Sem 1 - North 1991

Question 1

What are institutions?

Answer 1

Institutions are humanly devised constraints that structure political, economic, and social interaction. They evolve incrementally, connecting the past with the present and the future. Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline.

Consist of both:
- informal constraints (sanctions, taboos, customs,
traditions, and codes of conduct)
- formal rules (constitutions, laws, property
rights)

Question 2

Institutions from a historical perspective, what role have they had?

Answer 2

Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange.

Question 3

When talking about constraining human interaction with institutions, we think of a game-theoretic context. What does it look like?

Answer 3

Wealth-maximizing individuals will usually find it worthwhile to cooperate with other players when:

1. the play is repeated
2. they possess complete information about the other player’s past performance
3. when there is a small number of players

Cooperation is hard to sustain when:

1. the game is not repeated
2. information on the other players is lacking
3. large number of players

Question 4

What determines the cost of transacting? (transaction costs)

Answer 4

Institutions and the effectiveness of enforcement of exchange agreements (together with the technology employed)

In game theoretic terms, effective institutions raise the benefits of cooperative solutions or the costs of defection

Question 5

Which are the 4 general stages of economic development?

Answer 5

1. Local exchange within the village
   - specialisation
   - dense social network –> low transaction costs
   - people have intimate understanding of each other. Threat of violence is a continuous force for preserving power.
2. Trade beyond single villages
   - possibilities of conflict increases
   - market size grows –> transaction costs as well
   - religious precepts usually imposed standards of conduct on the players
3. Long-distance trade aided by caravans and ships
   - sharp break in the characteristics of an economic structure
   - poses two distinct transaction cost problems. 1. classic problem of agency 2. contract negotiation and enforcement in alien parts of the world.
   - capital markets are created
4. Last stage observable in modern western societies
   - specialization has increased, markets are nationwide and worldwide (specialization has increased)
   - economies of scale
   - society is overwhelmingly urban

Question 6

What are 3 primitive types of exchange that are unlikely to evolve from within?

Answer 6

1. Tribal society
   - dense social network
   - governed by a delicate balance of power. Each person is constantly involved in securing their own position in situations where they had to show their good intentions.
2. Regional economies with bazaar trading
   - widespread and relatively impersonal exchange and relatively high transaction cost exist
   - systems of weights and measures are intricate and incompletely standardized.
   - governmental controls over marketplace activity are marginal, decentralized, and mostly rhetorical

central features: 1. high measurement costs 2. continuous effort at clientization 3. intensive bargaining at every margin
- one makes money by having better information than one’s adversary

3. Long-distance caravan trade

Question 7

What are the 2 key factors North presents for why different nations have historically developed in different directions economically?

Answer 7

1. The relationship between the basic institutional framework, the consequent organizational structure, and institutional change