(Markets, Institutions and Economic Growth)

Harry M. Makler
September - December, 1994
Department of Economics


Markets are embedded in and are shaped by institutions. All human activity is bounded by institutions. Nobel Laurel Douglass North claims that "Institutions are the rules of the game in a society...they are the humanly devised constraints that shape human interaction...and consequently they structure incentives in human exchange, whether political, social, or economic". We cannot fully understand markets and their operations without understanding the institutions that permit, shape and bound their activities. But we must also learn how markets, in turn, shape institutions. Toward these ends, we will compare the role of economic, political and social institutions not only as products but as agents of economic growth among countries in the Americas, Asia and Europe that are facing or have faced the challenges of domestic and international markets.

Our aim is to encourage novel ways of thinking about various forms of capitalism through the study of the relations among markets, institutions and economic growth as a step toward the clarification of public policy choices. To accomplish this objective we will identify institutions and different forms of economic organizations that make a difference in national and regional development. This includes banking and manufacturing, the state, ideologies, social groups and networks, and new regional markets (EEC, NAFTA, MERCOSUR). To mention a few examples:

- Capitalism in Asia's Taiwan and Singapore is based on highly flexible family networks whose production and commodity chains are spreading throughout China and into Russia. South Korea's development is shaped by the state and managed by prominent families whose large industrially based groups (chaebol) dominate the country's key sectors and are now vigorously competing with Japan and Germany for the markets and resources of Eastern and Central Europe.

- In Latin America, Brazilian capitalism is shared by the state and by powerful financially based family groups who have mainly clustered in banks and other financial institutions in order to pursue profits through financial speculation rather than sustained industrial investment. a

- Russian and Central and Eastern European capitalism is increasingly based on friendship networks and autocracies whose current business transactions and contracting with other networks often require intermediation by third parties until trust and a normative system is developed and is shared.

- In the United States financial liberalization and banking reform is being advocated to allow banks to spread nation-wide and into other industries to gather the tremendous savings that American manufacturing so urgently requires to meet the challenges of global competition. In the early decades of this century a regulatory environment was imposed that resulted in the ascendancy of financiers to the helms of America's major corporations and heralded an epoch of market and product diversification whose hemispheric spread is threatened by sub-regional compacts.

We will begin our excursion by defining some key concepts, comparing the "health" of the world's nations and regions, and then we will briefly examine the l9th century to examine how legal institutions and markets contributed to invention and technology that sparked America's growth, and how the ideologies of entrepreneurs and management in Russia and the West affected the form and pace of industrialization.

INTRODUCTION: Some Basic Concepts

1. Course Overview and Basic Concepts (Week 1)

Purpose, organization and requirements of the course, and definitions of basic concepts as viewed by economists and sociologists.

Douglass C. North, Institutions, Institutional Change and Economic Performance, 3-10, 107-117. .
Walter W. Powell and Paul J. DiMaggio (eds.), The New Institutionalism in Orqanizational Analysis, 1-33.
Ronald L. Jepperson, "Institutions, Institutional Effects and Institutionalism," in The New Institutionalism in Organizational Analysis, 143-159.

2. Country Comparisons (Week 2)

Changes in the economic and social well-being of selected low, middle and high income countries in the global economy and within selected regions will be compared.

World Bank, World Development Report,1991,1-51.

3. Inventions, Law and Markets (Week 3)

One of the keys to American economic success was high rates of invention. Invention allowed the United States to stay ahead in the international productivity race in the nineteenth century through progressive patent laws and a modern patent office (institutions), and the extension of markets.

Kenneth L. Sokoloff, "Inventive Activity in Early Industrial America: Evidence from Patent Records, 1790-1846," Journal of Economic History, 58:4 (1988).
Kenneth L. Sokoloff and B. Zorina Khan, "The Democratization of Invention During Early Industrialization: Evidence from the United States, 1790-1846," Journal of Economic History, 50:2 (1990).

4. Ideologies and the Production of Trust (Week 4)

Real markets can only emerge and industrialization can only be forged after mechanisms of trust production are socially legitimated. This legitimation is influenced by such socioeconomic factors as high rates of immigration, internal migration and business instability that currently characterize countries in the CIS, Central and Eastern Europe. Examples of trust production are the ideological appeals of entrepreneurs and managers to workers in l9th century England and Russia.

Douglass C. North, Institutions..., 11-16.
Lynne G. Zucker, "Production of Trust: Institutional Sources of Economic Structure, 1840-1920," Barry M. Staw and L.L. Cummings (eds.), Research in Organizational Behavior, 8 (1986).
Reinhard Bendix, Work and Authority in Industry: Ideologies of Management in the Course of Industrialization..
Albert O. Hirschman, "Ideologies of Economic Development in Latin America", "Obstacles to Development: A Classification and a Quasi-Vanishing Act", and "Underdevelopment: Obstacles to the Perception of Change" in Albert O. Hirschman, A Bias For Hope

5. Organization, Law and Economic Growth (Week 5)

A comparison of the development of the German and American steel industry development will illustrate how laws bound the activities of firms and markets, and a focus on American corporations will show how government policy inadvertently resulted in vertical integration, unrelated product diversification and mergers that enabled managers of the largest enterprises to achieve rapid growth and to control the market.

