Lecture 6. The Emergence of Institutions
Recommended reading : 【Economic History】 Economic History Table of Contents
1. Overview
2. Case 1. Slavery and Serfdom
3. Case 2. The Guild System
4. Case 3. Sharecropping Contracts
5. Case 4. Scandinavian Dairy Cooperatives
1. Overview
⑴ Institutions : the rules of the game
① Forces that sustain institutions : law, members’ consent, coercive power of privileged groups
② Informal institutions : trust, commitment
③ Formal institutions : limited-liability companies, etc.
⑵ A yardstick for institutional efficiency
⑶ Positive aspects of institutions
① Because institutions are public goods, they can contribute to improving a society’s productivity
② Example 1. Money and banking
③ Example 2. The welfare state : resolves potential market failures in private insurance and capital markets
③ Example 3. Private property rights : addresses the inefficiency of communal property rights—i.e., the tragedy of the commons
⑷ Negative aspects of institutions
① Path dependence : the idea that historical context has shaped today’s institutions
② Due to path dependence, irrational institutions can continue to persist
2. Case 1. Slavery and Serfdom — focusing on serfdom
⑴ The emergence of serfdom : proposed by Evsey Domar
① Serfdom was concentrated in the centuries before and after the year 1000
○ Serfdom emerged because land was abundant and labor was scarce
○ When land is abundant, land rent converges to zero unless workers’ freedom of movement is denied
○ (Note) This is somewhat similar to profits being zero for price-takers under perfect competition
○ With abundant land, a way to deny or restrict workers’ mobility was serfdom
② (Reference) Conditions for the emergence of serfdom
○ Labor scarcity
○ A small and declining class of independent peasants
○ High concentration of land in the hands of the Church and secular elites
○ Low level of urbanization
○ Close networks between the Church and secular landlords
○ A state that cooperates with the aristocracy
③ In most of Western Europe, serfdom was voluntarily dissolved in the centuries before the Black Death
○ Serfdom was abolished because land became scarce and labor became abundant
○ There had been uninterrupted population growth over several centuries
○ Landlords could rely on market power, rather than restricting individual rights through command, to extract rents from labor
○ (Note) Relying on market power can secure higher profits
④ Critique 1. Under labor scarcity, nobles could not establish dominance over peasants
○ Under labor scarcity, peasants’ rights over labor increase
○ It does not explain how a monopsonistic cartel could be maintained for so long when labor was scarce (such cartels are hard to sustain)
⑤ Critique 2. Historically, the chronology of serfdom’s emergence and decline varied widely
○ Serfdom emerged only after a considerable time had passed since the fall of the Roman Empire
○ There were multiple peasant uprisings
○ Even when coercive elements of serfdom intensified, nobles sometimes yielded to market pressures
○ Even within small areas, landlords’ coercive power differed greatly
○ Not only serfdom, but various contracts coexisted
○ In England, until the late 13th century, about 1/4 of land was under serf tenure; the other 1/4 and 1/2 were freehold land and tenant land, respectively
○ Sweden and Denmark, with strong peasant self-reliance, did not introduce serfdom
⑥ Supplement 1. Path dependence of institutions
○ Serfdom emerged due to contingent initial conditions
○ Because the pressure for change was not large, serfdom persisted steadily
⑦ Supplement 2. After the Black Death, lords competed to secure scarce labor, but serfdom could not revive due to urban growth
○ Europe was largely a closed village system, but cities served as enclaves of freedom
○ Cities became safe havens for runaway serfs or tenants
⑵ Serfdom and slavery are inefficient institutions, but survived through institutional path dependence
① Why serfdom and slavery are inefficient : shirking and high monitoring costs
② When one works on one’s own land, shirking and monitoring costs do not arise
③ A landlord’s threat to expel a farmer for poor performance is not credible, so farmers have substantial incentives to shirk
④ Monitoring costs themselves can exceed the surplus value extracted as rent
3. Case 2. The Guild System
⑴ Monopolistic competition and monopoly firms
① Monopolistic competition is positive
○ Because monopolistic competition creates products specialized for particular groups (e.g., luxury goods), earning additional profit is not ethically problematic
○ Example: large firms such as Samsung and LG deter competitors’ market entry with distinctive technological capabilities
② Monopoly firms are negative
○ Because monopoly firms can abuse their dominant positions, they should be restricted through antitrust law
⑵ Guilds and perfect competition
① Without guilds, the market would become perfectly competitive, undermining incentives for technological development
② Historically, the number of market participants was much smaller, so markets were far from perfect competition
4. Case 3. Sharecropping Contracts
⑴ (Reference) Partnership contracts
① Limited-liability companies : investors are not responsible for losses or debts beyond what is accumulated within the company represented by the shares they own
② Unlimited-liability companies : investors bear larger risks, which limits the amount of capital that can be raised
⑵ Sharecropping is an inefficient institution
① (Reference) Under a fixed-rent contract : once the tenant pays the fixed rent, they can keep all output
② Under a sharecropping contract : because the sharecropper receives only a fraction of the marginal product, the incentive to work is reduced○ In other words, sharecropping tends to induce underinvestment in labor input
③ In general, sharecropping contracts were the prevailing practice
⑵ Explanation 1. Sharecropping existed because it reduced tenants’ risk in bad harvest years
① This explanation is not persuasive because it was customary to defer rent until the tenant had a good harvest
⑶ Explanation 2. The output-reducing effect of sharecropping prevents tenants from excessively exploiting the land and degrading soil quality
① This is based on the idea that landlords would suffer in the long run if land became barren
② This is only valid when tenants have short-term contracts
③ In practice, tenants often acquired inheritance rights to leases, so this explanation is not persuasive
⑷ Explanation 3. Institutional path dependence
① Initial conditions favored the formation of sharecropping contracts
② Afterwards, pressure to shift to fixed-rent contracts was not strong, and there were costs to changing the system, so sharecropping persisted
5. Case 4. Scandinavian Dairy Cooperatives
⑴ Historical background : Scandinavian dairy cooperatives emerged in the late 19th to early 20th century
Table 1. Number of cooperative dairy processing plants and privately owned dairy processing plants]
⑵ Why dairy cooperatives emerged in Scandinavia
① Reason 1. Milk is perishable, so suppliers needed sufficient scale to manage that risk
② Reason 2. Attempts to damage milk quality occurred continuously, but there was no established way to standardize quality○ A large, well-funded organization was needed to develop technology to standardize milk quality
○ A trustworthy organization was needed to create reliable quality labels for milk
⑶ Scandinavian dairy cooperatives were an inefficient institution : they were a system of horizontal integration
① Reason : In the late 19th century, there were not many farmers willing to sell their dairy assets and run farms
② This can be explained as an inefficient institution that survived for a long time due to path dependence
Entered: 2020.07.18 09:25