Topic 4.

Economic institutions and ownership

The concept of "economic institutions" was introduced to science by the

institutional-sociological trend of economic theory. The founders of
institutionalism are Torstein Veblen and his student Wesley Mitchell, an expert in
the field of industrial cycles, publicist and political figure John Helbreith,
economist and researcher of global problems Jan Tinbergen and others.
Institutions are a set of formal and informal rules created by humans that act as
constraints on economic agents, as well as appropriate control mechanisms to
enforce and protect them.
A control mechanism refers to a set of tools that help identify compliance or
non-compliance, as well as apply incentive or disincentive measures. Institutions
consist of both formal laws (constitution, legislation, property rights) and
informal rules (traditions, customs, moral codes). Institutions were created by
people to enforce rules and eliminate uncertainty in exchange. Such institutions set
the set of alternatives together with the standard constraints accepted in economics,
thereby determining the production and circulation costs, the corresponding
profitability and the probability of engaging in economic activity.
Despite much research over the past two decades, the modern economic
theory of institutions is still in its infancy. In 1993, Douglas North was awarded
the Nobel Prize as one of the pioneers of new institutional economics. Institutions
are a highly controversial concept. Scholars writing on this topic have not given a
clear explanation of what institutions are. Moreover, institutions are defined
differently from the point of view of economic perspectives. For example, Elster
writes that an institution can be characterized as a law-making mechanism, the
most striking aspect of which is the modification of behavior by the use of force.
Jack Knight believes that institutions are a set of rules that structure mutual
social relations in a particular way that all members of that community must know
and agree to. Using the terminology developed by K. Menger, institutions can be
defined as public goods of a higher kind. This is explained as follows: if
institutions ensure the production of information necessary for the movement of
individual economic agents, then this information becomes a public good. Thus,
the market price is formed on the basis of the mutual influence of economic agents
organized on the basis of certain rules, being the carrier of information.
Institutions can be viewed as public capital that can change through
depreciation and new investment. Formal laws can change quickly, but
enforcement and informal rules change slowly. As an example, we can point to
Russia, which adapted the economic institutions of capitalism to the market model.
Informal rules, norms, customs are not created by the government, they develop
spontaneously. Institutions are slow to adapt to environmental changes.
Many institutions that were once efficient become inefficient and remain so
for a long time, meaning that it is difficult to turn a society from its historical path
that was set many years ago. The role of institutions in economic life is quite large.
Institutions reduce uncertainty by structuring everyday life. They organize mutual

