Institutions matter for the structure and change of societies and economies throughout human history.* These institutions are not just economic institutions such as capitalism and socialism that can determine the allocation of resources, but also social institutions such as families, charities, and churches that can support the needy, and political institutions such as democracies and authoritarianism that determine property rights and enforce contracts.
Given that the system of federalism in the U.S. provides an opportunity for each state to devise different policies within a federal institutional framework of laws, fiscal policy, monetary policy, regulations, foreign trade policy, and other rules, this system provides a laboratory of competition among states to set their own institutional framework where all other factors are closer to remaining constant. This allows for an examination of each state’s economic results to determine which policies may support more prosperity than others. Demographics also play a part in states’ economic institutions and results; therefore, it is important to compare states that are as similar as possible to provide less biased comparisons, ceteris paribus.
This piece originally appeared in Texas Public Policy Foundation