UNIT 11: Economic Institutions

Table of Contents
Introduction 3
Essential Questions 4
Learning Targets 4
Lesson 1: Economic Institutions: Reciprocity 4
Starting Out 4
Learn about It! 5
History Maker 10
Check Your Understanding 11
Putting Value 12
Lesson 2: Economic Institutions: Transfers 13
Starting Out 13
Learn about It! 14
History Maker 18
Check Your Understanding 19
Putting Value 20
Lesson 3: Economic Institutions: Redistribution 20
Starting Out 20
Learn about It! 22
History Maker 26
Check Your Understanding 26
Putting Value 27
Lesson 4: Economic Institutions: Market Transactions 28
Starting Out 28
Learn about It! 29
History Maker 33

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 Check Your Understanding 34
Putting Value 35
Lesson 5: Economic Institutions: Markets and States 36
Starting Out 36
Learn about It! 37
History Maker 41
Check Your Understanding 42
Putting Value 43

Real-world Challenge 44
Society and I: Self- Check 46
Wrap Up 47
Bibliography 48
Answers to Check Your Understanding 49
Glossary 50

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GRADE 11/12 |Understanding Culture, Society and Politics
UNIT 11

Economic Institutions
In society, human interactions are made up of various cultural and economic exchanges or
transactions. How people exchange products and services vary, and each step in the exchange
process involves other small processes that further define and enhance the experience of
exchange.

Fig. 1. People buying goods in the market

Accessed February 18, 2018. https://www.pexels.com/photo/grayscale-photo-of-people-in-the-market-911893/

Economic institutions are those that are involved in the production and distribution of the
goods and services that members of a society need. Economic exchanges, which are an
important part of a functioning economy, happen for different reasons and through different
ways. Because societies greatly differ from each other in terms of culture, their systems of
economic exchange may also vary.

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In this unit, we are going to tackle different forms of economic institutions and determine the
factors that comprise them. To guide you in this unit, take note of the following questions:

• What are the different forms of reciprocity?

• What types of societies use the transfer system?
• How does redistribution affect a society’s economy?
• How do market transactions play a role in economics?
• How do markets and states relate to each other?

Learning Targets
In this unit, you should be able to analyze economic organization and its impacts on the lives
of people in society.

Lesson 1: Economic Institutions:

Reciprocity
Does the process of reciprocity always involve monetary transactions?

Starting Out

Every Christmas season, it is common for Filipinos to engage in different gift-giving activities
like Kris Kringle and the usual “exchange gift” activities during Christmas parties. However, in

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many instances, gift-giving does not stop there. You may find yourself giving gifts to your
closest friends or teachers. At the same time, you also get to receive gifts from them. Have
you ever reflected on why you give gifts in the first place? Could these gifts influence you and
your friends’ social relationship?

Fig. 2. Christmas exchange gift tradition

Accessed February 28, 2018. https://commons.wikimedia.org/wiki/File:FOB_Salerno_Christmas_party_121225-A-PO167-147.jpg

Learn about It!

Reciprocity is an activity that could be done by any person in society. It focuses greatly on the
exchange of goods and its impact on social relations. In this lesson, we will define reciprocity
and discuss its different types.

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The Meaning of Reciprocity

Reciprocity refers to the voluntary giving or taking of objects without the use of money in the
hopes that, in the future, they could be given back. Reciprocity could take the form of barter,
hospitality, gift-giving, and sharing. You might not realize it, but people engage in reciprocity
most of the time. Simple activities like borrowing and returning a pen could be categorized as
reciprocity. In societies, however, reciprocity means more than just a simple social activity.

The aim of engaging in reciprocity is to build and strengthen social relationships as well as
acquire more means or favors. As you may recall from earlier lessons, social relationships are
needed to expand personal and cultural development at the macro and micro level. Gaining
more favors through reciprocity contributes to this development by allowing people to
maximize their options in times of need.

A good example of reciprocity is the Filipino culture of utang na loob. This is an act of
kindness or favor that is expected to be given in return. For instance, Filipinos who seek help
from their acquaintances in accomplishing any specific task, such as looking for a job or
securing a personal loan for the family, would see themselves indebted to their friends. When
the time comes that the friend asks for a favor, it is common practice to help him out in
return. In our country, utang na loob is not mandated by any law or legal document. It is,
however, part of our unique culture and identity as Filipinos.

