Institutions and Their Impact

One of the concepts I always try to emphasize to my students (both in economics and personal finance courses) is the role of institutions. The rules (formal and informal) and organizations that each economic system sets up can have a profound impact on how the economy performs. (For a better understanding of institutional economics you can read Douglass North's Nobel Prize lecture, or this entry in Wikipedia.) Certain behaviors can be encouraged or discouraged because a fundamental precept of economics is that people respond to incentives in predictable ways.

One of the more interesting aspects is how informal rules can shape behavior. The journal Foreign Policy has a very interesting article titled "Europe's Philosophy of Failure" (HT to Robin Mooney at The Informed Reader) that considers the possible impact of how economics textbooks treat topics like entrepreneurship, capitalism, the role of government, and globalization. You might want to take a look at the article and then consider how you address the topic of institutions. You may decide to "pump up the volume" on this topic, or "tone it down" depending on your current practice.

I've found over the years that many teachers, particularly at the high school level, don't address the topic at all, or use it exclusively to discuss organizations like banks, unions, etc., without addressing the "rules" aspect of the issue. For teachers who want to learn more about the topic, I can recommend Douglass North's Institutions, Institutional Change and Economic Performance.

I look forward to your thoughts.