Economic Policies

Imagine a country with absolutely no political institutions or structures; a country ruled by anarchy. Would this country have an economic policy? If so, what kind of an economic policy would it be? Now imagine a country with highly powerful and well-organized political institutions. What kind of economic policy would this country have? Economic policies in these two fictitious countries described above would most definitely be different. The first country would be lucky if it even managed to have an economic policy at all. The people of this country would probably live in a world of economic uncertainty, not having any sense of security for what the future holds for them. On the contrary, the people of the country from the second example would have security in terms of economic future. The citizens would be able to invest their money in financial institutions such as banks and exchange it in international markets. They could save for their future without the fear of having everything looted from them anytime. What about these two countries make their economic policies so different? Although there are many factors that may affect a country's economic policy, I would like to argue that the most important factor is either the presence or lack of strong political institutions.

Prehistorically, large nations or political states did not exist. Every man himself was the law of the land. Bands, or groups, began to form as time went on. Initially, membership in such groups was voluntary, but the members soon figured the benefits of cooperation. Over time these bands became larger and larger and it was apparent that some groups were stronger than others. Of these groups, the strongest groups became what we refer to as "roving bandits". (Olson 1993,568). If the "roving bandits" can be seen as the first form of political institution, the economic policy they imposed was one of complete turmoil. They ransacked the country-sides, looting whatever they felt they wanted without any concern as to what would be left over for the next time they came through. As these "roving bandits" progressed they realized that settlement was the answer to profitability. (Ibid). Economic policies developed as the formation of governments and political institutions by "roving bandits" were established. Without economically tearing down their subjects, the "roving bandits" formed governments, which ditched their policy of taking what ever they could get their hands on and replaced it with a system of taking only as much as they could without harming anybody. The new "stationary bandits" were able to enforce a new economic policy with the use of political institutions, such as, tax collectors. The establishment of political institutions assisted the bandits to completely transform their economic policy from looting people to one of modern times. Clearly, the transitioning from a system with an absence of any political institutions to a system based on institutions is going to change economic policy dramatically. In today's world there are very few places, if any at all, that completely lack political institutions. Interestingly, economic policy is linked to political institutions, which determine how strong each policy may be.

Industrialization, over the last couple of centuries, has put into place thousands of political institutions. The state has become the most basic unit of political power. Through such institutions, countries have been able to establish national banks, stock markets, and economic tools such as the Federal Reserve. Governments have been able to control the flow and value of their money through these institutions. As history also suggests, the most successful of these countries have been those whose political institutions are strong, stable, and predictable. The political institutions in today's nations have been able to implement economic policies on a broad scale. From the socialism of North Korea to the capitalism of the United States, these policies would not have been possible without the presence of strong political institutions. The best way to prove this would probably be to consider what would happen if the political institutions of these countries were weakened considerably. It may seem logical that by weakening these political institutions, the economic policies would be weakened as well. Historically, we've seen the relationship between strong and stable political institutions with strong and stable economic policies, yet interestingly, in today's world, that may not be the case. In today's world, globalization has become a big factor in economic policies. With the rise of globalization some feel that the authority of the state is being seriously diluted. As According to Susan Strange, "A market economy, whether global or national, needs a lender of last resort, an authority...able to discipline but also to give confidence to banks and financial markets, and able to apply Keynesian logic in times of slow growth and recession". (Strange 1997, 366). Strange feels that the rising globalization in today's world has caused many political institutions to lose their power to control the economy. Due to the free market nature of globalization, political institutions such as the Congress and the Parliaments may be completely left out of the economic policy loop. This assumption becomes even clearer when one studies the influence the World Trade Organization is capable of leveraging over sovereign states. The World Trade Organization has fought several battles