Jeffrey Fear, "German Corporate Law and Organizational Innovation." Business History Review, forthcoming
Neil Fligstein, "Structural Change in Corporate Organization," Annual Review of Sociology, 1989: 15:73-96.

6. The State, The Private Sector and the Economy (Week 6 and 7)

Comparisons among countries in Asia ("The Four Tigers"), Europe (U.K.) and Latin America will provide fine illustrations of the relations between the state and the private sector in the creation of markets and technology.

Peter B. Evans, "State, Capital, and the Transformation of Dependence: The Brazilian Computer Case," World Development,14(7)
Denis F. Simon, "Taiwan's Emerging Technological Trajectory: Creating New Forms of Competitive Advantage," in Denis F. Simon and Michael Y.M. Kau (eds.), Taiwan: Beyond the Economic Miracle.
John Zysman, Governments, Markets and Growth: Financial Systems and Politics of Industrial Change, Chapters 1,2,5.

7. Principal Business Institutions Among Emerging Nations: Groups and Networks

A. South Korea's Chaebol, Japan's Keiretsu (Week 8)

Why do large business family and/or friendship groups continue to characterize, if not dominate, the Japanese and Korean economies and what affect does this have on the markets and growth of these countries?

Marco Orru, Nicole Biggart and Gary Hamilton, "Organizational Isomorphism in East Asia," in W.W. Powell and Paul DiMaggio (eds.), The New Institutionalism in Organizational Analysis
Gary G. Hamilton and Nicole W. Biggart, "Market, Culture, and Authority: a Comparative Analysis of Management and Organization in the Far East," American Journal of Sociology, 94 (Supplement)
Gary Gereffi and Donald Wyman (eds.), Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia
Paul Sheard, "Keiretsu and the Closedness of the Japanese Market: An Economic Appraisal," Australian National University and Institute of Social and Economic Research, Osaka University, June 1992.

B. American, Brazilian and Mexican Financial Institutions (Week 9)

Why is their an affinity between family control of private financial institutions in Brazil and Mexico today and the United States at the beginnings of its industrialization? What are the implications of this structure for investment, markets and economic growth? What challenges do sub-regional compacts pose for free trade zone 5

Stephen Haber, "Industrial Concentration and the Capital Markets A,A Comparative Study of Brazil, Mexico, and the United States, 1840-1940," Journal of Economic History, 51:3 (1991).
Naomi R. Lamoreaux, "Banks, Kinship, and Economic Development: The New England Case," Journal of Economic History 7,54,:3: (1986)
Harry M. Makler, "Brazilian Financial Conglomerates: Family Capitalism, Diversification and Implications for Hemispheric Integration," Universidad Nacional Autonoma de Mexico and Universidad Autonoma Metropolitana, 1994.

C. Singapore's and Taiwan's Guanxiqiye (Week 10)

In comparison to South Korea and Japan, Singapore and Taiwanese business groups, even when appearing to be large, are small, personalistic, closely-knit kinship or family group who formally convene to conduct business or address markets and then disband. To what extent does this type of business organization account for these smaller countries great and sustained GNP?

Tong Chee Kiong, "Centripetal Authority, Differentiated Networks: The Social Organization of Chinese Firms in Singapore," in Gary Hamilton (ed.), Business Networks and Economic Development in East and Southeast Asla.
Susan Greenhalgh, "Families and Networks in Taiwan's Economic development," in Edwin A. Winckler and Susan Greenlaugh (eds.), Contending Approaches to the Political Development of Taiwan.
Gary H. Hamilton, "Patterns of Asian Capitalism: The Cases of Taiwan and South Korea," Institute of Government Affairs, Univ. of California, Davis.

8. Review (Week 11) - Once we complete the discussion of the materials in Week 10 we will begin the review of the course materials.

9. Final Examination (Week 12) - Final in-class examination.

Course Requirements

The course will meet twice a week for 1 1/2 hours. Course sessions will combine a lecture and seminar during which course participants will be prepared to discuss, critically comment on the readings, and will also make scheduled presentations to the class on topics arranged with the instructor (10% of your final grade). Students will prepare and submit an outline for a 10 page paper (50% of your final grade). An in-class final examination (40% of your final grade) is also required and is scheduled for the last meeting of the course.

Books relating to this course have been placed on reserve in the library and a course reader containing the required readings will be available. Any assigned readings not found in the reader will be on reserve in the library.

Other readings relevant to the course can be found in such journals as: Economic Development and Cultural Change, Journal of Developing Areas, Journal of Development Studies, Journal of Inter-American Affairs, Comparative Studies in Society and History, Journal of Economic History, Temps Modernes, World Development, and International Organization.

CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996


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