What could be the effects of reciprocity when done by two people from different social
classes?

In the same way, exchanges at the larger-scale could be facilitated through reciprocity. For
example, it is common nowadays to see big companies partnering up with each other in
hosting big events and promotions. These partnerships allow companies to gain favors from
each other and at the same time, benefit from each other. Among national governments and

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states, the same process also occurs. This could be seen especially in times of calamities or
disasters. For instance, the disastrous effects of Typhoon Yolanda in 2013 that took hundreds
of lives and destroyed thousands of properties in the Samar and Leyte region caught the
attention of many countries, private institutions, non-government organizations, and even
individual donors. All of them helped the Philippines through different means. While the
Philippines was able to survive the heavy impact of Typhoon Yolanda, our country is still
indebted to those who helped us survive the unfortunate event. As such, when other
countries are facing risk and disaster, the Philippines is also expected to return the favor by
helping out.

Forms of Reciprocity

While reciprocity is a simple concept, societies still use it differently. Thus, various forms of
reciprocity have been developed over time. The three forms of reciprocity were identified by
anthropologist Marshall Sahlins; thus, these forms of reciprocity are collectively known as
Sahlins’ Typology. Let us discuss them one by one.

Generalized Reciprocity

The main feature of generalized reciprocity is the exchange of goods and services without a
definite time frame of when the favor should be returned. In this form of reciprocity,
individuals giving out the favors do not expect to receive anything back. Such activity is
commonly done among small groups or societies.

A good example of this is your relationship with your family and closest friends. When you are
given food by your parents, for instance, do they expect you to buy them food in return?
Parents usually do not ask their children to repay them for what they are given. At the same
time, children are not obliged or pressured to return the favor as well. The same situation
goes for close friends. While they may expect more, close friends who do favors for one
another usually do it out of love, concern, or camaraderie, and not for any economic gain.

Among societies, generalized reciprocity occurs in smaller groups like bands or tribes where

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high importance is placed upon the culture of sharing. Nevertheless, all human populations
experience this form of reciprocity.

What other situations or examples show generalized reciprocity?

Balanced Reciprocity

In balanced reciprocity, exchange occurs between groups or individuals with the donor
expecting to receive something of equal or similar value. In this form, no haggling occurs
between two parties, and the exchange of goods occurs at a particular rate set upon by the
groups. There is pressure to give back the favors at a specific point in time. Unlike generalized
reciprocity, balanced reciprocity demands timely reciprocation that when favors are not
received by the donor, they could refuse to continue giving out the favors. Among groups, the
effects of non-compliance could result in gossiping, refusal to commit to any other
transaction, forced reciprocation, or strained relationships.

In pre-industrial societies, balanced reciprocity is usually organized through trade

agreements. This would mean that one member of a group has a designated partner in
another whom he or she chooses to trade goods with. The pair is responsible for organizing
the terms of their exchange, but no bargaining would still occur.

In generalized reciprocity, donors do not seek out favors in exchange for their deeds. In
balanced reciprocity, equal favors are expected by the donors. No bargaining occurs
between donors and receivers.

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Negative Reciprocity

In negative reciprocity, groups try to maximize their gains while giving as little as possible.
This form is usually motivated by the desire to acquire a large number of goods using minimal
resources. Negative reciprocity is similar to market exchange; however, in negative reciprocity,
no monetary exchange occurs among groups.

In pre-industrial societies, therefore, negative reciprocity is important, especially when groups

need to acquire products that are not easily accessible to them. In common terms, groups
could “import” products that they need from other groups, and in order to reduce the favor,
barters and bargaining occur. Groups would maximize their resources to gain favorable
outcomes and products from their goods.

Fig. 3. Map of New Guinea

Accessed February 28, 2018. https://en.wikipedia.org/wiki/New_Guinea#/media/File:LocationNewGuinea.svg

In the Trobiand Islands in New Guinea a balanced reciprocal exchange called

wasi was formalized. Residents from coastal villages traded fish with yams from
residents in lowlands or interior agricultural societies. This practice cemented
inter-group dynamics and relationship. It also established and maintained good
connections among group members. In your opinion, what could happen to
these two groups if their exchange system falls apart? How could it impact their
societies?

