The question among a majority of the world population is why some countries are more developed than others are. In the world, United States of America and other European countries are considered to have superior economy compared to the developing countries. The situation is so, despite these countries having a richer economic history and a pool of both natural and human resources. The explanation for this situation remains elusive to many researchers with different reasons fronted by the investigators (Acemoglu, 385). However, to answer this question we need to understand the terminology; economic institution and its link to the economic growth.
The term Economic institution has been defined differently by varying authors. According to Cambridge English dictionary, “an economic institution is a company or organization dealing with money by managing the distribution of goods, money, and services in an economy such as banks, government agencies, and investment funds”. The business dictionary, on the other hand, defines the economic institution as a network of commercial organizations that generate, distribute, and purchase goods and services. They include manufactures, producers, wholesalers, retailers, and buyers. These two definitions and many others points to well established structures and arrangements that are either government or private and have a common objective of providing goods and services to the populations that are critical to the economy of any country. In the United States, we can list the US Federal Reserve, the internal revenue service, and the National Bureau of Economic Research as examples of economic institutions among other institutions.
Rodrik has demonstrated that economic institutions have positively contributed to the growth of the economy (Rodrick). This is through influencing different factors, among them, economic institutions both physical and human capital in any investment; they also affect the technologies used in production. This is notwithstanding the fact that economic institutions influence the distribution of resources, how well they are distributed determines the abilities of the populations to consume. An economy that has a high spending power among its people will experience growth because the demand for products will be high.
Economic institutions are mainly endogenous (Acemoglu& Robinson, 15) and will always bring conflicts of interests among the different groups or individuals. The design of prevailing economic institutions is highly affected by the political environment, which influences the distribution of the resources. The United States has developed plausible mechanisms that are tailored towards the reduction of opportunistic behaviors among the political and the elite class, this in return encourages transparency and equity in the distribution of wealth. The journey to achieving these successes, however, has not been easy due to barriers such as corruption and bribes.
Institutions are the ones that define rules of the game in any society and determine how the regulations will affect the people involved. The well-defined and enforced laws in the United States by different institutions has won confidence among the different investors; institutions such as contract enforcement, the rule of law, financial markets, protection of property rights, and government bureaucracies as some of the key drivers to good economic practices that contribute to the United States economic growth. These institutions are highly influenced by the moral fiber of the society, which is made up of the informal institution that includes norms, traditional education system, habits, and belief in the society. The formal institutions crystallize the informal institutions.
Most Economic institutions in the United States are designed to reduce cost economic activity. This is due to the capitalistic model of United States that allows competition among different institution. These costs includes information costs, bargaining, and decision costs, policing, and enforcement costs, (Coase, 197).All this together with the well-developed legal and justice systems reduce the transaction cost and in return, an increase in investment is experienced.
The United States legal systems are well designed with both public and private institutions participating in legal litigations. Large populations of United States share a common religious belief, this makes it easier to enforce laws as it reduces the chance of defaulting and conflicts arising, the high literacy levels support this. With small agreements, the private contracts enforcement is practiced, however as the economic engagements grow and become impersonal, the need for a third party may be necessary to enforce the agreements (Shirley, 2). In this case, legal experts are contracted to develop relevant contracts and agreements. The federal courts adjudicate disputes involving federal laws.
The American legal system is based on the United States enacted in 1787 and ratified in 1788, statutory laws, administrative regulations, treaties, and common laws. In the constitution, the legislature passes new clauses to protect the population while the judiciary is meant to interpret the laws leaving the executive to implement them. The American law applies to everyone irrespective of color, race or gender. Besides, even illegal immigrants enjoy almost equal rights with the citizens. With litigation being like a sport in American culture, everyone can access justice and this has led to masses trusting the legal system. With this, it is easy to do business because legal services are affordable and accessible to all the citizens without having to go through challenging procedures. With the accessibility of legal service and trust in the judicial system, people can do businesses, which in turn result in countries economic growth. This is evident by the much commercial litigation that has been handled by the judiciary including Apple against Samsung, Coca-Cola against Pepsi, just to name a few.
In countries where property rights are limited, investments are also limited and property ownership is highly influenced by the country ideological inclination, which is shaped by the economic and social structures. Some of these ideological beliefs range from capitalism to communism and either approach have a set of advantages and disadvantages when it comes to property ownership. While communism advocates for communal ownership of property, American capitalism allows people to own property freely; this in return encourages increased investment as this assures investors of complete ownership of property.
The capitalistic nature of an economy may inhibit development if the positive behavior of the political and elite class is not checked; few people may control all the tools of production, which reduces consumption as majority lack enough to spend (Taylor et al.). If this capitalistic behavior is not corrected, the economy stagnates because minimal money will be in circulation. The constitution and other institutions such as anti-corruption authorities provide checks for political class and elite because the Constitution stipulates the property right that individuals may hold and exercise against the government itself. Several amendments have continuously been made to protect the property under different conditions, which ensures that every property owner remains protected even if one is convicted of treason. Due to the many fears that numerous of our founding fathers had, much of the land control issues are handled by the state government and not the federal government.
The state, however, must play a critical role in the protection of private properties. Besides, the state is tasked with the duty of ensuring that private property is protected and kept intact. In the United State, individuals and corporations sacrifice some degree of freedom to enjoy state protection through payment of taxes to finance policing expenses and powers over the use of force for common security (Shirley, 2). All this power, however, must be regulated to prevent businesses from being suffocated to spur growth and much of this has been achieved through different institutions. The United States Constitution mandates parliament and judiciary in checking excesses.
The land is defined as a factor of production. The United States recognizes a deed as a document giving authority to the holder of the deed to perform certain actions on a parcel of land. A title deed provides for inheritance rights but ownership of land is not only through title deeds but, the law also allows the lease of land though in this ownership is permitted for a period. The government, however, retains the final control over land and proper laws that govern land use have led to increased productivity.
As a conclusion, the economic institutions that have been developed in the United States of American because of different rules, beliefs, and social practices, profoundly contribute to the success experienced by the American economy.
Work cited
Acemoglu, D., Johnson, S., and Robinson, J.A., 2001. “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review, 91, 5, December, pp. 1369-1401.
Acemoglu, D., S. Johnson, and J. A. Robinson (2005), ‘Institutions as the Fundamental Cause of Long-Run Growth’, in P. Aghion and S. Durlauf (eds.), Handbook of Economic Growth, Amsterdam: North-Holland, pp. 385–472.
Rodrik, D. (2007) One Economics Many Recipes: Globalization, Institutions, and Economic Growth Princeton: Princeton University Press.
Shirley, M. M., 2005. “Institutions and Development”.In Claude Ménard and Mary M. Shirley, eds., Handbook of New Institutional Economics. New York: Springer.
Taylor, L. et al. "Fiscal Deficits, Economic Growth and Government Debt in the USA". Cambridge Journal of Economics 36.1 (2012): 189-204.
