Why Institutions Matter

In the past two decades of reform and opening up, "system" has been one of the most frequently used words in China's economic and social life. The choice of scholars' English translations of the word "system" can also be seen in the changes in our understanding of the connotation of system. I remember that in the early 1980s, people often used the word "system", and later some people used the word "regime", but nowadays people use the word "institution" the most, of course, because it refers to the system of the economy and social life. "It is the most widely used term nowadays, because it has the widest scope and the richest implications.

The book Institutional Economics: Social Order and Public Policy (published by the Commercial Press in 2001), co-authored by German scholars Wolfgang Kasper and Manfred E. Streit, begins with a series of policy-oriented discussions about the basic premises of human cognition and motivation: for example, the logical foundations of institutions and the importance of institutions. the logical foundations of institutions and the importance of institutions; the institutional arrangements that underlie domestic markets and national trade; the institutional arrangements that underlie the organization of commerce; the functions of government, the relative merits of private and public choices, and the means of controlling the opportunistic use of political power; the reforms that can be implemented in a mature economy that is heavily regulated by the government but that must meet the challenges of new competitors; the problems of the socialist institutional system; and the problems of the socialist institutional system. reforms; the problems of the socialist system of institutions; and the impact of globalization on the development of institutions in the modernization process in Third World countries.

I. The Meaning and Role of Institutions and Order

In the 1980s and 1990s, institutional economics developed into an active and expansive field of study. It focuses on the central role of institutions in driving economic behavior. It is possible to divide the field into two camps: a group of analysts from traditional neoclassical economics and organizational science who emphasize the importance of institutions (and transaction costs) and seek to graft these phenomena onto traditional mainstream economics; and a group to which these two authors belong, who find that the basic assumptions of institutional economics are similar to those of neoclassical welfare economics such as "perfect knowledge" and objective rationality. They therefore painfully purged themselves of their old intellectual capital in order to build a new institutional economics that starts anew from basic assumptions about human values, cognition, and behavior.

The authors' definition of "institutions" is not only quite different from the old institutional economics[1], but also more direct and serious than that of many contemporary mainstream institutional economists. "Institutions are defined here as rules made by people. They inhibit arbitrary and opportunistic behavior that can occur in human interactions. Institutions are * * * owned by a * * * homo sapiens and always depend on some kind of punishment to be carried out. A system without punishment is useless. It is only through the use of punishment that an individual's behavior can become more predictable. Rules with penalties create a degree of order that puts human behavior on a reasonably predictable track". The above statement is condensed into one sentence, that is, "the system refers to a variety of rules with penalties, can have a normative impact on people's behavior".

Our general understanding of the function of institutions is based on Douglas Northey's statement that "the function of institutions is to regulate the behavior of people. North's statement: "Institutions are the rules of the game in society, or more strictly speaking, the constraints designed by human beings to limit people's behavior towards each other ...... In economic terms, institutions define and limit the set of individual decisions" (North, 1990)[2][3]. ) [2]. In contrast, Ke Wugang and Shi Manfei argue that the key function of an institution is to promote order: it is a set of patterns about behaviors and events that are systematic, non-random, and therefore understandable. From the above, it is easy to see the intrinsic connection between the two elaborations above, and it is also easier to understand why the two scholars from Germany (a country with a tradition of strict discipline and order) emphasize more on the centrality of order in institutions.

One of the important functions of institutions is to make complex interpersonal processes more understandable and predictable, so that coordination between different individuals can occur more easily. In discussing why institutions are important, the authors state, "Human interactions depend on some kind of trust. Trust is based on an order, and the maintenance of that order depends on rules that prohibit unforeseen and opportunistic behavior. We call these rules 'institutions'."

The essential characteristic of an effective system is primarily the universality of the system, which means that systems are general and abstract, deterministic and open-ended, and that they can be applied to a myriad of contexts. Universality consists of three criteria: (1) the system should be general; (2) the effective rule must be deterministic in two senses: that is, it must be recognizable (obvious) and it must provide a reliable guide with respect to future circumstances; and (3) the system should be open-ended in order to allow actors to respond to new circumstances through innovative actions (Leoni, 1961).

