Strengths of Institutional Economics - Essay Example

Introduction My school is Institutional Economics. I need to talk about the strength of Institutional Economics and the weaknesses of Ecological Economics. Before dwelling on these two aspects, it is imperative to understand what the two schools of Economics involve. Institutional Economics is defined as the school of Economics whose focus is on the roles played by institutions in shaping the economic behaviour (Keaney, 2002). The emphasis is on the study of institutions such as individuals, social norms, firms and states and how these institutions interact with each other in the market. Institutional economics thus focuses on evolution, learning and bounded rationality rather than assuming equilibrium, rationality and stable preferences. Institutional Economics is also referred to as Institutionalist Political Economy and it helps therefore to understand how economic behaviour is shaped by institutions created and made by man (Berle and Gardner, 1967). On the other hand, Ecological Economics is defined as the field of Economics whose emphasis is on the preservation of natural capital because the economy of a country is part and parcel of the entire ecosystem. Strengths of Institutional Economics One of the greatest strengths of Institutional Economics is that it makes the economic environment fairer. As stated there above, institutional Economics focuses on the role of institutions in shaping the economic behaviour in a given economic environment (Davis, 2007). These institutions help in structuring the interaction between human beings through formal constraints such as constitutions, laws and rules that as well as through informal constraints such as codes of conduct, conventions as well as behavioural norms. Hence, institutions through the formal and informal constraints functions in the economy for the common goal of all the individuals involved (Coase, 1998). For example, the trade unions or employers association as well as other institutions such as trade agreements and trade associations lay down regulation and enforce them to ensure that the economic environment is fair to every individual involved in the process of developing the economy through their collective action. As a matter of fact, the collective action of the institutions proves sometimes to be powerful than the collective action of the state or the political concern which drives which makes it possible for reciprocal relationships in the economy to be achieved (Demsetz, 1998). In this regard, the school of Institutional Economy brings about fairness in the economy by enhancing reciprocal inter-relationships between the individuals in the economy where every individual benefits in the exchange and use of resources (services and goods) (Demsetz, 1998). The second greatest strength of Institutional Economics is that it makes the development of the economic environment orderly. This is achieved through the working rules that determine what the participants in the economy may be allowed to do or not to do. This in turn brings about morality in the way things are done in the economy. For example, through the working rules institutions impose constraints on individuals from discriminating against other people because the collective action may not permit him/her to do so. Similarly, through the working rules the participants in the economy are constrained from engaging in unhealthy business competition that may be detrimental to others (Schmid, 2004). Hence, Institutional Economics makes use of the working rules to ensure that order prevails in an economy by indicating what individuals are allowed to do or not to do in the economy to prevent undue advantage to particular individuals in the economy. Weaknesses of Ecological Economics As compared to Institutional Economics, Ecological Economics suffers from the following shortfalls; Ecological Economics focus mainly on the protection of the environment over economic development. The protection of the environment cannot give people a better life during economic development because people need food, infrastructure and other amenities in order to rise and improve their standards of living (Hodgson, 1998). This means that some segments of forests need to be cleared in order to give room for the expanding population as well as construction of infrastructure such as roads and railway lines to ease transport congestion. Additionally, some marshy land needs to be reclaimed in order to increase the production of food and other products in the economy. Without food and infrastructure, the economy cannot develop and hence focussing mainly on environmental preservation and protection may hinder economic development in the economy. The second weakness of ecological economics is that it agitates for unpopular solutions such as introduction of carbon tax in order to limit the amount of carbon emitted by manufacturers and firms in the economy (Hodgson, 1998). Such unpopular methods increase the costs of living to the citizens in the economy which makes economic development more difficult because large amounts of resources are wasted on paying taxes. Additionally, the transition costs from the old system to the adoption of the new environmental systems such as costs related to the introduction of carbon tax are massive meaning that the burden is shifted to the economy and the citizens or participants in the economy bear this burden (Common and Stagl, 2005). This increases the costs of living and hence delays economic development intended to improve the standards of living. Ways to adapt Institutional Economics into Ecological Economics In order to make Institutional Economics more compatible with Ecological Economics, one of the ways that can be used is to change some of the working rules in order to favour