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Institutional Economics Institutions - rulet of the game that not moral not internal, certain rules with external sanctions, certain organizations Institution as a variable – institutions may differ. Institutional system – set of institutions which in some way affect behavior or actions. These institution systems are influencing standard of living. What else affects standards of living? - Natural resources (resource scare, dutch desis – your currency is to strong, resources are to important for economy, it’s hard for productions, to much money for the government,) Natural resources are not indispensable. - Location – difficulties in transportation, in china coasts developed faster, Silicon Valley, people have to move to better places, if mobility is hampered it is bad. - Productive actions – innovations, North and South Korea. West and East Germany. Poland – Spain. There is no one good example of socialism. Gold standard – hyperinflation was impossible, debase money (reduce amount of gold in money) – inflation 3-4% per year. Now, there are no physical limits. French revolution – huge inflation. What is the solution? - Dipolitisation of money – you take the power from the politicians. o You may introduce a currency from another country. Panama – dollar, Montenegro – Euro. o Currency boat – you can copy the exchange rate to another currency. o Currency union – one bank many countries. Independent central bank is dangerous but it is still the best idea. - Structure o Informal institution (family, friends) o Formal institution (state institutions, laws, legal firms) Informal institutions were most popular in the past as a form of governing power. Modern system – formal institution. Mafia is similar to the government. Formal institutions: - Legal framework (law; criminal law – defines certain actions as crimes, how repressive it is, crimes against the state(start your own company, print a newspaper) ) Types of organizations: KGB – political police, Mass coordination: - Market – mass and regular transactions (if you have enough freedom) Karl Marx - Corporatism – gilds – Consequences and causes of the welfare state Government expenditure as one of the measures of the government intervention in the economy. There is no more fundamental thing for the economy than the role the government plays in it. There are many ways to measure the role of the government in the market: - Index – Fraser Institute Index - Ownership - Intervention Definitions There are two main industrial structures of public finance: - The general government sector consists of all government units and all nonmarket nonprofit institutions that are controlled and mainly financed by government units Definitions - Budgetary central government - Non-budgetary funds (social security funds) - Local government 50% Budgetary central government 100% General government 700 bilion zł – expenditures of polish government - So-called tax expenditures – 66 bilion złotych - In nominal or real terms - Corruption and informal sector - In absolute or relative terms Good deflators - rational deflators – let say you produce computers in one year you produce 10 computers, for 10 dollars, next year you produce 15 computer for 12 per unit. General government expenditure in developed countries in a historical perspective (% of GDP) Definitions Welfare state = social expenditure Social expenditure = social transfers = social protection, health and education Social protection = old-age pensions + invalidity pensions… Why is this so interesting? Social expenditure responsible for the differences in the government expenditure. Consequences: Social expenditures influences growth. Rahn Curve 1 Explaining the Impact on Growth - Inefficiency of government in providing goods and services (government intervention in these markets) - Redistributive aspects of government activity (secondary distribution) o It discourages good behavior – labor and work, if you don’t have any incentives you won’t go to work. It encourages just to get those privileges. Rent seeking – is start to made some actions to receive help from the government. o Some parties are not encouraged to pay taxes o disincentive for saving if you are getting medicine and pension for you. - The nature of financing social expenditure (the other side of the two above mentioned factors) all benefits have to be financed by taxes, 1) Structure: -the legal framework - the system of organization - the mode of coordination 2) Dimensions - Political system (all the institution, execution of political power, organizations of political power, electoral law) - Economic system (institution that strongly influence economic behavior, earning money, saving, choosing your job, property rights, various types of enterprises ) - Civil society (3rd sector, neither the state nor enterprises, workers are important they organize, freedom of association, pressure groups; ideological and lobbyist(they are want to get protection and subsidies, more anti competitive laws, anti-state groups), ) What organization is indispensible for the state: - Police without police there is no state Government – has monopoly in physical protection. There is a lot of private contractors in army. Essence of communism is no private ownership and private business. You need a lot of police to do that. Subsidies always require more taxes or capital. Property rights - Controller rights (the right to fire something) - Cash flow rights (you have right to obtain