World Economic History II
October 12, 2007
Institutions
Chapter 8
Roadmap
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Institutions, defined
Bad institutions in Malthusian times?
The evidence:
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Medieval England and incentives
Taxation
Price stability
Public debt
Security of property
Personal security
Social mobility
Markets
Institutions, definitions
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Institutions are:
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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
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Adam Smith and his followers:
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Poor institutions  Poor economic performance
Clark:
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institutions matter but in an indirect way
Economic institutions
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Examples:
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structure of property rights
presence and perfection of markets
Importance:
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influence the structure of economic incentives in society.
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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.
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gains from trade go unexploited and resources are
misallocated.
Institutions and Economic Success
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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
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determine the aggregate economic growth
potential of the economy
determine an array of economic outcomes,
including the distribution of resources in the future
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distribution of wealth, of physical capital or human
capital
Cases
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Property rights
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Markets
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Inflation
Property rights
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Common property
rights widespread in
English agriculture for
at least 600 years
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Enclosure: was it
efficient?
The case of common lands
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Origin: ploughs and oxen
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Problem: scattered holdings inefficient
And Clark says…
…enclosure was unprofitable before 1750
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Markets
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England had an
elaborate market
economy at least 500
years before it had
sustained economic
growth.
The case of grain markets
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Market inefficiency causes: political and
cultural constraints
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Evidence: Prices varied widely within a year
(feast and famine)
And Clark says….
…markets worked pretty well
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Inflation
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The monetary system
collapsed post-1800. It
represents an
institutional breakdown.
The case of money
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Hyperinflations should not occur.
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Pre-industrial world: not a problem.
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Collapse of the monetary system: post-1800.