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Marshall Sahlins (1930 – ) is an American anthropologist best known for his
typology on reciprocal exchange, his ethnographic work in the Pacific, and his
anthropological theories. His most well-known work is Stone Age Economics (1972).

Fig. 4. Marshall Sahlins

Accessed February 27, 2018. https://commons.wikimedia.org/wiki/File:Marshall_David_Sahlins.jpg

Sahlins, throughout his career, argued against reductive theories of human nature
(i.e., biology and economics are primary determinants of personhood and society).
Instead, he posited that cultural exchange and interactions shape human behavior.
While Sahlins mainly focused on studying people in the Pacific, he also gave focus to
studies in Fiji and Hawaii. Sahlins is highly-affiliated with the University of Chicago,
having been given the distinction of Charles F. Grey Distinguished Service Professor
Emeritus and Social Sciences.

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 Check Your Understanding

A. Fill in the blanks with the correct answer.

1. The voluntary giving or taking of objects without the use of money is called
_______________________.
2. The form of reciprocity that typically describes parent-child relationships is
_______________________.
3. The forms of reciprocity include balanced reciprocity, generalized reciprocity, and
_______________________.
4. Marshall Sahlins first categorized reciprocity in his book _______________________.
5. In the Trobiand Islands, the system of balanced reciprocal exchange is called
_______________________.

B. In the Philippine setting, how does reciprocity occur? State relevant examples to support
your answer.
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

C. Research on three groups that particularly use each form of reciprocity. In the table below,
detail how each group functions. Cite particular examples to support your claim.

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 Group and
Agent Information Examples
Location

Generalized
Reciprocity

Balanced
Reciprocity

Negative
Reciprocity

Putting Value

Reciprocity occurs in different instances, even in classrooms or at home. Having familiarized

yourself with the different forms of reciprocity, observe your school, home, and community
environment and look for instances when reciprocal exchange occurs. List at least five
situations and identify the form of exchange for each. After the activity, reflect on the
differences of each form of exchange using the information you just gathered.

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 Lesson 2: Economic Institutions: Transfers
How are individuals and governments linked by transfers?

Starting Out

In a few years, you are going to step into the professional world to fulfill your dreams. In the
Philippines, wherever you will work, you will always be bound by your financial commitments
to the government. As you may know, all employees working in the Philippines are required to
give out a percentage of their salaries to the government. Likewise, private companies and
institutions are compelled to do the same.

Fig. 5. BIR Campaign to encourage people to pay their taxes.

Accessed February 28, 2018. http://knowyourtaxes.ph/home

In your perspective, why does the government need to acquire a percentage of your salary?
What is being done to your money? How does this process affect the goods and services
made available by the government?

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 Learn about It!

The Meaning of Transfers

Also called “government transfer” or “transfer payments,” transfers are a redistribution of

wealth and income where no goods or services are being given to the donor in return. Among
state societies, transfers are required payments that could take form through the collection of
taxes, social services, pensions, housing, and healthcare.

To better understand the concept of transfers, let us use the current Philippine economic
setting as an example. In every economy in the world, importance is placed upon the Circular
Flow Model that details economic processes and how they impact individuals, the market,
consumption, and production of goods. Naturally, high levels of employment are good for the
economy because it helps keep the economic balance, avoiding fluctuations and inflation. The
same situation goes for the Philippines. When employment rates are high, the economy is
kept in balance and in check. Another positive outcome of high employment is its effect on
transfer payments and economic institutions.

Could transfers only occur at the macro level? What other situations in the
Philippines show the concept of transfers?

All professional and service employees of the Philippines are required to pay their income
taxes to the government. This procedure is mandatory, and limited exceptions are given in
paying them. Taxes collected by the government are used to fund a range of public projects
and services for the benefit of the Filipino citizens. However, taxpayers do not expect to
acquire a personal favor or reward in exchange for the money they provided to the
government. In this situation, transfer occurs between individual taxpayers and the
government.

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Likewise, transfer payments could also originate from business institutions in the form of
corporate gifts to non-government organizations, medical and health benefits to employees,
and applicable local corporate taxes. Nevertheless, between the government and private
businesses, transfers originating from the government should be given greater importance.

Transfer is a process of redistributing money into new or existing programs such as

pensions, student grants, or health services.