something) What is characteristic for government owned companies: controller rights (government workers,). It is not part of competitive markets. There are no incentives. If there are financial incentives this is bribery. They don’t care how much money will be paid to the government. White elephant – prestigious projects that don’t make any profits but they are very prestigious for the government. Conclusion: avoid state ownership – there is no incentive. Concentration of political power is dangerous. Nomenclature principle – they are not chosen by members, they are nominated. The main dimension of political system – the concentration of political power, how repressive is the system, the extend of political power (this includes whether private property is allowed). Rule of law – refers to how the law acts, does the state acts mostly through law or through political police, if the state acts through political police, Two concepts of the rule of law: - Procedural (if the law is such that allows people to plan their life their actions, the law is not chaotic, the law should not be retroactive; you should not be punished on your acts, police is used against the law) - Substantive: Clarity and consistency (law should not require something that is impossible, quality of the law, modern notion of the rules of law ) Those two have to be fulfilled for the law to be good. Procedural features are important but not sufficient; nobody should be over the law, people should be equal to the law. There will be some individual dose. Political succession – how do people in the government change, There are 4 mechanisms of political succession: - Hereditary (king to son, examples: Saudi Arabia, Cuba, Syria) - Monopolistic organization: Organization has monopoly of power you have two types of organizations that have power in a country: party state ( you create an organization, you have a dual state, they exercise power, ministries, various commissions, ultimate power is in with the party) army (competition within an army, huntas, cliques, ) - Chaotic – chaotic succession, one time army one time party, always changes - Elections – political competitions, pluralism, you have to be able to organize party groups. General elections require certain democratic things: personal security, access to mass media, parties are allowed. There are two groups: - Nondemocratic: Hereditary, Monopolistic organization, Chaotic - Democratic: Elections Theory of rational voter – self interested, what impact would it make if I would vote; it won’t change anything, People vote because of moral obligations. Economy: Socialism – monopoly of the state ownership, you have two types of economic system, what are feasible D- Democracy C- Capitalism S- social economy – monopoly of state ownership Non-D – non-democracy 1) D, C - may exist 2) D, S – there is any. 3) Non-D, C - may exist; north Korea some years ago, China makes a transition to this, XIX century systems – UK, 4) Non-D, S – possible D,S - People would have to vote for the abolishment of private ownership. People should be allowed to travel, they would see better life but they would still vote for private ownership. You can not maintain democracy with socialism. Quazi socialists, mixed systems – they are full of problems, lots of foreigners. Capitalism: 1)dominance of private ownership (largest privatization- Italy, France, Britain, ) - structure (crony capitalization – family of president, concessions, extra protection, exploit other people, courts are not independent, you cannot compete. Free market – entrepreneur capitalism. - level of protection (you can have laws but you need protection, sometime the level of protection is negative, predatory states, fade states (the state is not a protector, the state officials are robbing you) Dominicana vs. Haiti. 2)extent types of regulations, labor regulations, minimum wages, there are some regulations which are clearly detrimental - anticompetitive regulations, regulations which limit flexibility of a market (Spain vs. Britain, France – high minimum wage, low skilled people are not employed) Hysteresis – the longer you are unemployed the harder it is for you to get a job. Poorer countries have more harmful regulations – they are poor because of that. You have developed countries, you have to sectors in Japan, one productive one not, Japan wanted to restrict production of cars and consumer electronics – now it is good, services are very poor, in services you don’t have competition, low effectiveness. 3) Monetary and Rate of Exchange, Two monetary systems: based on gold and fiat money(money supply and inflation). If you are under gold standard you cannot print money. Hyper inflation. There are 22 ways in which moderate inflation can harm the economy. Fiat money cannot be protected in any way. Politicians may be affreid of introducing taxes so they use hidden taxes – inflation. Independent central bank – is the answer, you need professionalists. You import other countries money - dollars and euro. Third you enter monetary union. Forth – currency board – you nominally preserve your currency, but money supply depends on other money. Central banks from times to time made huge mistakes. Summing up: you have to kinds of money fiat and gold or silver based. You moved to central banks. They made mistakes. There is no perfect solution. 4)The size of the government, what is the budgetary spending relatively to GDP, spending -> taxes GDP, over...
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