Political Institutions And Their Effect On Economic Policy Essays

Political Institutions And Their Effect On Economic Policy ESSAY: Political Institutions and their Effect on Economic Policy Laura Lynn Wantz Political Science 182 Section #28 November 30, 2000 Imagine, if you will, a country with no political institutions. A country ruled by anarchy. What kind of economic policy would this country have or would it have one at all? Now imagine a country with highly powerful and regimented political institutions. What kind of economic policy would this country have? The two fictitious countries mentioned above would certainly have very different economic policies. The first would probably be lucky to even have an economic policy at all. Its citizens would live in a world of economic uncertainty, never knowing what their future may hold. On the other hand, the citizens of the second country, although possibly unhappy with their ruler, would at least have a pretty good idea of their economic future. These citizens would be able to place their money in banks and exchange it in international markets. They could save for their future without the fear of having everything taken from them at any given moment. What is it though that makes the economic policies of these countries so different? While there are clearly many factors that affect a country's economic policy, in this paper I would like to argue that the most important one is the presence or lack of strong political institutions. In the beginning large nations or political states did not exist. The law of the land was every man for himself. As time went on small bands of people began to form. In the beginning membership in such groups was voluntary, but those who joined soon learned of the benefits of cooperation. With time these bands became larger and larger and it was apparent that some groups were stronger than others. The strongest of these groups became what is known as roving bandits. (Olson 1993,568). If the roving bandits can be seen as the first form of political institution then the economic policy they enforced was one of chaos. They ravaged the countrysides taking whatever they felt they needed or wanted without any regard as to what would be left over for the next time they came through. As these roving bandits progressed they realized that if they were to settle in one area they could easily increase their profits. The gigantic increase in output that normally arises from the provision of a peaceful order and other public goods gives the stationary bandit a far larger take than he could obtain without providing government. (Ibid). The formation of governments and political institutions by roving bandits led to great economic policy changes. No longer playing the role of bandits these newly formed governments ditched their policy of taking what ever they could get their hands on and replaced it with a system of taking as much as they could without economically destroying their subjects. With the use of political institutions, such as, tax collectors the now stationary bandits were able to enforce a new economic policy. So, one could say that through the establishment of political institutions the bandits were able to completely transform their economic policy. Obviously, transitioning from a complete lack of political institutions to a system based in institutions is going to change economic policy, but in today's world there are very few places, if any, that completely lack political institutions. Interestingly enough not only is economic policy linked to the presence of political institutions it is also dependent upon the strength of each. Over the last couple of centuries the industrialized world has put into place thousands of political institutions. The state has become the most basic unit of political power. Through these institutions countries have been able to build national banks, stock markets, and economic tools such as the Federal Reserve. Through these institutions governments have been able to control the flow and value of their money. As history also tells us the most successful of these countries have been those whose political institutions are stable, predictable, and strong. The political institutions in these countries have been able to implement economic policies on a broad scale. From the socialism of Norway to the capitalism of the United States the point is that these policies would not have been possible without the presence of strong political institutions. The best way to prove this point, though, would have to be to ponder the question of what would happen to the economic policies of these countries if their institutions were to be weakened considerably? It may seem logical to prove that the strength of political institutions is directly related to economic policy by citing examples of