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.