1 12 2015 Economics of Native Americans An institutional Explanation explanation offered in this course political economic and cultural institutions differ and they can change over time Changes and differences imply very different incentives and constraints What does institutions mean What does economic performance mean How are institutions and economic performance tied together Other questions will arise what are rules what are transaction costs why do property rights matter Institutions as proposed by Douglass North should be identified as the rules of the game He means more than just those rules of behavior He s also thinking about the rules that we create to establish legal processes The processes that we might put in place to try to enforce rules of be havior or create incentives for people to follow rules What are rules Rules are behavioral patterns that other individuals expect a person to adopt and follow in the context of various interdependent activities and actions The rules one individual is expected to follow influence the choices made by other individuals like prices rules coordinate and motivate interdependent behavior Native Americans still had recognized rules and expected people to follow but they developed through what we d call informal processes instead of a legislative process We develop rules to try to reduce the uncertainty of the world or what other people might do We develop these rules to reduce uncertainty and coordinate our interactions with other people Economic Underpinnings of Rules Rules are generally not necessary if there are no conflicts to resolve and the primary source of conflict is scarcity Because of scarcity 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 The primary source for conflict is scarcity The nature of the rules not only influence which process we use but the market for illegal drugs is going to involve a lot more violence than for legal drugs These rules are not only determine which process is going to be working but the characteristics too Rules can reduce transaction costs Transactions costs are the costs that arise when individuals exchange ownership rights to eco nomic assets and or enforce their claims to rights Alternatively transactions costs at the costs of running the system the costs of coordinating and motivating Exchange is not costless Moving goods from producers to consumers is a costly process Most of the things you buy as a consumer you buy from a retailer They re facilitating the transaction There are a lot of ways to reduce transaction costs There are strong incentives to reduce transac tion costs Example Transactions Costs in Exchange The exchange of property rights between individuals give rise to transactions costs 1 protection of property rights 2 search for information 3 bargaining 4 drawing up contracts 5 monitoring of contractual partners 6 enforcement damage collection Middlemen arise to reduce transaction costs Native Americans in the process of exchange Going back a century or two there are no computers to search for information no newspapers There were active markets though The transaction costs of exchange in those markets were very high though You typically in plain states or high plateau most exchange between communities took place at what they called a rendezvous They occur once maybe a couple times a year where lots of native americans would travel substantial distances in many cases where they knew many people would be There would be exchanges taking place there If you had to do all of your shopping in one day though that would be a very high transaction cost Basic Assumptions in Economic Analysis Scarcity implies rationing and competition Individual is the relevant decision making unit The individual s preferences are subjective The individual is rational Resources and Economic Activities Pre Contact North America Hunter gatherer Fishing Agriculture Trade Combinations Let s start thinking about Native Americans pre contact with North America Prior to Colum bus there were many people in North America and they engaged in lots of kinds of economic ac tivity and there were hunter gatherers and primitive kinds of economies we might think of as characterizing Native Americans There were hunter gatherers in the Great Plains There were well organized processes of agriculture as well There was fishing There was a lot of trade in fact a lot more than people realize All of these activities occurred and there was innovation and methods developed to facilitate or improve the performance of these activities Prior to the ar rival of Europeans there were no horses 1 14 2015 Pre European Native American Economic Activities Property Rights A property right a socially enforced entitlement to a specified use of an economic asset good or resource as we start looking at primitive native american economic activities most of the tribes in clans or bands in North America didn t have anything that looked like a government We think of Native Americans as having chiefs as executives or kings That isn t true There were chiefs but they didn t have anything close to the authority of a British King These entitle ments are enforceable but generally through various socially developed or voluntarily developed mechanisms Social pressures to induce people to respect each other s claims It s tied to a spe cific use of an economic asset Most economic assets have many different attributes that can be used and in many cases entitlements to uses for the same asset among different people bundle of rights With any asset there is a bundle of rights When you talk about a par ticular specified economic asset there are potentially multiple rights associated with it It can divided up to multiple individuals They can also be divided in terms of access so that some are owned by individuals and others are owned by the community Arise because rules create obligations for others to respect entitlements We create rules of obligations which mandate or require people in the community respect these entitlements Property rights can be divided up into different attributes That s why it is plural Property Rights and Expectations Alchain and Allen 1969 suggest that ownership rights can be thought of as the expectations a person has that his decision about the use of certain resources