No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 242 take down the pine trim and replace with mahogany (much more expensive) unless I had specifically asked for that in the beginning. So most businesses guarantee their work or product for suitability for some period of time, either explicitly or implicitly. If you could not count on people to routinely stand by their work, then you’d have to put much more attention into inspecting the results (and possibly pay an outside inspector). You’d also have to spend more time selecting a product/service in the first place and put detailed performance standards in the statement of work, which of course carries an increased opportunity cost. Contracts are a formal institution and are critical for economic success, but informal agreements based on trust and reciprocity constitute the bulk of all agreements. So institutions that help facilitate trust and honesty are critical for economic success. A nation that has a vibrant church system that encourages its members to be both honest and industrious will tend to reduce the costs for everyone, since you can count on someone you hire to be both honest and hardworking. Max Weber, an economic sociologist in the late 19th and early 20th centuries, highlighted the importance of the protestant reformation on economic growth. His thesis was that the puritan work ethic that focused on calling in the workplace and thrift was instrumental to growth in the western world. There are legitimate criticisms of his work, but we certainly see that cultures that are future-oriented, willing to work hard, and save and invest do better than those that do not. The bottom line is that we have voluminous formal and informal institutions, most of which can provide positive or negative benefits to the economy. The more closely a nation’s institutions align with biblical principles, the better the economic performance. As we examined the role of the entrepreneur, we find that entrepreneurial opportunities are in large part determined by the quality of the institutions in a society. A society that rewards hard work and thrift will have more entrepreneurship. A society that does not protect private property rights, for example, will see less entrepreneurship. A society that rewards legal plunder through political processes (called rent seeking by economists) will see more political entrepreneurship. Our understanding of the entrepreneurial market process must begin by understanding the institutional foundation, and any proposed change in the formal institutions must consider the impact to entrepreneurial incentives. IT’S A WRAP! By now you should at least have an appreciation of how foundational institutions are to economic performance. After property rights, perhaps the most important social market institution is money. Money is important because it’s ubiquitous—it’s everywhere! Money is on one side of every transaction. So if money gets messed up, we can have really big economic problems. And unfortunately, it does get messed up—all too often. We’ll spend the next two chapters examining this very important economic institution: money.