Institutions: The Life Force of Economic Growth
Introduction
When looking at economic growth as a whole, people often fail to take a look at the intricate
details and little parts that get the economy going. Institutions are the parts to a greater whole, and it
could be said that the whole is greater than just the sum of its parts. It is the interdependence and
relationship between these parts that matter. These institutions include laws that protect ownership of
property, and the legal system to enforce and interpret laws. They serve as the gears that make the
economic growth of a nation tick. They also include political institutions that develop those laws, the
cultural traits of society that guide consumer behavior and preferences, and the many organizational
structures such as corporations, banks, and non-profit organizations that make up the society. To
understand markets, you need to understand institutions. Based on many modern economic theories,
institutions are deemed to play a very central role in shaping how many factors work in an economic
system.
The Government
Even if government spending made up only a small proportion of total expenditures,
government would still be central to the study of economics and economic growth. “The reason is
that, in a market economy, government sets the rules of interaction between households and
businesses, and acts as a referee, changing the rules when it sees fit (Georgantopoulos and Tsamis,
2012).” The government decides whether economic forces will be allowed to operate freely. It is the
decision-maker of the economy, and functions like a brain where all the information are processed and
decisions are executed. Primarily as a referee or an overseer of the economy, the government has a
different set of roles in the economy. It provides a stable set of laws and regulations, promotes
effective and workable competition in the market, corrects externalities, ensures economic stability