the viewpoints held by the Ecological Economics (Spash, 1999). For example, by decreasing taxes from the institutions in the economy such as Corporations and manufacturing firms, such firms can be able to adopt ecological measures to protect the environment by channelling more resources towards environmental protection and conservation through the use of green production mechanism. The state could promise to give subsidies to institutions that pay attention to ecological requirements. Observing ecological requirements would eventually benefit the institutions (state and the society) as a whole and could help the state and the society to reduce some costs related to environmental degradation and hence institutional economics would be compatible with ecological economics. The second way is that institutional policy can be used to deal with ecological issues with the objective of achieving greater levels of economic development. For instance, if floods displace people or make development impossible in a particular area, institutional policies can be used to preserve the flooding areas and open up another area such as a forest to resettle people and build infrastructural facilities (Martinez-Alier & Ropke, 2008). This would ensure that economic development continues and environmental protection is also observed. Superiority of Instructional Economics Economic development is one of the most anticipated issues by many countries worldwide. Economic development means that people’s standards of living are improved. Improvement in the standards of living means that the health status of individuals improves and thus the lifespan of the citizens also increases (Martinez-Alier & Ropke, 2008). It also means that people have adequate access to educational facilities that is subsidised and made possible through increased allocation of resources towards. Economic development also means that infrastructural facilities such as telecommunication, road, rail, air and water transport are in place or an in the process of development. However, development is one of the economic problems that have been witnessed largely in the world today (Martinez-Alier & Ropke, 2008). This is particularly true in the developing economies where development is either slow or lacks in some parts and therefore the standards of living of people in these economies has continued to dwindle. As stated in the receding section above, Institutional Economics aims at enhancing the economic development by ensuring fairness in the distribution of resources in the economy. The reason for this is that the economic problem of poor development in the developing countries has been contributed largely by unequal distribution of resources in the economy here some parts are more advantaged than others. This results into unequal standards of living. Through the complex interaction of the institutions in the economy such as the state, individuals, organisations, trade associations and trade unions the problem of unequal development due to unequal distribution of resources by the state is solved because institutions such as trade unions are able to monitor the activities of the state to ensure that goods and services exchanged in the economy are to the benefit of the majority of the people in the economy and not just for the benefit of a few segments of the population in the economy (Coase, 1998). The collective action of the institutions which is the key aspect of Institutional Economics plays a major role in forcing the state to adopt development measures that enhance development in the entire economy. Through the working rules such as laws embedded in the constitution the institutions in the economy are able to check how development in the economy is carried out and who befits from the development for the common good of all (Coase, 1998). Additionally, development in the economy has also been a major problem due to poor working conditions advanced by international and local firms that operate in the economy. For example, some international firms openly exploit workers by paying low wages and salaries while banking huge amounts of profits. The Institutional Economics through the collective action aspect advanced by the trade unions and other bodies helps in solving this problem in order to achieve higher levels of development in the economy by empowering consumers with reasonable incomes which trickle down to the economy for development purposes. When trade unions agitate for increase in salaries and wages for the workers, the works (consumers) have more purchase power and this trickles back to the development of the economy. References Berle, A., and Gardner, M. The Modern Corporation and Private Property. New York, NY: Harcourt, Brace and World, 1967. Coase, R. The New Institutional Economics. The American Economic Review, 1998, 88(2): 72-74. Common, M. and Stagl, S. Ecological Economics: An Introduction. New York: Cambridge University Press, 2005. Davis, J. Why Is Economics Not Yet a Pluralistic Science? Post-autistic Economics Review 43: 43-51, 2007. Demsetz, H. Ownership, Control, and the Firm: The Organization of Economic Activity, Vol. 1. Blackwell Publishers, 1998. Hodgson, G. "The Approach of Institutional Economics," Journal of Economic Literature, 36(1), pp. 162-166, 1998. Keaney, M. "Critical Institutionalism: From American Exceptionalism to International Relevance", in Understanding Capitalism: Critical Analysis From Karl Marx to Amartya Sen, ed. Doug Dowd, Pluto Press, 2002. Martinez-Alier, J., Ropke, I. Recent Developments in Ecological Economics, 2 vols., E. Elgar, Cheltenham, UK, 2008. Schmid, A. Conflict and Cooperation: Institutional and Behavioral Economics. Blackwell, 2004. Spash, C. The development of environmental thinking in economics. Environmental Values 8(4): 413-435, 1999. Read More