Institutional Economics: Public Speaking & Constraints

• Institutional economics

Public Speaking Sessions

• There is a 90-second time limit for ten students
• Speakers share news related to course themes or cultural/political events
• They can express criticism, respond to previous speakers, or share group updates
• Speakers answer two audience questions of their choice after their speech
• The audience votes, and speakers collectively decide the winner
• Participating twice earns full 5 points; once earns 3 points
• Sign-up is on a first-come, first-served basis
• Focus on improving speech rather than competing

Informal Constraints

• Informal constraints include conventions, codes of conduct, and norms of behavior
• Culture defines how individuals process information, affecting informal constraints
• Kinship ties often form social order in the absence of formal rules
• Enforcement: Family members deter harmful behavior through threat of feuds
• Giving up wealth for values like altruism is an informal constraint
• Ideologies and convictions play a major role in choices
• Institutions can lower the cost for individuals to express their ideologies/convictions

Formal Constraints

• Formal constraints include rules and laws
• Contracts provide evidence about forms of organization to facilitate exchange
• A state is needed to enforce agreements, but the state may be harmful economic growth
• Political institutions evolve to lower exchange costs via credible commitments
• Formal rules interact with informal norms for outcomes

Agents of Institutional Change

• Institutional change involves marginal adjustments to rules, norms, and enforcement
• Organizations acquire instrumental knowledge and skills
• Communicable knowledge is transferable, tacit knowledge is acquired through practice
• Entrepreneurs reduce uncertainty, develop tacit knowledge to maximize wealth or other objectives

The Impact of Institutions on Organizations

• Incentives built into the institutional framework shape skills and knowledge
• This framework directs the acquisition of knowledge and skills
• This direction is decisive for long-run societal development
• Allocative efficiency is the optimal allocation of resources
• Adaptive efficiency relates to rules shaping how an economy evolves, especially learning, innovation, and risk-taking
• Adaptively efficient paths maximize choices under uncertainty, encourage trial methods, and eliminate inefficient choices

The Impact of Organizations on Institutions

• The maximizing behavior of organizations drives institutional change
• Organizations create a demand for investment in knowledge
• This involves ongoing interaction between economic activity, knowledge, and the institutional framework
• It leads to alteration of informal constraints
• Organizations learn by doing and may invest in skills/knowledge or changing institutional constraints

Sources of Institutional Change

• Sources of change include changing relative prices or preferences
• Changes in relative prices reflect entrepreneurs' efforts:
  • Factor Price Shifts: Ratio changes between land, labor, and capital
  • Information Costs
  • Technological Advances
  • Knowledge and Skills: The process by which entrepreneurs acquire skills/knowledge alters relative prices.
• Changes in preferences or tastes: Fundamental changes in relative prices alter standards of behavior

The Process of Institutional Change

• Change often begins when one or both parties realize they can achieve better via revised agreements/contracts
• Entrepreneurs respond to changing price ratios:
  • Directly: Devoting resources to profitable opportunities under existing rules
  • Indirectly: Estimating costs/benefits of altering rules
• Parties attempt to renegotiate contracts and might eventually restructure rules

Incremental and Discontinuous Institutional Change

• Incremental change happens when exchange parties recontract to capture gains from trade through minor adjustments to increase incomes

• Continuous incremental changes require the following:

  • New bargains and compromises
  • Freedom for entrepreneurs to bargain while maintaining group loyalty

• Discontinous Change (conquest or revolution):

  • Requires coalitions due to no party having enough singular power to win disputes
  • Distribution of rewards can lead to conflict
  • Violent action requires ideological commitment
  • Formal rule changes can create inconsistency with informal constraints
  • is seldom as discontinuous as it appears on the surface

The Path of Institutional Change

• The fundamental question to be asked is what determines the divergent patterns of evolution of societies, polities, or economies over time
• The evolution of technology: Incremental technological changes lead to dominance even if not the most efficient in the long run

W. Brian Arthur's Model of Technological Change and Extension to Institutions

• SELF-REINFORCING MECHANISMS OF TECHNOLOGICAL CHANGE

  • Large Setup or Fixed Costs, gives advantage of falling unit costs when output increases
  • Learning Effects improve products or lower their costs as their prevalence increases
  • Coordination Effects gives advantages to cooperation with other economic agents taking similar action
  • Adaptive expectations, where increased prevalence on the market enhances beliefs of further prevlaence

• PROPERTIES RESULTING FROM SELF-REINFORCING MECHANISMS

  • Multiple Equilibria: There are often a number possible solutions, and outcome is indeterminate
  • Possible Inefficiencies: A technology that is inherently better than another can lose out because of bad luck in gaining adherence
  • Lock-in: Once a particulare technology achieves dominance, a solution is difficult to exit from
  • Path Dependence: Consequence of chance events can determine solutions that lead to a particular path once it is prevealed

Two Forces Shaping the Path of Institutional Change

• In a competitive world that there no increasing rates and returns to institutions markets where actors initially have inccorect and implement models either modify or eliminate models based on information
  • Increasing Returns:
    • Large initial setup costs; learning effects, coordination effects: adaptive expectations The inderdependabt web of insitutional matrix produces massive increasing returns

Path Dependence in Incremental Institutional Change

• The increasing returns leads to path dependence, a way to narrow conceptually the choive set. It also links the making decision though the time

• The course is is reinforced as the development path is setting particular course: - Networking externalities arise from organization dependence in coordinantion with assosiciated beenefits - Learning processes of organizations lead them to get knowledge/skills thet are suitable for institutional conduct - Historically derived subjeective modeling influences how those who have been through it perveive opprotunitites/are shaped respond to cuurent events

• Although path dependence is key those that are not are unproductive

• It depends on what can be determined for the best, and most effiiciant way to change

Divergent Paths of North and Latin America

• NORTH AMERICA
  • Religious diversity / political parallels in colonies
• Colonists had freedom to develop their own economy
• The Northwest Ordinance prodivded the basic expansion plan of the United States
• It established rules for inheritance, ownership of land, mechanisms for territories to become states
• LATIN AMERICA
• People imposed a form bureacratic/religion administration on existing agricultural community
• Colonies continued with taking pattenrs and indeopndence
• Federal schemes and efforts did not work due to the lack of decentralization
• Consequelty striggling for political, economy, bureaucarcy between local colonies and imperial controls

Subjective Models of Actors and Models of Economic Change

• Long-run economic models come from the change that has accumatived though short runs of innuberable by economic and political entrepreneurs that come hand shape performance and how their environment/subejectivness goes Because their model often imperfect, the gap is wide since intentions and outcomes:
• Short runs done by efforts to maxmize profits can lead to perisiting inefficient
• Even though activities may be production, they still have unepecteed cconteequences The models degree, consiitent outcomes, and intentions will also be reflected by what modles are true
• The specific shotu paths that are une forseeable ,increasing returnn caracteristics make institution matrix make long tun outcomes.

Public speaking format for institutional economics. Students share course-related news or events, answer questions, and receive participation points. Informal constraints such as conventions, codes, culture, kinship, and ideologies influence behavior and social order.