Cause and effect in a changing economic world

Some things don’t really cross one’s mind too frequently.

For example, just how does Jell-O get that wobbly consistency? Or what if Genghis Khan were a vegetarian?

Similarly, in the United States, we don’t spend much time considering the economic impacts of various institutions.

My macroeconomic upbringing concentrated on discussing taxes, discretionary spending and monetary policy, but little of institutions that are frequently lumped by economists into a terms such as “total factor productivity” or “residual” with little thought.

Institutions don’t necessarily mean only tangible things such as “Congress” and “schools,” but also psychological, social and cultural factors such as “how business is done” – things difficult to put your finger on.

And yet they play huge role in our economy.

Problem is, policies the United States exports to the world make little accommodation for the role institutions play.

Our State Department promotes democracy to countries with no previous experience with democracy: Think Russia, and how some Russians beg to revert to Soviet-style communism.

So it goes with economic policies, too. After the fall of Iron Curtain, many Westerners rejoiced saying it was a victory for free markets.

Legions of economists from any number of institutions fanned out like missionaries preaching the good word.

“Liberalize your markets,” they opined. Not just trade, but also currency and asset markets.

And so went the Washington Consensus, predicated on sophisticated economic models and reams of empirical evidence (at the time). We can see how market liberalization helped Cyprus.

But many forgot or underestimated total factor productivity, institutions, from their calculations, as they’re often difficult to measure.

But institutional influence can be measured. Some are precise, such as “perceived corruption.” Others are more vague, such as “economic freedom.”

As you might imagine, “better” institutions lead to better economic outcomes – something I’ve become acutely aware of as an economic tourist and analyst. No State Department miscalculations here.

Research shows measures of corruption and economic freedom can measure improved trade, income growth and inequality.

Closer to home, we can measure state institutional frictions by economic freedom or “small business” economic perceptions.

With respect to freedom, Colorado was ranked 19th in 2011 down from ninth in 2009.

And small business? Colorado was given an “A” in 2013, in a thumbtack.com/Ewing Marion Kauffman Foundation survey, up from a B+ last year, using a variety of measures. As you might imagine, the lowest score we got is with health and safety.

These measures reflect institutions, and the people who create them. An institution is simply a cooperative manifestation of human beliefs, and these have economic impacts.

However, one inevitably must ask, what is more important: economic outcomes or the institutions that control them?

sonora_t@fortlewis.edu. Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.

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