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4.2 Institutions

Co-ordination requires the presence of institutions. Indeed the rules that govern co-ordination are essentially what institutions are.

A broad definition

The term 'institution' often causes confusion because it can be used to mean a variety of different things. In common parlance, it often refers to organisations - thus one might talk about 'financial institutions', 'government institutions', 'educational institutions', 'charitable institutions', 'international institutions' and so on. However, institutions are much more than that. North (1990 p. 164), for example, distinguishes between institutions and organisations, treating the former as the 'rules' of the game and the latter as the players.

We shall refer to institutions very broadly as

In our definition, institutions therefore include the formal laws of the state, social customs and ideologies, as well as the systems and organisations associated with gift exchange, markets, and hierarchies (see below).

Institutions for co-ordination

There many different ways of classifying institutions. We can distinguish, for example, between formal and informal institutions, the former being associated with legal recognition by the state, and the latter being associated with custom, tradition, unwritten codes of conduct, belief systems, social values etc.

We conclude this unit by introducing a simple framework that classifies economic co-ordination into three different institutional forms

You will learn more about the development implications of each of these different forms elsewhere. For now, consider each of the above as a different category of rules for determining how assets are accessed and used. Bear in mind that this is a simplified model of how resources are allocated - modern economies actually operate through complex interactions between each of these three organisational forms and there are many hybrid arrangements that combine elements of each. The model is nevertheless a useful starting point.

Gift exchange

Under 'gift exchange' access to assets and resources, goods and services (whether food, land, or someone else's labour) is governed by shared values which stress reciprocity and the collective good. Whilst parties to gift exchange enter into relationships of mutual obligation, the precise terms of exchange are not always clearly defined. They are not spelled out in written documents; they are not bound by formal, legally binding, contracts. Instead, it is ethics, customs, and rituals (sometimes religious in nature) that play the central role in maintaining the spirit and practice of reciprocity. Gift exchange is most often associated with social and economic organisation at the level of the household or the community, but can take place elsewhere, such as within firms, or between managers, business leaders, politicians etc.


Hierarchies are characterised by the use of a command and control structure in which decisions about how to allocate resources are passed down from above. Examples include state organisations, firms, and many other types of organisation.


The definitions of a market are varied and often depend upon the context in which the word is used. A market or market place is often associated with the specific location where goods are sold. These days, however, market exchange does not always take place at one specific location. A more appropriate definition of a market might be 'a mechanism by which buyers and sellers of goods and commodities are brought together for the purposes of exchange'. The market might involve buyers and sellers haggling over the price of goods displayed in a village stall, it might be on the internet whereby computer users from all round the world can view, order and pay for products online, or it might refer to the forces that bring together employers and suppliers of labour.