Transfers and the Government

The government plays a crucial role in ensuring that transfer payments are collected
successfully from participating citizens and institutions. In the government’s case, public
goods are provided to people through various programs and activities that benefit its citizens.
Among the different allocations of transfer payments, governments usually give priority to
retirement and disability benefits, medical benefits, unemployment insurance, and education
and training.

Allocation of Example
Definition
Transfer
Payments that are made to Qualified senior citizens in the
citizens who qualify for Philippines are given monthly
retirement or disability benefits pensions.
Retirement and upon meeting government-
Disability Benefits mandated requirements.
Countries have different
qualifications for these benefit
programs.

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 Government payments made Medical assistance could be
through third-party institutions. provided to individuals coming
This type of transfer payment from low-income families. At the
could take form as public Philippine General Hospital, for
Medical Benefits
assistance medical care or example, medical services are
military medical care. available at a minimal cost (or
sometimes at no cost) to the less
fortunate.
This payment includes all Specially-rated pensions and life
government employees who are insurances are given to veterans
Unemployment
no longer fit to work that have who served in the army or fought
Insurance
rendered a certain number of in wars.
years in public service.
The primary goal of this transfer State universities and colleges in
payment is to provide assistance the Philippines strive to make
to all individuals so that they education affordable by offering
could afford schooling. subsidized or reduced tuition and
Education and
Educational services offered by fees to potential enrollees.
Training
the government usually range
from fully-funded academic
scholarships to technical training
programs.

In the Philippine setting, the allocation of funds for government projects and programs does
not move far from typical allocations. Among the various sectors of the government, the
Department of Education (DepEd), Department of Public Works and Highways (DPWH), and
Department of Interior and Local Government (DILG) were found to be given large funding. A
significant focus is also given to the Department of Health (DOH), especially since new medical
technology and breakthroughs are being introduced. These budget allocations are
understandable since our government is keen on improving our physical environment, the
educational opportunities for citizens, and the local health setting.

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 Fig. 6. Bureau of Internal Revenue - the country's tax collection agency.
Accessed February 19, 2018. https://www.bir.gov.ph

Governments specify income taxes that individuals should pay depending on their
marital status, number of children, and gross monthly compensation. Usually,
individual taxpayers who are unmarried without children and are earning above
average are the ones who get the most tax deductions. In your opinion, do you
think that this practice is fair? Could the government ultimately remove individual
taxation from its working population? How could this process affect government
projects and activities?

The Impact of Transfers to the Economy

Transfer payments maximize the potential effects of money on different social and economic
settings. The process of redistributing money allows for the efficient use of funds to target the
underprivileged sector. In addition, transfers facilitate the creation of new jobs or industries
that could help improve the economic conditions.

An important quality of transfers that could greatly benefit the economy is that all donors of

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transfer payments do not expect to receive something in return. Such activity allows for better
allocation of resources without the need to return any favor. Efficient transfer systems also
positively impact the global community. The attractive socio-economic conditions of a state
would encourage more local investments and economic activities that could sustain economic
growth.

Adam Smith (1723 – 1790) was a Scottish economist, author, and philosopher who
pioneered political economy during the Scottish era of Enlightenment. He laid out the
foundations of the classical free market theory.

Fig. 7. Adam Smith

Accessed February 27, 2018.
https://en.wikipedia.org/wiki/Adam_Smith#/media/File:Adam_Smith_The_Muir_portrait.jpg

Smith gave great focus on division of labor and competition in relation to economic
prosperity. He is best known for his written works, The Wealth of Nations (1776) and
The Theory of Moral Sentiments (1759). His writings became the foundation of modern
economics.

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 Check Your Understanding

A. Identify each statement if it is true or false.

1. Transfer payments are a form of redistribution.
2. Transfer payments maximize the potential effects of money on different social and
economic settings.
3. Health benefits, unemployment benefits, and education and training are some
examples of transfer payments.
4. Another term for transfer is “government transfer” or “transfer payments.”
5. Adam Smith’s writings laid the foundation for modern economic principles.

