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World Economic History II

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

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World Economic History II

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  1. World Economic History II October 12, 2007

  2. Institutions Chapter 8

  3. 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

  4. 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)

  5. Institutions and growth • Adam Smith and his followers: • Poor institutions  Poor economic performance • Clark: • institutions matter but in an indirect way

  6. 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.

  7. 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

  8. Cases • Property rights • Markets • Inflation

  9. Common property rights widespread in English agriculture for at least 600 years Enclosure: was it efficient? Property rights

  10. The case of common lands • Origin: ploughs and oxen • Problem: scattered holdings inefficient • And Clark says… …enclosure was unprofitable before 1750

  11. England had an elaborate market economy at least 500 years before it had sustained economic growth. Markets

  12. 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

  13. The monetary system collapsed post-1800. It represents an institutional breakdown. Inflation

  14. The case of money • Hyperinflations should not occur. • Pre-industrial world: not a problem. • Collapse of the monetary system: post-1800.

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