Institutional relationships and economic systems

1.

2.

Тheme 3. Institutional relationships
and economic systems
Questions:
1.Institutions: the Nature, types and importance
2. Property and its qind
3.Economic systems and their models
https://www.youtube.com/watch?v=B43YEW2FvDs
4.The State and its role in a modern economy

3.

Definition of institutions
Institutions represent a totality of norms, rules and
organizations which coordinate the relationships
between people.
Institutions provide an economic order or
“the rules of game” ( obligations, responsibilities,
opportunities….) and
“way" of their development
Following “the rules of game” make people's
actions more predictable

4.

The Nature of the institutional relationships
- They are relationships between institutions;
- They are normative relationships:
characteristics and the content
determined by the society;
the
have
- They resolve conflicts, provide a balance
between the different interests of individuals
and groups;

5.

What do institutions do?
• Key role is to reduce uncertainty by
influencing individuals’ and firms’ decision
making
by signaling which conduct is
legitimate and acceptable and which is not

6.

Classification of institutions
Institutions are both formal and informal.
• Formal institutions include the written
constitution, laws, policies, rights, regulations
enforced
by
official
authorities
and
organizations.
• Formal
institutions
include:
ownership
institution, market institutions (banks, stockexchanges, insurance companies). They are
created by people.
• Their effectiveness depends on the degree of
conformity to informal institutions.

7.

• Informal institutions are generally unwritten
social rules, norms, traditions, religious norms,
ethics and moral guidelines of the people
• These norms are preserved, passed down from
generation to generation, providing historical
continuity and national specificity in the
development

8.

About «institutional balance»
• It’s not easy: requirements of behavior are
created at different levels and at different
rates.
• «If the formal rules can be changed overnight,
then informal rules usually change only
gradually ... therefore, revolutionary changes
are never as revolutionary as their proponents
would like”.
(G. North)

9.

What is property?
It is a social institution that has historical specifics.
Meaning and definitions
• The term “property” is derived from the Latin term
“ proprietat” and the French equivalent
“proprious” which means “a thing owned”.
• The term is extraordinarily difficult to define.
• The problem arrises because the legal meaning of
property is quite different from the common
meaning of the term.

10.

Economic vs Legal
From the economic point of view the property
means the relations between people in the
field of appropriation – alienation of the
goods/ services, incomes owned by them.
From the legal point of view the property
reflects the rights among people that concern
things. The property rights provide incentives
for individuals to participate in the economic
activities.

11.

• Property rights are often referred to as
a bundle of rights:
• the right to use and posess the goods
• the right to earn income from the goods
• the right to transfer the goods to others, or
destroy them
• the right to exclude….
(R. Coase)

12.

Qinds of property
Scarcity of resources, goods, incomes is a main
cause of ownership.
Who has an access to the scarce items, or income he
has a property on them, and certain rights, and
opportunities
• Two major types of property: private and
public
In the real economy, they can be combined
Result: a variety of properties (ex.: mixed, mixed
with a foreign capital)

13.

Classification of property on the base
of ownership
• Private property
• Common property
• Joint property
• Community property
• Public property
• Government property

14.

The role of property
• determines the forms of management and
ways of connecting of workers to production
conditions
• regulates the distribution of goods/services
and incomes in society
• "sets" the priorities of social development

15.

What is a system?
A system is a collection of interrelated elements or
components that are organized for a common
purpose.
Ex. Transportation system,
Ecosystem,
Biosystems,
Economic system

16.

Economic Systems
• Def. The method used by a society to produce
and distribute goods and services.
• Or, How the government tells us what we can
get and how to get it!

17.

Components of the economic system
There are multiple components of economic system.
It composed of people, institutions, rules, relations.
The most important components are following:
- productive forces;
- social-economic relations, including property and
property rights;
- coordination mechanism: how information is obtain and
used to coordinate the economic activity (plan or
market?);

18.

Regulation of the economic system
• internal (self-regulation)
• external (from the state, public
organizations, "abroad")

19.

Criteria for classifying of economic systems
• form of ownership (primary community, slaveowning, feudal, capitalist, socialist systems);
• The state of technology (instrumental, industrial,
information systems);

20.

Criteria for classifying of economic systems
• coordination mechanism (traditional, market,
centralized (command), mixed systems);
• level of development (industrially developed,
developed, less developed systems)

21.

All Economic Systems Must Consider the
Following Questions:
1.
2.
3.
4.
What goods and services to be produced?
How to be produced?
For whom to be produced?
How much will they produce now, and how
much later?
Each economic system answers these
questions in a DIFFERENT WAY.

22.

1. Traditional Economy
• Economic questions are answered by habits
and customs (the way it has always been
done)
• Children work the same jobs parents worked,
often farming or hunter/gatherer
• Fear Change!
• Ex. Eskimos, the Amish,
Pigmies, Bush People

23.

Traditional economy
– low level of the development of productive forces;
– Collective property;
– Predominance of a manual labor;
– Natural production, "self-sufficiency”;
– Leading role in the society of traditions and customs;

24.

Traditional economy
– Limited needs of population;
– Conservatism of economic behavior;
– A strict hierarchy of relationships in a community
governed by a leader (chief, elder, priest);
– Exchange of goods
The main goal is the survival of the
community

25.

