Economic decision making belongs on several different factors and two of the most important ones are institutions and history. This article analyses the ways institutions and history affect economic decision making.
Institutions and Economic Decision Making
Institutions and history may affect the economic decision making in different ways. The individuals consider their benefits, their economical situation and the conditions of the country while making their decisions. History and institutions affect these factors and thus they have an effect on the economic decision making of the individuals. Now, I will firstly analyze institutions and later history in terms of affecting decision making.
When the individuals decide on making economic decisions, the first thing that they consider is the budget that they need to work with. Even if the individual is very wealthy, he should consider his budget while doing an economic operation as no one has unlimited amount of money. The capital that the individual has is a very important constraint in making economic decisions because the expenditures cannot exceed the budget limit of the individual. Thus, this constraint limits the decisions of the individual and the individual can be forced to limit his decisions and ideas. On that point, the institutions become involved in the decisions. The institutions may help the individual in terms of capital and this will make the budget constraint limits restricted. As the institutions help the individuals financially and the individuals can modify their decisions accordingly. Secondly, the experienced institutions can give the individuals guidance and this may also help the individual change his decisions on his economic activities.
On the other hand, the individuals bear in mind the historical events while making his decisions. It is accepted by the authorities that ‘history repeats itself’. When an individual is making an economic decision, he can travel back in history and find out what happened in similar situations in history. If a negative activity is seen in the history and it looks like today’s factors, the individual may change his decision or he may totally back down from his decisions. Similarly, if he sees that there are positive issues happened in history and they intersect with today’s conditions, he may continue with his substantial decision.
Mainstream Economics and Economic Growth
Mainstream economics prevent us from fully understanding the answer of the question that says “why do some countries are reach while the others are poor?”. The main reason for this situation is that the mainstream economics considers only a limited amount of factors that result in richness and poorness of the countries. In this manner, mainstream economics has not done much to make us understand the answer. Mainstream economics take growth as a simple function of labor, capital and technology but there are many other factors that affect growth. These factors are institutions, entrepreneurs, private-property rights and economic freedom. These are the factors that play a vital role in economic development but mainstream economics does not consider these factors and prevents us from fully understanding the answer of the above problem.
Economic Decision Making and Coase
According to Coase, ‘there are costs to using the price mechanism for coordinating economic activity’. These costs are named as ‘transaction costs’ or ‘marketing costs’. Transaction costs include costs of learning prices, cost of negotiating contracts and costs of writing contracts and etc. Coase argues that, given these conditions and costs the institutions may be effective in coordinating economic transactions at a lower cost. To put it in a different way, institutions may help the firms become more profitable. For instance, the firms will be more effective in directing how the resources of the firm will be used. The fact that institutions increase the profitability of the firms helps us understand the importance of institutions.
keywords: economic decision making, economic growth, institutions and economic decision making, history of economic decision making, how is economic decision making shaped.