World Economic History II
October 12, 2007
Institutions
Chapter 8
Roadmap Institutions, defined Bad institutions in Malthusian times? The evidence:
Medieval England and incentives Taxation Price stability Public debt Security of property Personal security Social mobility Markets
Institutions, definitions
Institutions are: humanly devised constraints that structure human
interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitution, laws, property rights) – North (1991)
rules about who has the authority to legislate and enforce the regulations that govern economic activity and what are the legitimate extensions of that authority – Haber (2000)
Institutions and growth
Adam Smith and his followers: Poor institutions Poor economic performance
Clark: institutions matter but in an indirect way
Economic institutions Examples:
structure of property rights presence and perfection of markets
Importance: influence the structure of economic incentives in society.
Without property rights, individuals will not have the incentive to invest in physical or human capital or adopt more efficient technologies. are also important because they help to allocate resources to their most efficient
determine who gets profits, revenues and residual rights of control. gains from trade go unexploited and resources are
misallocated.
Institutions and Economic Success the question of why some societies are much
poorer than others is closely related to the question of why some societies have much “worse economic institutions” than others.
Economic institutions determine the aggregate economic growth
potential of the economy determine an array of economic outcomes,
including the distribution of resources in the future distribution of wealth, of physical capital or human
capital
Cases
Property rights
Markets
Inflation
Property rights
Common property rights widespread in English agriculture for at least 600 years
Enclosure: was it efficient?
The case of common lands
Origin: ploughs and oxen
Problem: scattered holdings inefficient
And Clark says…
…enclosure was unprofitable before 1750
Markets
England had an elaborate market economy at least 500 years before it had sustained economic growth.
The case of grain markets
Market inefficiency causes: political and cultural constraints
Evidence: Prices varied widely within a year (feast and famine)
And Clark says….
…markets worked pretty well
Inflation
The monetary system collapsed post-1800. It represents an institutional breakdown.
The case of money
Hyperinflations should not occur.
Pre-industrial world: not a problem.
Collapse of the monetary system: post-1800.