2. Command Economy
• The government answers the basic economic
questions
• Advantages: able to act quickly in
emergencies, provide for all people equally
• Disadvantages: Inefficient, no incentive to
work hard or be creative
• Ex. Communist Countries (China, Vietnam,
North Korea, former
Soviet Union, Cuba)

26.

Command economy
• Leading of public (state) ownership;
• Central planning and centralized economic
decision-making;
• lack of economic freedom and individual
responsibility;
• Social justice;
• Administrative "linking" of production and
consumption;

27.

Command economy
• Lack of market relations;
• low productivity and motivation;
• Monopolization and bureaucratization of the
economy;
• Deficit of consumer goods;
• Economic stability.
The purpose of the economic activity is to fulfill the
tasks of the "center" and plans.

28.

3. Free Market Economy
• Economic questions are answered by
individual buyers and sellers.
• Supply and demand influence economy
• People act out of self interest; motive for
profit (money) drives the economy
• Also known as FREE ENTERPRISE or
CAPITALISM
• Ex. The United States, Western
Europe, Japan

29.

Market economy
• Leading of Private ownership;
• Economic freedom of producers and
consumers;
• Competition;
• Flexibility of economic resources;
• Market mechanism of regulation;
• Decentralized economic decision-making;
• Orientation to maximize profits;
• Economic instability

30.

I lied!
• There were 3 types of economic systems, but
there is a 4th!
• Mixed Economy: No economy is pure market,
pure command or pure traditional, elements
of each appear in all economies, some have
more elements of one economy than another.
Market
Mixed
Command
USA
Great Britain
China

31.

Mixed economy
It is an economic system based on the
combination of elements from different models
• The term "mixed economy" was introduced by
American economist Chase in the 1930s.
• He considered that the concepts of
"capitalism" and "socialism" were pure
abstractions.

32.

Features of American Free Market
Economy
1. Economic Freedom: individuals have the
right to choose
2. Competition: more than one producer of
good/services insures choice
3. Private Property: individuals have the right
to own their own property, including
business

33.

Features of American Free Market
Economy (cont)
4. Self-Interest: individuals make
decisions based on what is best for them
5. Voluntary Exchange: individuals may freely
buy and sell goods
6. Profit Motive: individuals are driven by a
desire to profit (make money)

34.

Features of American Command Economy
1. Government regulation of some business
practices
• Ex. Wages, labor hours,
safety practice.
2. Government limits certain choices
Ex. Cannot buy or produce certain
goods/services
3. Government provides aid to the needy
Ex. Medicare, Medicaid, welfare

35.

My Pizzeria
• How would my pizzeria function under
different economic systems?

36.

My Pizzeria in a Free Market
• I answer the basic economic questions!
• I determine how much cheese and pepperoni
goes on the pizza
• I determine the quality of the cheese and
pepperoni
• I set my employees wages
• I set my business hours

37.

My Pizzeria in a Command Economy
• The government answers the basic economic
questions
• The government sets the amount of cheese
and pepperoni on each pizza
• The government determines quality of cheese
and pepperoni
• The government sets employees wages
• The government sets business hours
Problem: What does the government know
about pizza?

38.

My Pizzeria in a Mixed Economy
• The Government and I both answer the basic
economic questions
• I determine the amount of cheese and
pepperoni on the pizzas; government
determines the quality of cheese and pizza
• I set employee wages; government sets
minimum wage for employees
• I determine business hours; government
determines whether I am safe to be open or
not

39.

A variety of economic models
For each country, the "mix" of various economic
elements and forms is specific, unique!
• Centralized regulation on the base of private
property was typical for Hitler's Germany
("authoritarian capitalism");
• Administrative-command regulation and public
property was typical for the USSR ("pure
socialism");
• Market principles of regulation in the conditions
of public (state and collective) form of ownership
was developed in the Yugoslavia ("market
socialism");

40.

The specifics of national development
• Natural, cultural and ethnic factors,
• Experience and historical "heritage“
• The originality of the technological condition,
• The level of economic potential,
• Political course and its priorities.

41.

The problem of national identification
It is the problem of self-determination and
choosing the trend of a country's
development, that could be adequate to
its essence and values

42.

The role of State: evolution of concepts
• “Night watchman" protecting private property
and maintaining a public order (classical school);
• “Absolute" regulator of all economic processes
(Marxism)
• “Judge," who determines in the market system
the "rules of the game" (neoliberalism);
• A stabilizing force capable to eliminate of market
disequilibrium (Keynes)
• An institution of a mixed economy, caused by
market failures (Neo Keynesianism).

43.

Functions of a Government

44.

The functions of Modern State
• Legal enforcement of the economic activity,
the establishment of "rules of the game”
• Maintaining political stability and
macroeconomic sustainability;
• Regulation of "natural monopolies";
• Providing basic public goods;
• Redistribution of income and support for
vulnerable groups;
• Regulating of the externalities…

45.

Centralized regulation?
√ Slowing economic growth;
√ Reducing the competitiveness of national
products;
√ Bureaucratization and corruption of the state;
√ The State budget deficit;
√ The "center's" inability to anticipate and
effectively influence on the consequences of
its decisions