Economic Systems and Institutions

First, I know it's been a long time between posts - life isn't always what we want. I frequently come across items that should be brought to your attention. But due to other factors, I have to choose. It seems opportunity cost is an operative concept.

I don't know how many of you spend time discussing economic institutions and systems.  While many textbooks seem to bypass the subject or give it short shrift, I always try to spend at least one class period discussing them. And they are revisited throughout the semester. The rules that a society puts in place to influence or control decision-making are important if we are to understand the decisions.

Here is an excellent article from The Daily (HT to Arts & Letters Daily) that really brings the importance of institutions home. What I find particularly interesting is the aspect of traditional economies in a modern setting. One quickly understands how traditions can be an important mold for many choices. And attempts to change the rules, by issuing formal rules to replace informal rules, can have significant costs on many levels. I hope you take a moment to check the article out. And I hope you will share your thoughts.

Out of Poverty: Financial Institutions and Economic Development

Here's a news release (HT to Marginal Revolution) that could be useful a number of ways.  It's about some research that came from data collected by Dr. Robert Townsend of MIT. It the article speaks to the role of saving in helping people out of poverty. But I think it would be useful when discussing financial systems, institutions (the importance of saving), and the formation of capital. There are links to various articles, working papers and a book on Dr. Townsend's page. I'm also adding the book in my carousel at left. I hope to pick up a copy soon. Then I will share my review.

Rent Controls, Price Ceilings and Property Rights

I've been meaning to post this for a number of days now. I apologize for not getting to it more quickly. Recently, I ran across this article about a landlord in San Francisco who is having trouble with the city's rent controls. This is not a new concept for those of us who teach economics. Rent controls are the classic example of a binding price ceiling creating shortages.

What made the article a little different was the fact that it mentioned a portion of the San Francisco law that limits what the owner can do with the property. In this case, the landlord/owner wants to evict a tenant so he can move family into the space. But if he does that, it limits his use of the building in the future. In essence his property rights are restricted in such a way as to make it hard for him to evict the tenant. At the same time, eviction impacts the tenant’s property rights. While the tenant is not the owner, there is an issue of possession.

This makes an excellent discussion piece if you want to tie property rights into price ceilings. I encourage your comments.

Human Capital and Growth

If you're looking for an example of the role of human capital on growth and the production function, look no farther than this article from today's edition of The Wall Street Journal. (Subscriber content at this writing but put the story title in your browser and you should be able to find an ungated version.) The story is about Portugal and the low level of education in that country. As you would expect, it has a significant impact on growth and standard of living.

The video below is from the story and explains some of the institutional aspects of the problem. And as we understand, you can change the law but changing culture and tradition can take a while.



I think this would make a great example for that production function discussion. Please share your thoughts.

Rent-Seeking, Public Choice and Margarine

Mark Perry offers this post on Carpe Diem about butter, margarine and opposing interest groups.

I actually believe I had heard this before, but I must have forgotten it.  It does sound familiar. It's an excellent example of rent-seeking by interest groups; and Mark brings it around to discussion about trade issues and why special interests can do a better job seeking protection and a beneficial position in the marketplace at the expense of consumers.

I recommend you give it a quick look and see if might serve you as an example for your classes.

Economic Systems - Remember the Bad Old Days?

Here is an interesting item from the BBC (HT to Carpe Diem).

It seems that the hot game in Poland is about shopping in the old days - when Poland was a communist country. It's based on the queues that people had to wait in to purchase just about anything.

If you want to show students a similar situation, I recommend the first few minutes of the movie Moscow on the Hudson. Although the relevant cut takes place in the old Soviet Union, the story is essentially the same. See a queue? Stand in it and buy whatever is being sold.

When we talk about economic systems, we sometimes to remind students that price is a rationing mechanism that distributes goods according to willingness to pay. (Students should be able to connect to that if they read anything about ticket prices, parking prices, airline, and hotel prices in Dallas last week.)

The Imaginot Line

Foreign Policy has a very engaging article on the recent financial crisis and central banking (HT Arts & Letters Daily). The article compares the faith in central banking prior to the crisis to the faith of the French nation in the Maginot line prior to World War II.

The article notes there are reasons to quibble over the comparison, but it is a good place to start when thinking about how we place our faith in institutions (rules and organizations) and that can impact our choices - for good or for ill. I recommend it.

Tragedy of the Commons Meets Institutions

There are always lots of examples when discussing the tragedy of the commons. But today's edition of The Wall Street Journal has a new take on an old issue - fishing. The story (free content at this writing) is about fish migration in the Bosporus - that narrow stretch of water near Istanbul that connects the Black Sea to the Mediterranean.

It seems that the annual fish migration has drawn fishermen for centuries. But in recent years, the take has been diminished – a classic example of overuse of a common resource. But what makes this story a little bit different is the institutional twist. Turkey is seeking admittance to the EU. The EU may put restrictions on Turkish fishing as a condition of admittance. (Remember, rules set up the incentives that impact decision-making.) Turkey doesn't think limits are warranted. But there are ethnic issues involved, as well. (Cultural norms are part of the institutional matrix.)

