Monday, December 8, 2008

Two from The Post about Institutions

When we teach about economic institutions, we stress that rules influence the choices individuals make - that's the purpose of the rules. Usually we also provide simple examples of rules and how they impact our decisions. We can talk about minimum standards, property rights, even blue laws. However, at that point it's not uncommon for us to drop the discussion and move on. We may not even use the term institutions when we discuss fiscal policy, monetary policy or international trade. Or we may use it differently, causing some confusion for our students or providing an unwitting incentive to forget the concept altogether. In defense of that behavior, it may be because we don't have good examples.

This past Sunday's edition of The Washington Post provided a couple of them. The first article, by Dan Morgan, explains how conflicting policies can create problems. Specifically, he looks at how agricultural subsidies (a formal rule) are in conflict with voluntary and commercial efforts to maintain prairie in the Western United States. The efforts to maintain the virgin prairie are examples of private beliefs (informal rule) about conservation of resources. This is particularly interesting given the desire to maintain the natural habitat without having it declared a national park or preserve.

The second piece, by Paul Blustein, talks about the potential for rising protectionism to extend the economic downturn by isolating national economies from world trade, similar to what happened in the 1930s after the passage of Smoot-Hawley. Blustein also calls for a resumption of the Doha Round of World Trade Organization (WTO) talks that ended abruptly this past summer. Treaties can provide the framework for laws and legislation (formal rules) that encourage or discourage certain decisions - decisions about international trade in this case.

You might find both of these articles good discussion starters as you enter the last week of the semester. I look forward to your comments.


bhagan said...

So in the difference between preservation and ag subsidies which will prevail? To me it seems that without official conservation the prairies could be doomed.

Tim Schilling said...

I think doomed might be too strong. I think there are many people who value the environment and may use market forces to protect it.

But I am consistently amazed at how government can throw resources at two opposing efforts, or set up opposing sets of incentives and expect "wise" decisions from the folks the incentives are aimed at.

bhagan said...

Thank you so much for getting back to me so quickly you may have just helped me get an A instead of a B in my econ class. I enjoy your work and will continue to read. Again thank you so much.