Comparative economicsComparative economics

2010 Fall

ISTITUTIONS AND THEIR FORMATION INTO AN ECONOMIC SYSTEM  1. lectureCOMPARATIVE ECONOMICS AND ECONOMIC INSTITUTIONS

1. The subject matter and the theoretical framework of comparative economics

2. What do we mean by institutions?

3. Institution and organization

4. The stability and changing of institutions

The subject matter of comparative economics

The subject matter of comparative economics: economic systemsThe economic system is one of the independent sub-systems of society, which has separated itself from the other sub-systems through a long path of development. As long as the economic processes were embedded in the political, the cultural and the religious life and relations of society, the notion of the economic system could not be conceived. We can only speak of an independent, autonomous system after the development of capitalism, when the economic processes and events are not subject to the other spheres of society, rather they work based on their own logic and goals.

The theoretical framework of comparative economics

Mainstream economics institutional economics

Basic institutions coordinating mechanisms and the forms of property

Comparative economics is quite close to international economics and to world economics.

The framework of the nation states Globalization

The system paradigm it provides the perspectives and the theoretical framework of comparative economics

What is a paradigm?

(A given group of) researchersapply the same point of view and they analyze the same group of phenomenause the same conceptual apparatususe the same methodology

The shared paradigm does not necessitate that the researchers

should set out from the same axioms andshould arrive to the same conclusions

The elements of the system paradigm 1-4. (J. Kornai)

1.  Researchers who think in terms of the system paradigm are concerned with the system as a whole, and with the relations between the whole and its parts.

2. The system paradigm cannot be confined within any traditional partial discipline (such as economics, sociology or political science). It has to be seen as a school of comprehensive, general social science.

3. The attention of researchers guided by the system paradigm is not focused on economic, political or cultural events and processes as such, but on the more permanent institutions within which these events and processes occur, and which largely determine their course.

4. A researcher inspired by this paradigm must search for an explanatory theory in historical terms. We search for a strong linkage between various disciplines of social science and history.

The elements of the system paradigm 5-8.5. According to the system paradigm, individual preferences are largely the

products of the system itself. If the system changes, so do the preferences.

6. System researchers enquire into what processes of decay are going on within a system, so that it will come to an end and give way to another system. They ask how there occurs a transition from one system to another system, or from one typical version of a great system to another.

7.  Researchers guided by the system paradigm recognize that all systems have shortcomings or dysfunctions specific to them. No system is perfect. Every system possesses harmful attributes that can only be alleviated, not eliminated, because the propensity for them to reproduce is deeply imbedded in the system.

8. One of the most obviously characteristic methods of the system paradigm is comparison. It explains an attribute of a system by comparing it with a corresponding attribute of another system, analyzing the similarities and differences between them. This comparison is mostly qualitative, although some attributes are easily measured, which offers a chance to make quantitative comparisons based on statistical observations.

Why do we need institutions?

Institutions are the building blocks, the most important factors of the economic systems. Their total effect rules the workings of the system. The economic activity is an interactive process between individuals and groups, which demands coordination. Institutions provide solutions for these coordination problems.

The concept of the institution

Rules governing the activities and interactions between the members of societyFormal rules (like laws, contracts)Informal constrains (social norms, habits, conventions, beliefs)A rule is an institution, if the decisive majority of the affected social actors knows and repeatedly applies it. A third actor, mostly the state, needs to guarantee its adherence

Example for the necessity and the development of an institution

Caller calls Caller waits

 Good for both 

Bad for both 

Bad for both Good for both 

Receiver waits 

Receiver calls  

The continuation of a disconnected call

Adhering and braking the rules

Both influences the workings of the institutionsBoth types of behavior can be profit maximizing For short term gains – in contrast with social utility – they maximize their individual profits. In the long run individual profit can also decrease

Example: Paying for social securityDodging the fare on public transportation

Short run weighing can be influenced by the method and magnitude of punishment for rule braking

Example: the ramification of a fender bender type car accident

Institutions and organizations

Institutions are the rules of the game the organizations and their agents are the playersAn organization is a group of such individuals, whose intentions fall in line with achieving certain goals

The three-sided character of institutions The two-sided relations inside the organization

(the police as an institution) (the police as an organization)

Individual (driver A) Individual (driver B)

Chief

Subordinate

Vertical relationship

Horizontal relationship

The development, stability, change and end of institutions

Institutions develop spontaneously example: gold becoming a currency, or the numeric system, or languagesInstitutions can also develop through planning example: laws (artificial language – Esperanto)(Especially spontaneous) institutions change with difficulty and slowly example: handshake, keyboard arrangement, wedding (institutional hysteresis)Artificial institutions can be changed relatively easily example: laws requiring simple majority (tax laws), but not the ones requiring two-third of the votes! Changeability is related to the institutional hierarchy (example: a ministerial regulation can be changed easier than a law)The change of spontaneous institutions = reproduction of similarity, double contingency example: badly placed stop sign, right hand rule