Factors That Affect The Decision Making Of Economic Agents Essay

Factors That Affect The Decision Making Of Economic Agents Essay

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Institutions (often defined to be anything which affect the decision making of economic agents) are seen to be of paramount importance for an economy looking to achieve sustained economic growth. According to North (1991, p.6), a major role of institutions is to “reduce uncertainty by establishing a stable structure to human interaction.” This is important as it encourages economic agents to partake in socially productive activities such as investing and trading. It is widely accepted that these are needed for sustained economic growth. In particular, good institutions can be seen in the form of, but aren’t limited to, intellectual property rights and good governance. They can enhance the benefits accrued by countries endowed with favourable factor endowments. Examples of regions that have experienced sustained economic growth due to these are Britain and the USA.

Britain benefitted significantly from the presence of intellectual property rights, which came to existence as a result of ‘The Glorious Revolution”. Following the revolution, a Parliament with enforcement rights was born. Prior to the revolution, the Crown had full control over the economy. According to North and Weingast (1989, p.812), the Crown often expropriated the wealth of citizens, be it via the seizing of goods or by reducing “settled industries to monopolies under cover of technical improvements.” (W. Price (1906), cited by North and Weingast (1989, p.819)). Expanding on the latter, the Crown would award patents to firms for minor technological improvements, driving other firms in the industry out of the market. The grant of monopoly acted as a tax and thus, decreased the potential profit to be received from investment. People were adverse to the idea of inno...

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... US was a leading producer of many minerals in the early 20th century. This is not a coincidence. Rather, this is down to the governance of the state. The state did not lay claim to any minerals discovered. Instead, it gave full ownership to those who founded the deposit. This encouraged people to search for deposits (hence why they worked together). In addition, the state funded geological surveys whilst also supporting findings and distributing them to others. David and Wright (1997, pg. 224) argue that this was a “critical part” in the success of the development of the American mineral industry. The collective learning institution allowed the US to benefit significantly from their favourable factor endowments. The success may not have been as significant if firms kept their secrets to themselves or if the state demanded a cut of any deposits that were discovered.

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