B. In your perspective, which among the many outlets of transfer payments is the most
beneficial to society?
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

C. Search for an example of the impact of transfer payments to the global economy. Cite
relevant examples to explain your answer.
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________

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 Putting Value

Search for online journals or articles that detail how transfer payments are utilized by the
government. List down the ways by which money has been redistributed. Write an essay
detailing the positive impacts of transfer payments to the economy. You could also choose to
focus your discussion on how your article impacts the Circular Flow Model.

Lesson 3: Economic Institutions:

Redistribution
What makes redistribution beneficial to society?

Starting Out

During relief operations for calamity victims, individuals and companies participate actively in
providing help in the form of commodities such as food, drinking water, or medicine. All these
donations are pooled together and prepared for distribution to the people and families
affected by disasters. The process of pooling together and distribution becomes efficient
because many volunteers play an active role in donating goods to the needy.

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 Fig. 8. Individuals helping each other
Accessed February 28, 2018. https://pixabay.com/en/together-helping%E2%80%8B-each-other-winning-2643652/

In your perspective, how does this process affect the receivers? How do you think the goods
are organized? Is there inequality in the allotment and distribution of these goods?

Learn about It!

From the previous lessons, you have learned that reciprocity and transfers are important
aspects of economic and social exchange. To continue with our discussion, we will now tackle
a new form of exchange called redistribution.

The Meaning of Redistribution

Redistribution occurs when individuals’ goods or services are pooled together by a central
authority to be used at a later time. The central authority may refer to a regional collection
point, a storehouse, or the national capital. Note that the main difference between
redistribution and reciprocity is that the latter refers to an exchange where goods are passed
back and forth from one group to another. Redistribution, on the other hand, focuses on the
collection of goods from individuals in a community to be kept by a central authority. These
goods are collected to be used in the future by the same group.

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 How does redistribution differ from transfer payments?

Products often move along the hierarchy, where one official transfers the goods into the care
of another until they reach storage. While in storage, it is possible for members of the central
authority to consume some of the goods that are kept for the future. However, because the
primary aim of redistribution is to allocate such goods back to the people, the central
authority should do so. Doing such requires a reversal of processes—from the storage area to
the central authority, and ultimately back to the common people.

A good example showing redistribution is the lifestyle of the Cherokees in Tennessee.

Cherokees typically harvested corn, squash, and beans, but they also fished and hunted on
the side. Every Cherokee family had an area of land to harvest, and they were required by
their chief to give a portion of their annual harvests. These were pooled together at the
central plaza where redistributive feasts and council meetings also take place. The products
pooled together by the chief are reserved for the needy and for travelers. Commoners could
also acquire some of the products with permission from the chief, while recognizing that the
chief still owned such goods. At times, the chief holds redistributive feasts where he
distributes the accumulated goods to his people.

In some societies, pooling together goods and resources also means relinquishing the
rights of those goods. For instance, some societies would consider pooled goods as
property of their community leader.

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In the pre-industrial setting, a common form of redistribution is called tribute. This is when
the subjects of a chief contribute products under a central authority. The Cherokee society
discussed earlier is an example of this. Expectedly, those part of the central authority,
sometimes even their families, are also given the right to consume a portion of the food. It is
important to know, however, that cultural meaning is also placed upon tributes. Participating
in such activities is seen as a way to show respect and recognition of the chief’s authority over
the group.

Other examples of redistribution systems could be found in many islands in Polynesia and
Micronesia. In these islands, members of the society are divided into two social classes:
nobles and commoners. The nobility does little agricultural work and mainly focuses on
managing the political and economic systems of the group. On the other hand, commoners
take charge of planting and fishing. They are also required to relinquish part of their harvests
to the nobility for their consumption and future redistribution.

Issues in Redistribution

While the goal of redistribution is to help out the community and to provide equal
opportunities for all members of society, certain aspects of the process still cause issues. Let
us discuss the main issues in the process of redistribution.

• How resources should be handled. There is conflict on who should provide goods and
who are exempted from giving them. This disagreement spurs from the fact that in
many societies, especially pre-industrial ones, there is no specific minimum standard or
guideline given on how much goods and products should be given for redistribution.
For instance, in modern societies, disagreement within groups arise because of
arguments regarding who should be exempted from paying their taxes or how much
tax should be acquired from each individual.