The article also has a slide show and brief video to accompany it. I think you'll find it a worthwhile resource.

On Friedrich Engels

About 15 months ago, I posted a link to a review of a then new biography of Friedrich Engels, Marx's General by Tristram Hunt. In the interim I received the book as a gift and just finished reading it. It was excellent.

I am not endorsing the book merely as one who studies the history of economics and the lives of economists. I also applaud the book for its historical and personal insights. Engels was a tireless, committed worker in the fields of the socialist movement of the mid-19th century. And he was a paradox.

The son of a wealthy manufacturer, Engels spent time on the barricades in the uprisings in the mid-1840s. But he would return to the world of commerce in order to finance Marx's writing. After Marx's death, Engels continued to move the socialist agenda forward, continuing to support members of Marx's family. All the while, his own life-style seemed to more closely parallel the bourgeoisie than the proletariat.

In fact, a quote from the epilogue may describe his view best:

"Neither a leveler or a statist, this great lover of the good life, passionate advocate of individuality, and enthusiastic believer in literature, culture, art and music as an open forum could never have acceded to the Soviet communism of the twentieth century, all the Stalinist claims of his paternity notwithstanding."

If you are looking for an interesting read to start off the New Year, I would recommend Marx's General. If you're still hesitant, I would suggest you might want to listen to a podcast of a lecture by the author on the London School of Economics (LSE) podcast series in April 2009.

For those of you who want go more deeply, here's Friedrich Engels' Conditions of the Working Class in England. I read it as a graduate student some (mumble mumble) years ago. It provides insights, not only into the impact of the Industrial Revolution in 19th-century Manchester, but provides a framework for The Communist Manifesto, of which Engels was a coauthor.

I welcome comments by anyone else familiar with Hunt’s book.

Possible Rent-Seeking? Captain Renault Is Shocked

USA Today provides this story.  This is a good time to discuss coincidence, correlation and causation.  Regardless, Captain Renault is shocked...shocked.

Not Really a Whole Lot More to Say

Institutions and Entrepreneurship

Regular readers of this blog know I find the idea of economic institutions interesting. Institutions have been defined as "the rules of the game." More specifically they are the set of rules and organizations (both formal and informal) that influence our decision-making by setting up incentives to action. They can include written laws, voluntary standards of conduct, even cultural beliefs. The last category is the subject of this post.

An article in today's edition of The Wall Street Journal (free content at this writing), discusses motorcycle taxis in Nigeria. Specifically, the article is about how dangerous the motorcycle taxis are. Evidently, there are so many accidents that one hospital has a ward specifically for people who were in motorcycle taxi accidents.

But attempts to get people to wear helmets have been unsuccessful, largely because of superstition (cultural belief). There is a belief among many that placing the helmet in contact with their head is bad "juju" which can have drastic consequences. People can disappear, lose their brains or their luck. People make choices, often tragic, because the belief presents a perceived cost that exceeds a perceived benefit. Thus, they make a "logical" choice.

Enter one entrepreneur who has developed a cloth liner that can be placed between the helmet and the wearer. It eliminates the contact and, for some at least, overcomes the cultural fear. There are other issues involved, including hygiene, but the fact is the entrepreneur was able to use his understanding of an institutional factor to identify and open a market. I don't know how successful he will be, given there are many inexpensive substitutes like personal handkerchiefs. And there are likely to be more commercial substitutes. But this remains an interesting example of entrepreneurship mixed with institutional economics.

I look forward to your comments.

A Little Late for Some...Perhaps not for Others

Some of you have already covered monopolies and protection of research and government intervention to improve social welfare. But some of you haven't. Regardless, here's a comic strip that can be used to kick-off those ideas.



Please share your thoughts. Is this useful, or not really....and why?

Ruthless Capitalism and Alternative "Technology"

Dr. Mark sends this link as something to think about. I think it would make a great discussion starter. What do you think?

Institutions and Choices

If you read this blog regularly, you know one of my areas of interest is institutions. The rules and organizations that are put in place, either formally or informally, have a significant impact on our decisions. Whether they arise from legislation, commercial agreement or voluntary action, once they are accepted and become part of a regular mindset, they influence our choices. The incentives may be financial, temporal, or even imaginary. Nevertheless, they shape our decisions.

A couple weeks ago, Richard Posner and Gary Becker had an informative discussion in their blog about the role of institutions in the current U.S. economy. Specifically, they discussed the impact of unions. (You can read Posner's post here and Becker's post here.) Both agreed that the institutions were shaping both policy choices and business choices, and both felt there was an impact on the current economy, in some cases negative.