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relations between people. Institutions define and limit the set of alternatives in
economic behavior available to each individual. Institutions include all forms of
restrictions created by people to regulate human relations.
To understand the relationship between institutions and production
efficiency, the concept of transaction costs exists. The concept of "transaction
costs" was introduced into the scientific circulation by Nobel laureate R. Coase
(born in 1910). These costs are not related to the production itself, but to the costs
accompanying them: prices, searching for information about the partners of farm
contracts, costs related to the conclusion of farm contracts, control over their
implementation, etc. is connected. In the personalized simple model of the
exchange, the participants repeatedly conduct the same type of transactions with
each other, they know well each other's properties and characteristics.
Measured transaction costs in such a society are extremely low. Lies, breach
of obligations, unprincipledness are either poorly manifested or not profitable at
all, as they are not useful. In such circumstances, the norms of behavior are rarely
reflected in the law. Official contracts are not concluded, contract terms do not
exist by themselves. However, while measured transaction costs are low in such a
society (while unmeasured costs may be high in a community structure),
production costs are high because the specialization and division of labor is
constrained by market boundaries conditioned by individualized exchange.
Coase's theorem - the position of the new institutional economy that the
market copes with any external effect when transaction costs are zero. This
theorem was first stated in 1966 by George Stigler as follows:
If property rights are well-defined and transaction costs are zero, then
resource allocation (production structure) will remain unchanged and efficient
regardless of changes in the distribution of property rights.
This expression of the theorem by Stigler is based on Ronald Coase's article
"The Problem of Social Cost" published in 1960. Coase proved this theory in the
example of considering the external consequences of any activity, which are not
directly related to its participants, but to third parties. Previously, this problem was
considered by the economist Arthur Pigou in his book "The Economics of
Welfare". According to Pigou, externalities lead to overproduction of material
goods with negative externalities and deficit production with positive externalities.
In order to neutralize these effects, which he called "market fiasco", in such cases,
Coase refuted the idea that externalities necessarily cause "market fiasco".
According to him, in order to neutralize the problems related to externalities, it is
important to have a clear distribution of property rights to resources and to
minimize transaction costs. The Coase theorem reveals the economic meaning of
property rights. According to Coase, the more precisely property rights are defined,
the more external costs become internal costs. The economist Trayn Eggertson
stated the "Generalized Coase theorem" as follows: .
If transaction costs in the economic and political spheres are zero, the
country's economic growth and development are largely independent of
the type of government in place. However, when transaction costs are
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 positive, the distribution of power within the country and the
institutional structure of regulatory institutions are considered
important factors of its development.
In the absence of institutional costs, the optimal set of "rules of the game"
would occur everywhere and at all times, in which case there would be no benefit
in replacing any obsolete institution with a new and more efficient one. In such
situations, as the new institutionalists have shown, technical progress and capital
(physical and human) accumulation could automatically and comprehensively
ensure economic growth. It should be noted that there are many cases where the
Coase theorem cannot be applied. This happens when negotiations are impossible
or expensive (for example, when there are many parties involved in a contract or
dispute). The term transaction costs was first used in Coase's work "The Nature of
Firms" and refers to the costs incurred for concluding contracts, that is, the costs
spent on collecting and processing information, conducting negotiations and
making decisions, monitoring the performance of contracts and their legal
protection. The main role that institutions play in society is to reduce uncertainty
by creating a stable (but not necessarily efficient) structure of interaction between
people. However, the stability of institutions does not contradict their
changeability. All institutions evolve in the same way, from traditional convention,
codes and norms of conduct to written law, common law and contracts between
individuals. Institutional change is a complex process because changes in the
extreme can result from changes in rules, informal constraints, and the methods
and effectiveness of enforcing rules and constraints.
According to the researches of institutionalists, the society in the conditions
of the transition economy must solve the following three issues: first - to adopt
changes and new mechanisms, second - to eliminate the negative consequences of
changes and mistakes, and finally, to preserve the valuable things of the past
heritage. Douglas North's position on this legacy seems justified and reasonable:
regardless of your attitude to the past, you have to reckon with what people are
used to, and the strategy and tactics of reform cannot ignore it. The basis of human
knowledge is not the individual knowledge gained by a person or a generation
during their lifetime, but their aggregate accumulated over a long period of time.
Unfortunately, there is no theory of transformational dynamics that involves
minimizing its cost.
The fundamental nature of possession lies in the act of appropriation.
Expropriation refers to the act of transferring ownership of a property or asset from
one party to another using many methods, including economic, violent, and legal
mechanisms. When analyzing the concept of appropriation, it is feasible to identify
many forms of appropriation, including labor-based appropriation, circulation-
based appropriation, and direct appropriation occurring throughout the production
process. Differentiating between possession, use, and disposal and ownership is
crucial, as ownership encompasses the comprehensive concepts of appropriation
and expropriation.