• Who gets to make the important decisions. When conflicts regarding the goods and
products themselves have already been resolved, another issue sets in: how do
societies decide on what to do with the pooled products and who are allowed to

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 consume them? This issue occurs because some leaders or members of the central
authority use the pooled resources for their personal gains. Such act is a clear violation
of the goals of redistribution and should, therefore, be dealt with accordingly. However,
because the central authority also takes charge of the actual redistribution, no
sanctions are given when they prioritize their personal interests. In these cases, political
ties and considerations factor in greatly to redistribution.

Anthropologists also tackle on issues involving redistribution. For instance, Sahlins argued
that pre-industrial redistributions, especially among chiefdoms, are just more organized forms
of kinship-rank reciprocity where the basic principles of exchange do not differ. Another
similar point of view is French Marxist anthropologist Claude Meillassoux’s who claimed that
redistribution developed from the linear system of generalized reciprocity. To support his
claim, he cited the practice of potlach as an example. Potlach is a practice where individual
resources are ceremonially given away according to social status, with the hopes that
community members will also give away part of their resources in the future.

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 Fig. 9. Potlatch ceremony
Accessed March 1, 2018. https://commons.wikimedia.org/wiki/File:Klallam_people_at_Port_Townsend.jpg

The practice of potlatching is common among the tribes in the North Pacific Coast of
North America, such as the Salish and Kwakiutl of Washington and British Columbia. In
their societies, potlach items included pieces of copper, food, and blankets. As a result of
participating in potlach activities, individuals gained attention and positive reputations.
Despite this unique practice, economists claim that potlatching activities are economically
wasteful because such resources could have been used in more productive means that
could benefit a bigger social group. In your opinion, is potlatching really wasteful? Why do
think tribes place great value upon this activity?

In another perspective, cultural anthropologist Erik Bähre argued that redistribution is a

central mechanism of capitalist societies. This occurs when resources that are pooled together
are used to fund ventures and investments that drive income. A primary example that he
used to defend this theory is the situation in South Africa where taxpayers are engaged in
redistribution practices facilitated by the state, religious institutions, and markets.

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 Karl Polanyi (1886 – 1964) was an Austro-Hungarian historian, economic
anthropologist, and economic sociologist. He authored the book The Great
Transformation where he detailed his dissent against traditional economic thought.

Polanyi’s name is easily associated nowadays with the concept of substantivism, a view
that countered mainstream anthropology and sociology. He is also responsible for
conducting several studies on cultural exchanges and distributions that paved the way
for a modern approach to such topics.

Check Your Understanding

A. Write the correct answer on the blank provided below.

1. This occurs when individuals’ goods or services are pooled

together by a central authority to be used at a later time.

2. It is a practice where individual resources are ceremonially

given away according to social status.

3. This term refers to the instance when subjects of a chief

contribute products under a central authority.

4. He was associated with the concept of substantivism and was

credited for his writings against traditional economies.

5. He argued that redistribution is a central mechanism of

capitalist societies.

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B. In the Philippine setting, does redistribution occur at the macro-level? Discuss your answer
using pertinent examples.
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________

C. List three examples of redistribution. Detail and discuss each example.

1. __________________________________________________________________________________________
2. __________________________________________________________________________________________
3. __________________________________________________________________________________________

Putting Value

Engaging in redistribution is a social activity that could benefit a group when done properly.
As a class, gather recyclables (e.g. old newspapers, bottles, cans) and pool them together. Sort
out these recyclables according to type. With the help of your teacher, sell the recyclables in a
junk shop or similar facility. Once the products are sold, decide among the class how you will
spend the money. You could use your earnings to fund other class activities or projects. Once
done, discuss among yourselves the learnings you gained from the activity.

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 Lesson 4: Economic Institutions: Market
Transactions
How do market transactions differ from other forms of economic exchanges?

Starting Out

You may have already realized that today, money is important. Money is used to buy
commodities and services; money is used to send kids to school; money is used for enjoyment
and recreation. Tangible objects could usually be bought by money. Nowadays, a person’s
income level could easily define what he or she could afford in life. Even as a student, you are
taught that, in order to acquire goods, you need to use money to purchase them.

Fig. 11. Money

Accessed February 28, 2018. https://pixabay.com/en/money-money-tower-coins-euro-2180330/

In your perspective, what makes today’s society more conducive to dealing using monetary
transactions? How does this form of economic exchange impact economy in general? How

28
does this phenomenon drive economic and cultural change?

