Economics Essay Research Paper The aim of

Economics Essay, Research Paper

The aim of this essay is not to agree with or refute the statement made by Douglass

North. The purpose of this essay is to identify the key points of the statement and discuss

with relation to the institutional evolution in the Australian financial and labour Markets.

With this, it will attempt to conclude whether the statement has a relevance to the

evolution of the financial and labour markets.

The passage, taken from North.s paper Institutions has a relevance to Australia.s

Financial and Labour Markets. Its relevance can be shown by analysing the key points of

the statement. These being, institutions are humanly devised, institutions provide

constraints to the market, institutions provide economic incentives and institutional

change leads an economy towards its success or failure.

North.s statement regards Institutions as being . humanly devised .. Institutions are

devised for the purpose of protecting the various groups effected by the market. This is

done by imposing corrections on a market ( subject to failure). A market failure occurs

.when the market is unable to determine the use and allocation of resources in a way

society most desires.. ( Kirkwood, Cronk, Swiericzuk & Searle 1999). Institutional

intervention in a market occurs due to imperfections in the market and is an attempt at

ammending such imperfections. The key institution within the financial system is the

Reserve Bank of Australia (RBA). In January 1960, legislation was passed to create the

RBA, hiving off the central banking functions of the Commonwealth Bank of Australia

(CBA). The induction of the RBA in1960 was due to growing concern from the private

banking sector of a commercial bank maintaining the functions of a central bank (Lewis

& Wallace 1997). The RBA was devised to . ensure that monetary and banking policy of

the bank is directed to the greatest advantage of the people of Australia….. and will best

contribute to the stability of the currency of Australia, the maintenance of full

employment in Australia and the economic prosperity of Australia.1. (Reserve Bank Act

1959). Before 1960, the role of the RBA was performed by the CBA. The CBA was

established in 1911 to regulate the banking sector that saw widespread failures in the

1890.s which caused the closure of fifty-four of sixty-four banks across Australia (Lewis

& Wallace). As North.s statement suggests, institutions are devised by human

admission, shown by the introduction of the CBA in 1911 and RBA in 1960. Institutional

intervention in the financial market has been for the protection and prosperity of those

organisations and community groups involved.

As with the financial market, institutional organisations in the labour market were

formed by people looking to protect the interests of those involved in the market.

Institutions have traditionally played a key role in the Australian labour market in

determining wage rates and employment levels. The key institutions within the labour

market are employer association and trade unions. Employer associations were created

by individual businesses concerned with protecting themselves against overseas

competitors and more importantly against the might of unions. Trade unions are

concerned with the .defence of employee interests and administration of awards and

enterprise agreements..( K.Bruce Lecture 4).

In relation to the labour and financial markets, North.s point that Institutions are

.humanly devised. is valid as it is evident that institutions do not occur for the market

but as a result of the markets inability to .work. in a way suitable to the entire society.

Another important concept put forward by North is that . Institutions are humanly

devised constraints .. What is a constraint. A constraint is an intervention in a market

that hinders the free interplay of market forces. Elementary forms of constraints are rules

and regulations that form the basis for what organisations within the market can and

cannot do. Constraints are necessary because if the market was left primarily to market

forces, the end result would not always be desirable for society. Such institutional

constraints in the labour market are set by government regulation including reasonable

wages and conditions and laws against child labour, long hours and wrongful dismissals.

Within the Financial Market, the CBA and then the RBA had highly constrictive

regulatory measures over the financial sector up until the late 1960s. This confined the

banking sector to limited trading activities allowing limited success in the market

(Edey&Grey 1997).

One of the most important issues in the Australian financial and labour markets is the

ability for institutions to provide economic incentives. Institutional structure needs to

provide incentives to industry for greater productivity and an incentive to consumers to

increa

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