Economic history

4) INSTITUTIONS, PROPERTY RIGHTS AND GOODS AND FACTORS
1. Growth and institutions: the neo-institutionalist view
2. Pre-modern inefficient institutions?
3. Constraining the Leviathan
4. Modern institutions for a market economy

1. Growth and institutions: the neo-institutionalist view

North and Thomas
“Efficient economic organization is the key to growth, the development of anefficient economic organization in Western Europe accounts for the rise of the West. Efficient organization entails the establishment of institutional arrangements and property rights that create the incentive to channel individual economic effort into activities that bring the private rate of return close to the social rate of return … if a society does not grow it is because no incentives are providedfor economic initiative.”

[Good institutions and good incentives -> Efficient economies]

Institutions: Set of rules (formal: legal system and informal: trust) that affect the economic activity, define and influence the opportunities and choices of individuals.
* Incentives
* Contract enforcement: crucial -> protect property rights

An institution is efficient if reduces:Externalities and Transaction costs. So, efficient economic organization requires: Legal framework and public/ private tribunals.
An institution is inefficient if there is low private returns and high social returns or vice versa , which is the case of negative externalities.
Problems with institutions arise if:
* The individual cannot decide the employment of resources (L, K)
* Thebenefits of individual efforts are not (sufficiently) rewarded
* High transaction costs and inefficient contracting institutions
* Rent seeking (people search only for their own bnefits)

The state, government, elites
The State is powerful enough to protect property rights and also to confiscate assets and wealth (via taxation for example) or to distort incentives.
Problems withproperty rights are most severe for growth than problems with contracting. Hence, institutional frameworks which do not impede elites and the government from interfering with individual economic activity are much more harmful than those that inefficiently regulate transactions between individuals

Institutional change and (in)efficiency
Institutions can be changed, changes in relative prices andpreferences are the most important causes. Also, the political process does not always follow the economic logic of competition and efficiency.
* Therefore, inefficient institutions can exist and persist(e.g. arbitrary expropriation, forced taxation by a strong government, privileges for minorities with strong influence)
Why institutions remain inefficient?
Problems:
* Distributiveproblems (La Mesta)
* Public goods – Free riding
* Monitoring – Police

2. Pre-modern inefficient institutions? - Serfdom - Land use in the manor

Labor markets
Serfdom in the manorial system
• Lord’s property rights: the lord was given a conditional grant of land tenure in return for military services to overlords and the king.
• The peasants’ property rights: peasants were given aconditional grant of land rights in return for compulsory labor services on the portion of land held directly by the lord; they had also to pay fines and taxes both in kind and money.
• Serfdom entailed a personal bondage to the land and the landlord, constraining peasants’ freedom and mobility (no leave or marriage without permission)
• Serfdom is an inefficient contract in terms ofproductivity (lack of incentives).
• Serfdom emerged in the high Middle Age to “capture” scarce labor as lords could not lease land to peasants when there was fertile and abundant free land in the frontier.
• Serfdom can be viewed as a contractual relationship: peasants provided labor services in return for protection and justice (they paid part of their taxes in labor)

Rise and decline of sefdom...