Importance of Institutions in International Trade
What makes it necessary to constrain human interaction with institutions?
Efficient and competitive markets
The formal economic constraints
Property rights
create
economic environment
increase productivity
Evolution of political and economic institutions
Institutions and the effectiveness of enforcement
determines
The cost of transacting
raises the benefits
cooperative solutions
the costs of defection
solutions to problems of organization
competitive framework
Definition
Structure the interaction
Economic
determines the choice set
Transactions
production costs
Political
Social
Restrictions
Formal Rules
Constitutions
Laws
Property rights
Informal
Taboos
Traditions
Code of conduct
Institutions to Capture the Gains from Trade
The earliest economies
local exchange
trade expands
region
bazaar-like economy
longer distances
shipping routes
caravans
boats
Stages of exchange
Local exchange
hunting and gathering societies
Specialization
rudimentary
self-sufficiency
Small scale trade
informal constraints
local exchange
costs of transacting low
Long distance trade
Specialization
Substantial specialization
fairs
permanent towns or cities
Geographic specialization and occupational
Specialized producers
Problems
Transaction costs
PROBLEM OF AGENCY
use of kin
measur
The strength of kinship ties
Performance
The price of "defection"
CONTRACT NEGOTIATION AND ENFORCEMENT
foreign countries
enforce contracts
protection of the goods and services en route
standardized weights and measures
Economies of scale
get start
hierarchical producing organizations
full-time workers
increases
In the proportion of the labor force engaged in manufacturing and services
URBANIZATION OF THE SOCIETY
central places
A capital market
security of property rights
rulers
The technology associated with the growth of manufacturing
entailes
increased fixed capital
plants
equipment
uninterrupted production
a disciplined labor force
a developed transport network
secure property rights
polity
judicial system
allow
low costs contracting
flexible laws
modern western societies
specialization has increased
society is overwhelmingly urban
the markets
become
National
world
When Institutions Do Not Evolve
Tribal Society
Delicate balance of power
high costs of transacting
innovation would be seen to threaten survival
Regional Economy
an enormous number of small transactions
Missing fundamentals underpinnings of institutions that would make organizations viable and profitable
Systems of weights and measures areintricate and incompletely standardized.
low fixed costs in terms of rent and machinery
finely drawn division of labor
Long-Distance caravan trade
Berber societies
Does not have an effective legal structure and court system to enforce contracts
Protection is personal, unqualified, explicit, and conceived of as the dressing of one man in the reputation of another
The reputation may be political, moral,
spiritual, or even idiosyncratic, or, often enough, all four at once.
While tribal chieftains found it profitable to protect merchant caravans they had neither the military muscle nor the political structure to extend, develop, and enforce more permanent property rights.
Institutional Evolution in Early Modern Europe
Complex organizatition
the writing of contracts to disguise interests complex and cumbersom
became more problematic
Increasing volume
institutional development
mobility of capital
Innovation and techniques
innovations that enhanced the mobility of capital were the
techniques and methods evolved to evade usury law
evolution of the bill of exchange
improved enforceability of contracts
development of discounting methods
mobility of capital
commercial law
enforcement mechanisms by traders themselves
development of internal codes of conduct in fraternal orders of guild merchants
uncertainty into risk.
insurance and portfolio diversification are
methods for converting uncertainty into risks
coverage against variability, security and transaction costs
practice to use printed forms provided with a few blank spaces for the name of the ship, the name of the master, the amount of the insurance, the premium, and a few other items
Opening to a large number of investors to participate in risky activities
Jewish origins
Relating economies of scale and the development of improved mechanisms to enforce contracts at lower costs
union for more information
printing of prices of various commodities, manuals that provided information on weights, measures, customs, brokerage fees, postal systems, and the complex exchange rates between monies in Europe and the trading world.
distributed risk
Contrasting Stories of Stability and Change
changes in the human economic condition.
maximizing activity
no greater productivity
private gains
changes
organizational
institutional
raises productivity
political competition for more income and survival
improving knowledge and skills meant getting better information about opportunities, having more negotiation and more wealth
the basic institutional framework
organizational structure
institutional change
economic change due to the increasing returns
the basic institutional framework creates opportunities for subsequent organizations to evolve,
promote activities that improve productivity
trader would invest
improved knowledge and skills
getting better information on opportunities
having greater bargain skills than other traders