1.3 How laws and rules of behavior affect what people do

In all of the following interactions (and many more interactions, too) people and firms choose from among many alternatives: what to buy at the supermarket, what price Bunker Hill will charge for its metals, how much Bunker Hill will pay its workers, and how best to care for a sick child.

But the choices available to each of the actors are limited. Each choice involves not just what one person wants to do, but also what others do or are willing to do. The owners of the Bunker Hill Company could not decide to cut the wages it pays its workers in half. If it did, the workers would not show up, or as Bill Voss, the welder, said, they would “pull out of the state.” What you can buy at the supermarket will be limited by the prices of the goods and how much money you are free to spend.

institution

An institution is a set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed ‘the rules of the game.’

The limits on the choices an actor can make are also set by institutions. Institutions govern social interactions. We use the term institutions for the “the rules of the game.” The rules of the game determine the choices open to each actor—what they can or cannot do. The rules of the game also determine how the outcomes for each actor depend on what they and the other actors do.

Institutions include the laws and regulations enforced by the government as well as any custom (or social norm) strong enough that few people would consider violating it. Because the government makes and enforces the laws, it is also one of the main actors in the story of Kellogg, Idaho, and any other economy.

Here are some of the rules of the game described in the Kellogg story:

• Buying and selling goods and services, and taking a job, are voluntary. You can always say no. The owners of Bunker Hill are not free to dictate any wage to the workers. The wage must be good enough for workers to show up (rather than leaving town and searching for work elsewhere).
• The owners of a firm decide who works there, and whether to shut down so that nobody has a job there. If the workers are members of a labor union, they can act collectively to demand a higher wage and refuse to work unless their demands are met. But they cannot insist on too high a wage, because the company has the option of closing down and smelting ore in a different place.
• The owners of the firm are free (within the law) to decide how to operate their business. Because they own Bunker Hill, the owners (or the managers they appoint) are free to choose the technology they use in smelting the ore. They could have fixed the filters and emissions capturing system after the fire. Instead, they chose to run the plant with a high level of emissions. If they impose too severe a health hazard on the people in the town, then the residents might leave town, which they are free to do.

A key idea is that the owners of Bunker Hill are limited by the fact that workers can choose not to work for the company. Likewise, the workers are limited by the other opportunities that the owners of Bunker Hill would have if they “walked away” from Kellogg (which is what they eventually did). About half as many people live in Kellogg as when the smelter was in operation. Many former Bunker Hill employees are trying to make a living serving the skiers, hikers, and other ecotourists visiting the nearby Bitterroot Mountains.