Generally, there are two ways to define economic institutions, depending on the context in which the term is used. First, it is thought of as an organization, whether public or private, that engages in the collection and research of economic data or that provides a service or product deemed economically central to a nation’s economy. Examples include national economic bureaus, tax collection agencies or university departments dedicated to economic research. These institutions are also considered foundational structures or organizations in society that are inherent to the economic system or culture, such as the banking systems, investment markets or even a custom, such as providing children with a weekly allowance.
Important to understanding what is meant by economic institutions and central to the role they play in the development, functioning, and sustainability of an economy is the meaning of the term “institution” itself. There are a variety of attempts historically and presently to accurately define the term, usually integrating a variety of elements like that it has embedded social rules and interactions, social behavior agreed upon by members in a society that is either self-governed or governed by outside authorities, rules and enforcement, patterns of interactions consistently repeated, and norms of behaviors assigned value to achieve outcomes or expectations. Evident in the common elements is the themes of both formal and informal regulation as well as legal formalities that dictate actions within the larger society. Defining the word is this manner distinguishes it from other related terms, such as organization.
Therefore, an accurate portrayal of economic institutions is constitutional in nature and defines how an economy is allowed to develop and function to achieve sustainability and growth. Typically, there are three main functions of these institutions: determining and safeguarding property rights, enabling and facilitating transactions, and allowing the economic participants to organize and co-operate.
The development of economic institutions happens at many different levels in society, and one usually forms either formally and informally. National governments may establish formal ones that help guide economic decisions and policy. On the other hand, one may arise out of natural reactions within the economy. For example, banking systems evolved to help facilitate transactions and to provide capital to spur growth and create new wealth. Of the various roles these institutions play, however, the most important seems to point to bringing a measure of predictability to an economy, often hardening those institutions against change, despite evidence of outdated practices.