In an article in today's edition of The Washington Post, we get another view of institutions and the role they play in shaping choices. But unlike the institutions of discussed in the Posner-Becker discussion, these are much older. These institutions date back to Han Dynasty of China, some 2,000 years ago. And the institutions are largely geographical in nature. Yet they have an impact on the choices available to many citizens - providing positive and negative incentives for activities and opportunities.

I found all of these informative. And they can be used a number of ways. They could be used to augment discussion the role of institutions in shaping an economy in macro, or the role of government regulation in the marketplace in micro. In either case, students can discuss both the intent of the institution and its result or consequence. I would think the article from The Post could even be used in a world history class when discussing Ancient China.

I welcome your thoughts.

Economic Lessons from Monopoly

Regular reader and good friend Dr. Mark sent a link to this story from National Public Radio.

The short story explains how Monopoly can be a mechanism for discussing all kinds of economic concepts and theories. Featuring a game between fellow-blogger Russ Roberts of George Mason University and Dan Hammermesh of University of Texas at Austin, the story ranges from choice theory to the formation of derivatives.

I have a colleague and friend who uses Monopoly in his AP classroom, including a no rules version. What better way to discover the value of institutions in an economic system?

Please share your thoughts and ideas. (And thanks again, Dr. Mark.)

Institutions and Incentives

This article from the summer 2010 issue of City Journal (HT to Cafe Hayek)is a sobering reminder that much of what happens in any economic system can be explained as a logical reaction to incentives. What is particularly arresting is that the incentives were often created by government in an attempt to manage economic growth and decision-making.

If we remember that incentives are the result of institutions, the rules and beliefs that guide our decision-making, it is harder to discount the effect of the institutions that have been put in place over the last quarter to half-century.

That is not to say that the rules were put in place to move the nation toward a financial crisis of the type and at the time of the the one recently incurred. However, one can say that efforts to promote certain activities (whether home-buying or derivative-trading) by distorting or transferring risk, should be seen for what they may result in - the attempted disguising of risk and postponed imposition of market discipline.

I hope you take a few minutes to read the article, think about it and then consider sharing your thoughts.

Haiti Update

A few weeks back, I posted on the unintended consequences of foreign aid. Specifically I highlighted a story on National Public Radio about how food aid to people in Haiti who had been impacted by the earthquakes earlier this year was affecting local rice farmers.

NPR did an earlier story (which I did not see or cover) about a Haitian woman who was in danger of losing her small business, which had been devasted by the earthquake, because she did not have the funds to make a loan payment.

But her life has changed. Many NPR listeners sent her money - more than enough to make the payment. She has taken the bulk of the extra funds and reinvested in her business. It's a great story, and speaks to the positive side of aid to developing countries - and especially to the power of small amounts of capital to change a life.

Now in NPR's Friday podcast, there is a follow-up on that story. You can listen beginning at about the 3-minute mark. I see it as an interesting variation of an unfettered market. Funds did not have to go through a government bureaucracy, and they provided a benefit to both parties - the donor and the recipient. The recipient’s business is clearly better off, and the donor "profits" although not in a monetary sense. Rather the donor feels better knowing they have done some good. This is similar to what I try to teach about Adam Smith. It is not just about The Wealth of Nations, but it is also about The Theory of Moral Sentiments. (However, suffice it to say, there is a trade-off to success. But I don’t want to give it away.)

In that same podcast, there is another story about economic success in Haiti, beginning at about the 14:45 mark. In this case, it involves an economic development project to help Haitian mango farmers. The previous attempts by various governmental and non-governmental entities failed. But through the combined efforts of the villagers who benefitted, the work gets done - apparently including digging up and replacing 27 miles of pipe to bring water to a newly-built processing center.

I recommend this. If you can’t sit and listen, download and put it in your personal device and listen while you jog, while you work in the yard, or around the house. It will be time well-spent.

Republic of Facebook

While I'm not a citizen of this entity, I'm sure many of you and many of your students are. Here is an engaging graphic from the folks at VisualEconomics that I suspect many of you will see uses for. All I ask is that you share your ideas with the rest of us.

The Euro and ECB

A couple days ago, The Washington Post had an piece by Ezra Klein on the ramifications of the European debt situation on the future of the European Central Bank (ECB). I found it particularly insightful on two counts.

The first was the institutional barriers that make the ECB so difficult to manage. Specifically, each of the member countries has different views towards inflation and unemployment, which means a single policy (which focuses on inflation), is going to be unpopular in many of the member countries, particularly if they are experiencing differing economic conditions. In that respect, it is not unlike the Federal Reserve, which must formulate policy across a geographically and economically diverse nation. The advantage the Fed has is that the U.S. view on those conditions has had more than two centuries to approach something like consensus. The ECB hasn't had that luxury, even for its oldest members.

The second insight was the ECB's reversion to buying debt. Like the Fed, it is basically restricted from buying debt in the primary market (direct from government). As a result, it resorted to buying debt in the secondary or open market (individuals and institutions that had already purchased government debt).

If you're interested in the functioning of central banks, I strongly recommend you read Klein's piece.