6 - On Institutions: Fundamentals of Confidence and Trust

Summary

Institutions

The concept institution has many meanings. For example, there is an important distinction between its meaning as an abstract concept and as a concrete one. The judicial system in Norway is an institution in an abstract sense, while the Supreme Court is concrete. The Norwegian National Opera and Ballet is a concrete cultural institution within our more abstract cultural heritage. In my own field, the monetary system is abstract whereas Norges Bank is concrete.

I would like to speak about the role institutions can play in the economic advancement of a nation and use the central bank as an example. My co-speakers will view the issue from different perspectives and the ensuing debate will bring forth yet further aspects.

Good institutions provide sound frameworks that increase confidence and promote economic progress. This is so in relation to minor, everyday situations as well as to major life choices. At the fishmonger's, the Norwegian Metrology Service ensures that you pay for the actual weight of your cod fillet. When you buy a home, clarity about ownership and encumbrances is ensured by the land register. The Norwegian Industrial Property Office grants patents so that entrepreneurs can make profits on their innovations. In the absence of such institutions, each of us would have had to spend more time on taking precautions and fewer investments would have been profitable.

However, in and of themselves, institutions are insufficient to ensure progress – the key is whether they are strong or weak. This is also the starting point for Daron Acemoglu and James Robinson's book Why Nations Fail. They introduced the concepts of inclusive and extractive institutions.

1. • Inclusive institutions do not forget why they exist: they remember that their purpose is to serve the people, as the term “public servant” aptly illustrates. A well-functioning constitutional state makes cooperation and transactions simpler and cheaper.

2. • Extractive institutions, on the other hand, are found in countries where rulers govern without notable opposition, where the judicial system is not fair, and where rights are not equal for all.

The authors refer to several examples where people groups with identical backgrounds and access to the same natural resources have developed differently because of institutional differences.

This leads to a key question: what are the principles that underlie those institutions that actually fulfill their role and effectively serve society?