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What Are Economic Institutions?

By Kenneth W. Michael Wills
Updated May 16, 2024
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Generally, there are two ways to define economic institutions, depending on the context in which the term is used. First, it is thought of as an organization, whether public or private, that engages in the collection and research of economic data or that provides a service or product deemed economically central to a nation’s economy. Examples include national economic bureaus, tax collection agencies or university departments dedicated to economic research. These institutions are also considered foundational structures or organizations in society that are inherent to the economic system or culture, such as the banking systems, investment markets or even a custom, such as providing children with a weekly allowance.

Important to understanding what is meant by economic institutions and central to the role they play in the development, functioning, and sustainability of an economy is the meaning of the term “institution” itself. There are a variety of attempts historically and presently to accurately define the term, usually integrating a variety of elements like that it has embedded social rules and interactions, social behavior agreed upon by members in a society that is either self-governed or governed by outside authorities, rules and enforcement, patterns of interactions consistently repeated, and norms of behaviors assigned value to achieve outcomes or expectations. Evident in the common elements is the themes of both formal and informal regulation as well as legal formalities that dictate actions within the larger society. Defining the word is this manner distinguishes it from other related terms, such as organization.

Therefore, an accurate portrayal of economic institutions is constitutional in nature and defines how an economy is allowed to develop and function to achieve sustainability and growth. Typically, there are three main functions of these institutions: determining and safeguarding property rights, enabling and facilitating transactions, and allowing the economic participants to organize and co-operate.

The development of economic institutions happens at many different levels in society, and one usually forms either formally and informally. National governments may establish formal ones that help guide economic decisions and policy. On the other hand, one may arise out of natural reactions within the economy. For example, banking systems evolved to help facilitate transactions and to provide capital to spur growth and create new wealth. Of the various roles these institutions play, however, the most important seems to point to bringing a measure of predictability to an economy, often hardening those institutions against change, despite evidence of outdated practices.

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Discussion Comments
By ddljohn — On Feb 04, 2015

There have been a rise in the number of private, non-for-profit economic organizations in the US. They do research and look for ways to both improve the economy and standards of living for workers. They're interested in job creation, fair competition in economic markets and just more prosperity in general.

I would actually like to see government economic institutions working with some of these smaller research organizations. I think they have some very bright ideas and it can do a lot for our economic policies as a nation.

By burcinc — On Feb 04, 2015

@ysmina-- That depends on the type of institution. If the institution is a part of the federal government, like the Federal Reserve Bank, it just implements economic policy. Although the research and data collected by the bank is used by the government to make decisions on economic policies. They can give advice and also make some decisions in line with the general economic policy of the country.

It's actually not a good idea for economic institutions in countries with free market economies to be controlled to much by the government. There are some countries in the world where central federal banks, an essential economic institution, is supposed to be autonomous but is not really.

In many developing nations for example, the government administration will force the central bank to take certain decisions even though they don't want to. Central banks always try to do whats best for the economy. Sometimes this may mean leaving interest rates high for example. But the government in some places forces interest rates to be reduced or for currency to be printed into the economy. These decisions may save the day but will cause more problems in the long term.

By ysmina — On Feb 03, 2015

Do economic institutions have a say in economic policies in a country? Or do they just do as they are told?

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