September 25, 2023 

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SECOND RULE OF SUBJECTIVITY: The second of seven basic rules of the economy. It is the notion that market prices are ultimately determined by subjective values and preferences of buyers and resource owners. While regular, everyday consumers are prone to accept the prices "set" by retail stores and other sellers as etched in stone (perhaps along with the Biblical ten commandments), such is not the case. The price of a product depends on two things, demand (especially the demand price that buyers are willing to pay) and supply (especially the supply price that sellers are willing to accept). Both, I repeat both, are subjectively determined. By subjective, I mean they are based on the values, beliefs, tastes, and preferences of people.

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An established method or way of performing an activity that is widely accepted throughout society. Institutions provide the rules, guidelines, and structure needed to carry out day-to-day economic activities, such as production, consumption, and exchange.
Institutions form the framework of an economic system. This framework establishes the "rules of the game" under which members of society operate. Institutions can be both formal, such as government laws, or informal, such as cultural practices. By their very nature, institutions create structural rigidity, which is extremely beneficial. However, this rigidity inhibits change and progress, which can be exceedingly harmful. In some cases, institutions are so intertwined with the fabric of society that only outsiders recognize their existence.

Economic Institutions

Several institutions key to the study of economics can be considered economic institutions. These include market exchanges, the circulation of money, production techniques, private ownership of property, 40-hour work weeks, labor unions, and a host of others too numerous to list. Many other institutions can be thought of as political, social, or cultural. Examples include marriage, government, baseball in the summer and football in the fall, high school proms, language, driving on the right (or left) side of the street, holidays, and a great deal more.

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

Institutions can be either formal or 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

Without the structure provided by institutions, anarchy would prevail. With this structure, though, comes rigidities that can prevent resources from being allocated efficiently. For example, labor unions might try to keep their members employed at one job, when the workers and the economy would be better off if they worked at another. The bureaucracy of a business or government organization might be so institutionally rigid that it fails to adopt new ideas, technologies, or innovations that improve production.

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

All institutions are not created equal. Some are a fundamental part of human existence that have been around for millennia. Others are more transitory and tied to current production. Five different types of levels of institutions can be identified.
  • 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).
The ease of changing institutions increases from humanity (the hardest) to polarization/spread (the easiest). Save for humanity institutions, each level tends to outlive what it was designed to support. This provides continuity, allowing one civilization, nation, or industrial base to build on a predecessor without the need to start over from scratch. But it also inhibits the development of a newer and better civilization, nation, or industrial base.

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.").

This confusion can be quite problematic one nation erroneously assumes that another nation necessarily has different institutions from top to bottom. Those in Country A oppose murder (humanity), believe in God (civilization), speak English (nation), and drive cars (industrial base). As such, others in Country B must necessarily support murder, not believe in God, speak a different language, and ride oxen. When in fact, the only difference might be that Country B speaks a different language.


Recommended Citation:

INSTITUTION, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2023. [Accessed: September 25, 2023].

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