Economic Institutions

The primary economic benefit of institutions is the creation of a stable framework under which production, consumption, and exchange activities can occur. Buyers and sellers, for example, voluntarily engage in market exchanges based on the institutional "rules of the game" established by government laws. They can safely engage in exchange with some degree of certainty that everyone is playing by the same rules.

Formal and Informal

• Formal: Formal institutions are those officially established in one way or another, often by governments. Laws are an excellent example of formal institutions. For example, governments in the United States officially mandate that automobiles drive on the right side of the street, that dollars are legally used as money, and that the fourth Thursday in November is celebrated as Thanksgiving Day. Each of these institutions affect production, consumption, and exchange.

  Perhaps the most noted formal institution established by government is government itself. In the United States, the U. S. Constitution establishes the Federal government as a formal institution. The myriad of government agencies, from the U. S. Department of Defense to the Shady Valley Department of Sanitation, are all formal government institutions.

  Other examples of formal institutions include business corporations, labor unions, and religious organizations. Each provides "official" structure to society and the economy. Although not part of government, many non-government institutions are actually enabled in one way or another by government. Governments, for example, establish the guidelines for what legally constitutes a corporation or a religion (at least for tax purposes).



• Informal: Informal institutions are not officially established, but are practices commonly accepted throughout society. Many societies, for example, have informal institutions regarding courtship and marriage. In one society, it might be common for parents to arrange a marriage when children are young. In another society, the accepted practice might be for the groom-to-be to seek the blessings of the prospective father of the bride.

  Informal institutions apply to all types of activity--social, cultural, political, and economic. It is, for example, common practice to pay food servers a gratuity (or tip) at many restaurants (fancy eating places). Those who fail to tip in the accepted manner commit a social blunder. However, tipping is not an accepted practice at other restaurants (fast food burger joints), and attempting to tip is also considered a social faux pas.

  Many formal institutions undoubtedly began life informally. Our earliest ancestors most likely agreed, informally, that murder was a bad idea long before it was legally, and formally, outlawed by governments. However, even if informal institutions do not carry the weight of law, they create a solid structure to society. For example, triskaidekaphobia (fear of the number 13) is an informal institution that has virtually eliminated the thirteenth floor from all high-rise skyscrapers.

Bend or Break

The ideal institutions balance rigidity with flexibility. They must be rigid enough to provide structure, but flexible enough to enable progress. If institutions become too rigid and prevent a needed reallocation, then the economy and its institutions might "snap." The consequence can be a devastating. The economy can be mired in a stagnant downturn (recession or even depression) until new institutions emerge to replace the old.

Alternative Levels

• Humanity: The most basic types of institutions are those associated with humanity itself. Such institutions as prohibition against murder, theft, and incest fall into this category. These institutions are so intertwined with humanity itself, that they are often followed without question, they are what make humans humans. Breaking or changing these institutions is almost unthinkable and thus incredibly hard to do.


• Civilization: The next level of institutions are those associated with a particular civilization, such as Western European, Native American, or Ancient Egyptian. These institutions often die off with the civilization, but they can change or evolve as the civilization progresses. Religion and language are two common civilization-based institutions. They are often recognized only when one civilization clashes with another.


• National: A notch up on the institution layering is nation-based institutions. These are tied to a particular country. The most noted national institutions are governmental, starting with the form of government itself (democracy, monarchy, republic, etc.). These can be modified (such as a constitutional amendment), but substantial changes are tantamount to creating a new nation.


• Industrial Base: The next level is institutions that arise from a given industrial base. Given enough time, many nations will have more than one industrial base. The automobile industry, for example, was an important industrial base for the United States throughout the 20th century. The Interstate highway system, parking lots, and the car "culture," are all part of this industrial base. They support and promote the base and change with changes in the base, often after the fact. These institutions often outlive the base itself, preventing the nation from easily developing a new industrial base.


• Polarization/Spread: The growth of given industrial base often experiences two "phases." One is the polarization phase, which is the creation and expansion of the core components of the base. This is then followed by the spread, which is the diffusion of activity form the core of the base to the rest of society and the economy. Each phase lasts several decades and tends to develop its own set of institutions. Both are included in the industrial base set of institutions, but oriented either to the polarization or spread phase. Political parties are commonly associated with phase (Republican and polarization, Democratic and spread).

It's quite common to confuse the corresponding institutional levels. That is, assuming that an industrial base institution is necessarily also a national institution ("What's good for GM is good for the US."). Or assuming that a civilization institution is also just a national institution ("God must be a Republican.").