I Introduction to Economics of Native Americans January 8 2014 Why Different Economic Conditions Arise and Persist Pre Conquest North America vs Europe Many explanations have been offered o 1 Culture Communal did not believe in private property not true Wide variety of cultures in many ways pre contact North America was like Europe several centuries earlier o 2 Lack of innovation survived as hunter gatherers not true Developed some of the most important food crops in the world Mayan calendar architecture writing mathematics o 3 Lack of resources and or capital investment True that Native Americans did not have large domesticated animals for agriculture and transportation Transportation usually by foot or water Only domesticated dogs Smaller population than Europe but lots of land and other natural resources Some metals developed in Europe did not exist in North America Today some reservations desperately lack resources some do not Today difficult for reservations to attract capital investment More difficulty in attracting resources than having them available Modern Reservations Reservations vs the United States Continue to be depicted as communal societies do not believe in private o Culture property rights o Lack of resources unproductive land Certainly lost huge amount of land and other resources to Europeans o Poor management by tribal governments and or Bureau of Indian Affairs Bureau responsible for allocating resources Tribal governments vary in effectiveness An Institutional Explanation Political economic and cultural institutions differ and they change over time Changes and differences imply very different incentives and constraints o Culture matters but other institutions do too Comparative Institutions Some institutions create better incentives than others o Poor institutions prevent community from reaching total production frontier i e Native American community has had bad instructions imposed onto it What are Institutions Not a hospital or university these are organizations that develop from rules Douglas North institutions should be identified with the rules of the game o The game i e university might be called an institution but the rules that shape the process are the true institution What are Rules Rules behavioral patterns that other individuals expect a person to adopt and follow in the context of various interdependent activities and actions o Not restricted to formal laws or legislation could include cultural norms and positive or negative incentives The rules one individual is expected to follow influence the choices made by other individuals like prices rules coordinate and motivate interdependent behavior 2 Economic Underpinnings of Rules conflict is scarcity Rules are generally not necessary if there are no conflicts to resolve and the primary source of o Because of scarce resources people compete to influence the allocation of resources Rules can direct the competition into markets or into the political arena rather than violence and establish characteristics of the competitive process Rules that encourage voluntary behavior can prevent violence Rules can Reduce Transactions Costs Transactions costs the costs that arise when individuals exchange ownership rights to economic assets and or enforce their claims to rights Alternatively transactions costs as the costs of running the system the costs of coordinating and motivating All transactions even the simplest ones involve costs o Middlemen can reduce transaction costs The exchange of property rights between individuals give rise to transactions costs January 10 2014 Example Transactions Costs in Exchange o 1 Protection of property rights o 2 Search for information o 3 Bargaining credibility o 4 Drawing up contracts o 5 Monitoring of contractual partners o 6 Enforcement damage collection Basic Assumptions in Economic Analysis 3 Scarcity implies rationing and competition Individual is the relevant decision making unit The individual s preferences are subjective The individual is rational o Rational does not mean logical Rationality Assume that individuals rationally pursue their objectives o Not just utility maximization subject to a set of given constraints in part because some of the constraints some of the rules of the game may be subject to manipulation o Respond to incentives Rationality and Uncertainty Individuals are not fully informed There are also costs in processing information and since individuals have limited cognitive ability they may not even be able to effectively use all of the information they have Rational actor can make mistakes and have regrets Resources and Economic Activities Pre Contact North America o Hunter gatherer Did not domesticate animals except dogs Buffalo hunting drive buffalo to a trap or cliff complex Before horses Very uncertain process Would lite fires to direct the buffalo 4 At the end would want to stampede them to avoid them from straying Could take about 150 people complex requires organization Nomads Dried the meats to preserve them overtime High transactions costs o Fishing o Agriculture Complex traps organizational issue Corn was the main crop in many places also grew beans squash Mostly women Men generally hunted or guarded community crops Most innovations in agriculture came from women Organizational issue Some plots of land were private If hostile tribes were around the domestic tribe would live apart from agricultural fields the opposite is also true Hernando de Soto found 12 solid corn fields in Tallahassee area Agriculture mostly in South East South West Midwest some North East Specialized villages trade with other tribes i e Agricultural tribes traded with nomads who were hunter gatherers o Trade o Combinations 5 Property Rights resource Property right a socially enforced entitlement to a specified use of an economic asset good or o Socially enforced not government enforced many tribes did not have government authorities o Enforcement threat of social ostracism Bundle of rights Arise because rules create obligations for others to respect entitlements Property Rights and Expectations Alchain and Allen 1969 suggest that ownership rights can be though of as The expectations a person has that his decision about the use of certain resources will be effective o If you expect that your decisions will have effective outcomes secure property rights o Have the incentives to use property effectively carefully when your property rights are secure and there is a