Institutions
Why Do Institutions Matter?
Why study institutions? Because institutions play a significant role in the growth and development of nations, and the living standards and individual liberties enjoyed by their citizens. Global and national institutions in countries where operations are conducted are also critical components of the external environment that affects a company’s competitive opportunities and threats. An understanding of these institutions is thus essential to effective business planning and leadership.
Every society must determine what to produce, how to produce it and who gets the goods and services that are produced. A society is a collection of institutions – political, legal, economic, social, cultural and spiritual among others. These social institutions, to varying degrees in different countries, exert influence over the decisions about what to produce, how to produce it and who gets it.
The kicker is that some institutions respond to these three fundamental decisions that every society must somehow make in ways that provide opportunities and powerful incentives for individuals to work, save, invest and innovate – the sources of economic growth and development. These countries typically experience economic growth and rising living standards. They also typically enjoy high levels of individual liberty. Other institutions provide no or limited opportunities, and no, weak or disincentives for individuals to work, save, invest and innovate. Not surprisingly, these countries usually do not prosper for any lengthy period of time.
As an example of the impact of institutions on incentives, a legal institution that protects private property rights provides powerful incentives for productive economic activity. A legal system that does not protect property rights – perhaps that does not even recognize private property- provides little incentive for productive economic activity as witnessed by the horrific starvation caused by the decline in production that followed attempts to collectivize (eliminate private property rights) agriculture in Russia and China.
Who said it?
We have to “resolve the issue of the excessive concentration of unrestrained power,” and “create conditions for the people to criticize and supervise the government.”
Vladimir Putin
Wen Jiabao
Barack Obama
Kim Jong Il
Sarah Palin
Our economic model “doesn’t even work for us anymore.”
Ben Bernanke
Fidel Castro
Naoto Kan
Dmitry Medvedev
“Universal values tell us that government serves the people. . . .”
Nancy Pelosi
Qin Xiao
Gordon Brown
Manmoham Singh
I feel that the institution which most contributes to the three question that each society has to answer is the economic institution. In a thriving economy, there are plenty of opportunities and work to go around. A society with a poor economy will be forced to produce in any way possible to survive.
1) Wen Jiabao
2) Fidel Castro
3) Qin Xiao
Josh – I agree that economic institutions should play the largest role in responding to what, how and for whom, but in some countries it is the political institution that plays the largest role, almost always with severe negative consequences for economic growth and individual liberty
Tom.