Shiping Tang argues that institutions shape economic development through four “Big Things”: possibility, incentive, capability and opportunity. He advances an understanding of institutions and economic development through a holistic, interdisciplinary lens that embraces political science, sociology and economics. This approach is an essential element of a new, comprehensive approach to international finance for economic development (IFED).

What is the foundation for an economy?

Economies have to make choices about how to allocate scarce resources. How should they use their human labour and machinery to produce goods and services? What mix of goods and services should they produce, and for whom? These questions are a fundamental part of any economic system.

There are two broad categories of economic systems: planned and free market systems. In a planned system, the government controls production and distribution of all or some goods and services. The highest form of a planned economy is communism. A free market economy, like the one espoused in Adam Smith’s The Wealth of Nations (1776), relies on competition and the customer’s ruthless search for value, which should automatically correct all imbalances.

However, even in a free market system, it is possible that the amount of socially desirable goods and services produced is too low or too high relative to what the economy has to work with. To remedy this, a resource reallocation is needed. This means choosing to produce fewer or more cigarettes or alcohol, or less or more education or health care.