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 Ownership is imperfect, partial appropriation. The proprietor serves as a
representation of the means of production. The individual in question serves as the
designated representative of the proprietor. Ownership refers to the legal and
exclusive rights possessed by an individual or entity over a particular asset or
property, according to the terms and conditions established by the owner. An
illustration of this concept may be seen in agreements such as leases and loans,
which establish specific conditions about the duration, payment structure, payback
terms, and allocation of a portion of the earnings.
The use of an object is contingent upon its intended function. The concept
of "use" represents a manifestation of possession and control over an object or
resource. If the concept of ownership is seen as a variable, then the use of a
resource may also be perceived as a variable dependent on ownership. Disposition
refers to the determination made by an entrepreneur or any individual to engage in
the operation of a particular item of ownership. This determination is rooted on the
owner's entitlement to utilize the property within the boundaries permitted by their
ownership rights. It is important to acknowledge that within a market economy, an
entrepreneur may not necessarily be an owner, but rather must possess the
privileges of ownership, including the rights of ownership, utilization, and
disposition, sometimes referred to as the three powers of ownership.
Thus, property is a whole, and its elements (parts of the whole) are
possession, use and disposal. The relationship between the elements is as follows:
disposal is determined by use, use by possession, and possession by forms of
ownership. According to the economic theory of property rights, it is not the
resource (means of production or labor force) itself, but the set or share of the right
to use the resource. The theory of property rights was founded by two famous
American economists - R. Coase and A. Alchian. Y. Barchel, G. Becker, D. North,
N.S. Cheng, R. Posner and others participated in the further research of this theory.
A complete "set of rights" consists of the following 11 elements:
1) the right of ownership, that is, the right of exclusive physical control
over goods;
2) the right to use, i.e. the right to use the beneficial properties of goods
for oneself;
3) the right of management, that is, the right to decide who will use the
benefits and how;
4) the right to income, that is, the right to own the results of the use of
benefits;
5) sovereign right, i.e. the right to alienate, consume, change or destroy
the good;
6) the right to security, i.e. the right to be protected from being deprived
of benefits and from damage caused by the external environment;
7) the right to inherit benefits;
8) the right to permanent possession of the benefit;
9) banning the use of methods that harm the external environment;

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 10) the right of liability in the form of a fine, i.e. receiving a gift instead
of a debt;
11) a residual characteristic right, that is, the right to the existence of
procedures and institutions that ensure the restoration of violated powers.
Property rights are understood as behavioral relations that are permitted by
society (state laws, traditions, customs, by the order of the administration, etc.),
arise from the existence of goods between people and relate to their use. Property
relations in this theory derive from the scarcity of resources: it makes no sense to
speak of property without some condition of scarcity. Therefore, property relations
are a system of exclusions from access to tangible and intangible resources. If there
are no exceptions to access to resources, they are owned by no one, owned by no
one, or owned by all because of free access.
Different economic schools define property and its essence in different
ways. According to the Marxist theory, property as an economic category
expresses the relationship of appropriation (expropriation) of the means of
production and the material goods produced with their help in the process of
production, distribution, exchange and consumption. Here, attention is focused on
the fact that material goods belong to the subject, not only he himself, but also
other subjects should recognize, therefore, property rights arise as a social
relationship.
Western economists treat property only as a person's relationship to a thing.
In reality, property relations are viewed as the real interaction of the owner with his
property, his control over the property and the reflection of his use of it. According
to Marxist theory, property as an economic category exists independently of the
will and consciousness of people. As early as Solon (594 BC) and Cleisthenes (509
BC) noted that laws do not create property relations, they actually determine the
relations formed within society. Therefore, economic and legal categories of
property are distinguished. Property as an economic category expresses relations of
appropriation and alienation between people.
Property as a legal category is a subjective interpretation of objectively
formed property relations, a manifestation of the public demand for legislative
determination of those already formed in practice. In this case, ownership itself is a
right. Property is a legal category if we approach the right of ownership as a rule
established by law, which determines what things this or that person can use or
dispose of, as well as the conditions that ensure the realization of such use or
disposal. Property relations are objective-subjective relations, in which the material
conditions of production and human life (means of production and labor force), as
well as the results of production (material goods and services) as objects, and a
person, company, association, labor collective, state representatives, as subjects.
state apparatus employees speak.
Property relations include the processes of appropriation, expropriation, use,
ownership and disposal of production factors and labor products, the strategy and
tactics of production development, the directions of use of resources, the choice of
forms of organization of labor and production, as well as control over them.

