INSTITUTIONS AND MARKETS IN A DYNAMIC WORLD

This article concerns the role of institutions and policies and their relationship with market processes in open economies characterized by various forms of technological change. Here the article suggests a framework of analysis of institutions, which is in its essence non-reductionism (that is institutions and polices are a permanent feature of the constitution of the economic system and an essential part of the ways the economic machine evolves). Innovation and change are the central features of modern economic systems. The very existence of innovation requires a market failure. in the static allocative sense: in decentralized markets, the incentive to innovate needs some kind of asymmetric information and super-normal profits. Technical progress can be of two types: normal that proceeds along trajectories defined by an established paradigm; and extraordinary that relate to the emergence of radically new paradigms.

1. Whenever new paradigms emerge, the material technology, the required knowledge skills and equipment etc., all contextually change. Technology, far from being a free good, involves a fundamental learning aspect, characterized by varying degrees of cumulativeness, opportunity, appropriability.
2. There are widespread asymmetries in the technological capabilities, input efficiencies and product performances between firms and between countries; these asymmetries correspond to equally uneven patterns of economic signals facing the economic agents.
3. The behaviors of agents are most adequately represented by routines, strategies, and search processes. That is to say that in an environment, which is complex, changing and uncertain, firms DO NOT and CANNOT adopt maximizing behaviors. The signals that firm receives and its adjustments. The technical opportunities (and expected economic benefits) associated with technical change. This is a Schumpeterian adjustment. The rate of growth of the demand in that and other products. This is a Growth adjustment. The changes in costs, prices, quantities, profitabilities. This is a .Ricardian adjustment.
4. Untraded interdependencies between sectors, technologies, firms have a primary importance in the process of technological change! Technological bottlenecks and opportunities, experiences and skills embodied in people and organizations etc., tend to organize context conditions which (1) are country-, region- and company-specific; (2) are a fundamental ingredient in the innovative process; and (3) as such, determine different opportunities/constraints to the innovation process.
5. The institutional and scientific contexts and public polices are fundamental insofar as they affect (1) the linking mechanisms between pure science and technological developments; (2) the criteria and capabilities of search by the economic agents; and (3) the constraints, incentives and uncertainty facing would-be investors. The nearer one activity is to the economist’s model of pure competition., the higher also appears to be its need for strictly institutional organization of its .externalities and technological advances!
6. 6. Let’s pay attention to the economical processes and technological change in open economies! When we have non-increasing returns and indivisibilities each country receives gains from trade. They are based on: (1) allocative efficiency (comparative advantages.); (2) Schumpeterian efficiency (The changes in technology and levels of macroeconomic activity); (3) growth efficiency (the growth of the demand). Whenever the sector-specific technology gap is higher in the most dynamic technologies, than allocative efficiency directly conflicts with dynamic efficiency. If we have the increasing returns than the advantages may not lead to mutual gains from trade. We have here non-predictability and potential inefficiency. However technological change is associated with increasing returns over time. With them the market cannot signal to the agents the unintentional outcome of their collective behavior! The likelihood of such trade-offs between (1) and (2) is proportional to the distance of each country from the technological frontier.
7. A limited price-induced substitution between commodities and a relatively stable evolution in the baskets of consumption may well imply painful trade-offs between microeconomic mechanisms leading to Ricardian efficiency and patterns of production that could yield comparatively higher rates of macroeconomic activity compatible with the foreign balance constraint. Current allocative decisions influence the future technological advances!!! Markets functions: (1) to provide a mechanism of coordination between individual economic decisions; and (2) to provide an incentive to innovate.

1. We cannot separate the strictly economic variables from their institutional context.
2. The market performance is affected by a change of institutions.
3. Non-market institutions shape and select the fundamental rules of behavior and interactions of the economic agents.
4. Non-market variables form the patterns and organization of externalities and the unintentional outcomes of market processes.

1. The structural need for polices affects the patterns of economic signals.
2. Policies SHOULD: (1) provide a satisfactory flow of scientific advantages; (2) develop conductive financial structures to support the trial-error procedures to search new technological paradigms; (3) act as focusing devices in the process of selection of the directions of technological development.
3. Policies affect the fundamental rationalities, the ways their expectations and objectives are formed.
4. Policies are an institutional factor and are the part of the very constitution of economic processes.