are conducive to greater economic interaction by increasing levels of trust and wider availability of information Putnam, They allow greater sharing of resources through democratic institutions and the use of the state to reduce the risk attached to economic activity Bardhan, , p.

The welfare state is an example of an institution which pools resources to limit the negative effects of business cycles on incomes and unemployment. Institutions conducive to development pool resources to provide the investments in education, health and infrastructure which lie at the basis of economic interaction and are necessary and complementary to private investment. Informal institutions lie at the basis of an economy. They include public agencies, trade unions, community structures and professional associations. They make up the fabric which determines the response to laws and government decisions.

Most often they shape these outcomes themselves. There is wide-ranging evidence that institutions matter a great deal in determining the level of economic development of a country. Cross-country analyses use indicators such as degree of protection of property rights, the rule of law, and civic liberties and find that they are strongly correlated to economic performance. This essay has described why institutions are so important for economic development and has provided evidence for the claims made.

It has identified four broad channels through which the correlation can be explained. Institutions determine the costs of economic transactions: they spur development in the form of contracts and contract enforcement, common commercial codes, and increased availability of information, all of which reduce the costs of transactions, risk, and uncertainty. Institutions determine the degree of appropriability of return to investment: protection of property rights and the rule of law spur investment and thus increase incomes.

Institutions also determine the scope for oppression and expropriation of resources by elites: unequal institutions which allow the dominance of powerful elites over economic exchange strongly limit development, as can be seen in the case of many ex-colonial countries. Lastly, institutions determine the degree to which the environment is conducive to cooperation and increased social capital; inclusive and participatory institutions increase the flow of information and the extent to which resources can be pooled to reduce risk and ensure sustained levels of wealth.

This fits nicely with the finding of historical studies that high quality institutions today are rooted in greater equality, political competition and cooperative norms in the distant past. Institutions strongly affect the economic development of countries and act in society at all levels by determining the frameworks in which economic exchange occurs. They determine the volume of interactions available, the benefits from economic exchange and the form which they can take.

Acemoglu, D. Aron, J. Banerjee, A. Croydon: PublicAffairs. Bardhan, P. In: D.

Institutional economics

Clark ed. Bates, R. New York: W. Birdsall , N. Chang, H-J. Kremer, P. Went eds. Amsterdam: Amsterdam University Press. Coase, R. Dahlman, C.

Munger explores the interaction of these forces across different sports and how they relate to insights of Coase and Hayek. Podcast on EconTalk. The discussion begins with the empirical approach of Elinor Ostrom and others who have studied the myriad of ways that actual communities have avoided the tragedy of commons. Boettke emphasizes the distinction between privatization vs. The conversation also looks at urban development and the benefits and costs of multiple municipalities vs. The Rule of Law. YouTube video, LearnLiberty.

Why is the rule of law so important? Bell explains how the rule of law is a critical part of a free and tolerant society. The rule of law means that people are not subject to the arbitrary will of others.

It means they can engage in activities that others might disapprove of without fear of persecution. When there is rule of law, people can buy property, plan businesses, and otherwise plan for the future with confidence.

Antecedents and the general framework of firm economics

As Bell explains, the rule of law provides a necessary framework for civil society. Government institutions are a type of institution formalized by law. For example, what is the Federal Reserve? Meltzer on the Fed, Money, and Gold. He describes and analyzes some fascinating episodes in U.

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The Economy of the Firm - OpenMind

This is a wonderful introduction to the political economy of the money supply and central banks. Housing Market. The conversation closes with a postscript on the current financial crisis. With so many institutions, how do we get information? Sunstein on Infotopia, Information and Decision-Making. 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. Weingast talks with EconTalk host Russ Roberts about how violence shapes political institutions, the role of competition in politics and economics, and why most development advice from successful nations fails to lift poor nations out of poverty.

January 23, David Rose of the University of Missouri, St. Rose argues that morality plays a crucial role in prosperity and economic development. Knowing that the people you trade with have a principled aversion to exploiting opportunities for cheating in dealing with others allows economic actors to trust one another. That in turn allows for the widespread specialization and interaction through markets with strangers that creates prosperity. In this conversation, Rose explores the nature of the principles that work best to engender trust.

The conversation closes with a discussion of the current trend in morality in America and the implications for trust and prosperity. Firms—businesses—are private institutions. But what exactly is a firm? Coase on Externalities, the Firm, and the State of Economics. EconTalk Podcast, May At the end of conversation he discusses his new book on China, How China Became Capitalist co-authored with Ning Wang , and the future of the Chinese and world economies. Seidman on the Constitution. EconTalk Podcast.


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Seidman argues that the we should ignore the Constitution in designing public policy, relying instead on the merits of policy regardless of their constitutionality. Seidman defends his position by citing examples in the past where constitutionality has been ignored and says it would be better to recognize our disdain for the Constitution in a transparent way.

In this lively conversation, Roberts pushes back against these ideas, citing the limits of reason and the dangers of using popular sentiment to determine policy.