Political Institutions And Their Effect On Economic Policy

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Political Institutions And Their Effect On Economic Policy

ESSAY:
Political Institutions and their Effect on Economic Policy
Laura Lynn Wantz
Political Science 182
Section #28
November 30, 2000

Imagine, if you will, a country with no political
institutions. A country ruled by anarchy. What kind of
economic policy would this country have or would it have one
at all? Now imagine a country with highly powerful and
regimented political institutions. What kind of economic
policy would this country have? The two fictitious
countries mentioned above would certainly have very
different economic policies. The first would probably be
lucky to even have an economic policy at all. Its citizens
would live in a world of economic uncertainty, never knowing
what their future may hold. On the other hand, the citizens
of the second country, although possibly unhappy with their
ruler, would at least have a pretty good idea of their
economic future. These citizens would be able to place
their money in banks and exchange it in international
markets. They could save for their future without the fear
of having everything taken from them at any given moment.
What is it though that makes the economic policies of these
countries so different? While there are clearly many
factors that affect a country's economic policy, in this
paper I would like to argue that the most important one is
the presence or lack of strong political institutions.
In the beginning large nations or political states did
not exist. The law of the land was every man for himself.
As time went on small bands of people began to form. In the
beginning membership in such groups was voluntary, but those
who joined soon learned of the benefits of cooperation.
With time these bands became larger and larger and it was
apparent that some groups were stronger than others. The
strongest of these groups became what is known as roving
bandits. (Olson 1993,568). If the roving bandits can be
seen as the first form of political institution then the
economic policy they enforced was one of chaos. They
ravaged the countrysides taking whatever they felt they
needed or wanted without any regard as to what would be left
over for the next time they came through. As these roving
bandits progressed they realized that if they were to
settle in one area they could easily increase their profits.
The gigantic increase in output that normally arises from
the provision of a peaceful order and other public goods
gives the stationary b...

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