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Property is closely related to economic power. In fact, production management is a
function of ownership, one of its essential aspects. Production is usually managed
by the owner of the means of production. Property is one of the main elements of
economic power (but not the only one), its source. One of the first definitions of
property was given in the "Roman Law" code of the emperor Justin (5th century),
where property is seen as the right to own, use and dispose of property.
It is often said that the basis of market relations is private property, which is
defined as the property of individuals or individuals. World experience shows that
a developed market economy, a civilized market is based on different forms of
ownership. This is explained by the lack of competition on the basis of the market,
which requires the presence of a large number of market subjects. The market itself
is indifferent to forms of ownership. It does not ignore the extent to which market
subjects are independent and free in their economic activities (within the law), as
well as the conditions of competition. The most diverse forms of property are
known in the history of mankind. The most important of these are state and private
property.
State property. There is no country in the modern world where the state
does not conduct active economic activity. In Western countries, the share of the
state in the main funds falls from 7 to 30 percent and more. The state form of
ownership prevails in the basic areas of the economy, where there is really a great
demand for direct centralized management, the implementation of state
investments, and the profitability trend is not sufficient for public interests. This
applies only to the types of activities that are developed in general (as a whole),
because of the form of state management of these types of activities and their
material basis (informational means, social and production structures,
environmental protection, fundamental science and, for example, the conquest of
space, science capacity production, etc.) is created objectively.
The form of state ownership also arises when it is necessary to help failing
non-governmental enterprises. This is actually done on the basis of nationalization
of loss-making enterprises, their rehabilitation and subsequent privatization at the
expense of state funds.
World experience shows that state ownership can be effective because it has
certain advantages compared to other forms of ownership due to the following
functions: the ability to implement macro-regulation, to formulate the economic
development strategy of the society as a whole, and ultimately to achieve the
highest efficiency directed at the people, national to optimize the economic
structure. At the same time, regardless of the economic and social structure, state
ownership in most cases operates less efficiently than other forms. On the one
hand, this is related to the development of state ownership in areas where market
opportunities are limited and interest in labor is low. On the other hand, due to the
owner's irresponsibility and the enterprise's loss of market direction, the efficiency
of state ownership may decrease even in areas with a normally functioning market.
The predominance of the state form of ownership leads to the creation of a state
monopoly. This, in turn, is harmful for the development of the country's economy,

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consumers and the population, and very favorable for the producer. Thus, we can
talk about eliminating state property, but its monopoly. State ownership always
plays an important role in the economy in the form of national, republican and
municipal ownership.
Municipalization (lat. muriicipium - self-governing society) refers to the
transfer of state property rights over land, construction, and local economic
activities to self-governing bodies in cities (rural - rural areas). The history of
municipal ownership dates back to the end of the 19th century (in some countries,
the middle), and its formation to the beginning of the 20th century.
Private property. The concept of "private property" was created historically
to distinguish state property from all other properties. Therefore, it was considered
that whatever is not state property is private property. In the modern age with a
great variety of forms of ownership, not only the property of individual citizens,
but also of cooperatives, associations, and public enterprises is considered "non-
state" property.
In Western economic theory and practice, the idea that "any non-state form
of property is private property has been confirmed. This approach has its own
logic. The state acts as a representative of its society, while other subjects of
property represent only a part of society, so it would be correct to consider them as
owners of property. Today, many people try to prove that private property is
indivisible property that is not limited by anything (except the will of its owner). In
fact, a private owner has the full right to conduct all the operations he deems
necessary on his property, provided that these operations do not penetrate the
private property of other people. In a civilized society, certain rules of behavior of
owners have been developed.
The following can be attributed to private property:
■ Household as an economic unit - produces products and services for
personal needs.
■ Legal special enterprises operating in accordance with the legislation.
These are enterprises of any size, from individual, artisan to large.
■ Illegal private enterprises that are part of the "shadow economy". This
includes all activities of individuals in the field of production of goods and
providing services without special permission of the state.
■ Any form of use of private property or personal savings, from renting out
an apartment to conducting money transactions between individuals.
The private sector develops on its own without any direction from the center,
which shows the viability of private property. One of the main conditions for the
development of a special unit is full freedom to establish an enterprise and start
any production activity. The special unit should not face any prohibition, it should
have an unlimited right to lease the property it owns on the basis of free agreement
between the lessor and the lessee, as well as to collect, sell and buy any high value
article. Free prices based on free contract between seller and buyer, free foreign
trade activity, free buying and selling of houses and property in private ownership,
free lending with interest, freedom to hire labor force, freedom of financial