Order is the repetition of events or behaviors that conform to recognizable patterns. It gives people confidence that future patterns of behavior on which they can rely are fully and reasonably foreseeable. Institutions help promote order. In their book, the authors suggest two ways of establishing order, which they argue can be used to regulate human behavior in its essence: (1) directly by virtue of external authority, which relies on instructions and directives to plan and establish order in order to achieve a ****same goal (organizational or planned order); and (2) indirectly, in a spontaneous and voluntary manner, as various subjects submit to a ****same recognized system ( spontaneous order or unplanned order).

Two, the interaction between public *** policy and institutions

As a theory, institutional economics describes, explains, and predicts the emergence of rules and their effects, and examines, how changing a particular rule will promote or impede certain consequences or classes of consequences. In this respect, institutional economics falls within the realm of empirical science and contributes to economic policy. The systematic application of political instruments by public * * * policy in the pursuit of certain goals usually unfolds within established institutional constraints, but it can also be implemented by efforts to change institutions. Institutional change can be effected either in an explicitly direct way or as a side effect of policy action. Thus institutional economists are generally concerned with the interaction between public ****policy and institutions.

Public **** policy implies the systematic pursuit of certain goals through political and collective means. Public ****policy is not only implemented by governmental subjects (parliaments, politicians, administrative officials), it is also implemented by representatives of organized groups, such as trade unions, trade associations, consumer and welfare extramural groups, bureaucrats, and certain individuals (industry leaders, academics, representatives of publishing houses). Representatives of these groups shape collective action. Collective action involves agreements between more than two partners and often implicitly among millions of people within a given ****sibody.

If discrimination is prohibited and the use of coercive force is not permitted, people must rely on voluntary cooperation with others on a contractual basis. The purpose of private law is to ensure that all citizens have an equal opportunity to act of their own free will, without unnecessary legal restrictions. This is procedural justice, and the only justice that can be guaranteed by the government; justice of result cannot be guaranteed under any circumstances, since opportunity and degree of effort influence the result. In the long run, "social justice" cannot be achieved by government action.

Nor can governments promise absolute material security for all citizens. That would rigidify the entire economic system, and would lead to a proliferation of moral hazard and idleness. The costs of such a government commitment can only be shared collectively and anonymously through taxation, while the benefits of material security are enjoyed by individuals. This creates an asymmetry that will generate an unfettered and unending demand for more and more of society's supply of security.

Three: Two Views of Order and Public **** Policy Options

The individualist worldview holds that individual motivation is the basis of all social behavior and the point of reference for the study of social phenomena. Individualists recognize that an individual's behavior has side effects on others, which requires the existence of a system of rules that act as constraints in society. Individualists generally prefer rule systems that protect the realm of freedom and allow for spontaneous coordination.

Collectivists view society as a whole, and they believe that the society or collective is greater than the sum of all the individuals that make it up at any point in time. They assume that social truths and overarching interests are recognizable and acceptable, and that some statutory structure of authority can be established to look after those interests.

Individualism usually prefers coordination achieved by voluntary transactions in a framework of rules, whereas collectivists tend to rely on centralized command by plans and orders. Additionally when examined on a philosophical level, there are two other basic behavioral attitudes that people use in interaction and cooperation: egoism and altruism. Egoism prioritizes self-interest, while altruism prioritizes particular others.

In mainland China in the second half of the twentieth century, those in power and their ideological guardians often equated individualism with egoism, and claimed that collectivism had a higher moral status because collectivists were assumed to be altruists who had eliminated or gotten rid of selfishness, and whose goals were no longer their own personal interests but those of the collectivity or others. Through observation of political movements, historical events, and the reality of everyday life, it has been found that such assumptions are often divorced from reality, and that egoists who form a particular group under the banner of "collectivism" play a large role in creating discrimination and victimization of outsiders (i.e., dissidents outside the group).

All in all, the exploration of institutional origins and evolution, as well as the related comparative institutional analysis, can help us to understand and recognize the social and institutional environments in which we lived in the past and today in a more rational way. For China and its people in a period of gradual institutional change, the practical and historical significance of institutional progress is no less than that of technological progress and productivity improvement.

In the meantime, check out the relevant books.

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