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investment in any private enterprise are the necessary environment for the
development of private sector.
The second condition for the development of a special section requires that
the law guarantees the fulfillment of the obligations of the special contract. If a
special contract is violated in any way, the injured citizen should have the right to
apply to the court to force the person who caused the damage to fulfill his
obligations. The third condition is the need to ensure complete security of private
property. The guarantee of his immunity should be taken into account in the law,
party programs and declarations of leading statesmen. We need assurances that
confiscation will never happen. The fourth condition requires a special investment
incentive of the credit policy.
The provision of equal opportunities to develop all forms of property can be
considered perfect. In reality, too much capital has been accumulated by the state
department, the bureaucratic apparatus, the state banking system and state
enterprises have merged. These determine the undoubted superiority of the state
unit at the beginning. Nevertheless, the efficiency of the special unit increases due
to the constant threat of bankruptcy in the face of financial difficulties, even under
any conditions of lending. For the further development of the private sector,
respect for the special unit in society (the fifth condition) is extremely important.
In the market economy, if the buyer needs the goods offered by the seller and this
buyer is ready to pay the asking price, the entrepreneur's activity as a seller should
be considered as a socially beneficial case.
The provision of equal opportunities to develop all forms of property can be
considered perfect. In reality, too much capital has been accumulated by the state
department, the bureaucratic apparatus, the state banking system and state
enterprises have merged. These determine the undoubted superiority of the state
unit at the beginning. Nevertheless, the efficiency of the special unit increases due
to the constant threat of bankruptcy in the face of financial difficulties, even under
any conditions of lending. For the further development of the private sector,
respect for the special unit in society (the fifth condition) is extremely important.
In the market economy, if the buyer needs the goods offered by the seller and this
buyer is ready to pay the asking price, the entrepreneur's activity as a seller should
be considered as a socially beneficial case.
Denationalization can be carried out in different directions:
■ denationalization of the appropriation process, recognition of each
employee and labor collective as an equal participant in appropriation,
demonopoly;
■ creation of different forms of economic activity, giving all forms of
enterprises the same degree of freedom in economic activity within the framework
of the law;
■ formation of new organizational structures, creation of new forms of
entrepreneurial activity (concerns, companies, associations) in which horizontal
relations play a leading role.

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 Thus, privatization is aimed at overcoming monopoly, developing
competition and entrepreneurship. This is the central problem of the transition to a
market economy. Privatization is closely related to privatization. Privatization is
one of the directions of denationalization of property, the essence of which is its
transfer to the private ownership of individual citizens and legal entities. Thus, the
difference between privatization and denationalization is that privatization reflects
the process of fundamentally changing property relations, while denationalization
includes the entire complex of changes aimed at destroying the existing economic
system, state dictates, and making the economy work independently of the state.
The objects of privatization can be large-scale industry, small and medium-sized
industry and trade enterprises, service sector enterprises, housing stock, housing
construction, agricultural enterprises, etc.
After privatization, private individuals, employees of the privatized
enterprise, labor collective, banks, holdings, joint-stock companies (companies),
etc. become property subjects. The extent of privatization in one or another country
depends on how widely used the method of nationalization of a special unit was in
the previous period. In countries where the nationalization method is rarely used
(USA, FRG, Japan), the tendency to privatization is weakly manifested. In
countries where the process of nationalization is very strong (Great Britain,
France), privatization is carried out on a large scale.
Denationalization and privatization can be carried out by various methods,
for example, free transfer of ownership, purchase of enterprises on preferential
terms, sale of shares, leasing of enterprises, competitive or non-competitive sale of
small enterprises at auction. Funds received from privatization should be directed
primarily to the development of market infrastructure, as well as to the provision of
private capital to enterprises that have gained independence.
The goals of privatization in developed market economies and transition
economies are different. Great Britain, the leader of privatization, proposed the
following methods of privatization: sale of shares and free distribution; service
contract work; sale of public housing to a tenant; rejection of state monopoly in
order to increase competition. There are different methods of transfer of state
property and its functions to a special unit, in whole or in part, around the world.