Learn about It!

You are already aware that some forms of exchanges occurring in society are done without
the use of money. However, living in the present, you are also aware that in many states and
countries, that is not the case. Monetary transactions occur every day and at a great cost. In
this lesson, we will discuss market transactions and its impact on the economy and society.

Understanding Market Transactions

Over a long period, many societies have evolved and have adopted a capitalist economy
where the market principle dominates. This principle implies that the market is responsible
for the sale and distribution of goods and services. A prominent concept in discussing market
transactions is market exchange which refers to the organized process of sale and
distribution at money price. This would imply that for all forms of transactions within a
market, money is heavily utilized.

What role does a market play in the circular flow of economy?

Note, however, that a market, in this sense, does not just refer to a physical structure (such as
a public market) where local goods are sold to consumers. A market, in economic terms,
refers to a bigger setting where buyers or sellers simultaneously trade or exchange goods or
services. Markets could imply a global setting where states engage in market transactions to
exchange goods or services.

In a market exchange, at least two people should be involved: one who has a product and
another who has the money. Using a system of barters and bargaining, the two individuals

29
agree upon a specific price for a specific quantity of the product. To further understand this
concept, let us use your personal experience as an example. Dining out at restaurants by
yourself or with your family is an example of market exchange. When you eat out, you allot a
specific amount of money to buy food. The same amount of money you have allotted could
buy specific quantities of products from the menu. When you pay for your food at the cashier,
you are already engaging in a market transaction because you gave up your money in
exchange for goods or services, which in this case, is food.

Thus, all forms of market exchange would require the following: a medium of exchange, a rate
at which products are exchanged for money, and parties who are involved in the exchange
(i.e., buyers or sellers).

Elements of Market Transactions

In understanding market transactions, it is important to also familiarize yourself with the

elements that make up market exchanges. Note that these elements are also important in
balancing the economy.

Element Description

It consists of objects that serve as means of

Money
exchange for goods and services.

It is the amount required or agreed upon by the

Prices exchanging parties. It is the amount of money used
in exchange for a certain product.

It refers to the quantity of goods or services that are

Supply
available to sell at a given price and period of time.

It refers to the quantity of goods or services that

Demand consumers are willing to purchase at a given price
and time period.

30
Money is an important aspect of market transactions because it is the medium with which
goods and services are exchanged. At the same time, prices also quantify the goods that could
be purchased using a specific amount of money. Supply and demand are both dictated by
economic conditions. Additionally, since no physical coercion to purchase goods is available in
markets, no group is forced to buy or sell in the market when prices are set by supply and
demand. This phenomenon paves the way for a free market where no third-party
institution—for instance, the government—sets or controls the prices, and no single supplier
controls the market to make people purchase from him or her.

All market transactions involve the use of monetary exchanges in order to acquire
goods or services.

Market Transactions and the Economy

Market transactions facilitate the flow of economy and help keep its balance. Remember that
a significant principle in economy is the productive use of money and monetary transactions.
In the economic sense, money should be utilized in ways where income could be generated or
produced. As such, putting money in banks or purchasing goods and services are ways by
which money flows consistently in the circular model of the economy.

Market transactions, therefore, pave the way for more means of monetary exchange that help
build the economy. At the micro-level, individuals are given more opportunity to utilize their
incomes or savings because of the products made available to them.

31
 Fig. 12. Money could be used in different ways
Accessed February 28, 2018. https://pixabay.com/en/coins-money-uk-money-english-money-2512279/

Among modern societies, money could be used in several ways. Such is quite
uncommon for pre-industrial societies like bands, tribes, or chieftains who usually
resort to reciprocity and redistribution. However, the Kapauku people of
Indonesia used shells and two variants of necklaces as a form of currency. They
used these materials to purchase labor, agricultural goods, animals, and medical
services. In your opinion, could the same form of currency be successfully applied
in more industrialized societies?

32
Milton Friedman (1912 – 2006) was an American economist best known for his
works on consumption, stabilization policies, and monetary policy and its history.
Because of his vast contributions to the field of economics, he was awarded a Nobel
Memorial Prize in Economic Sciences in 1976.

Fig. 13. Milton Friedman

Accessed February 28, 2018.
https://en.wikipedia.org/wiki/Milton_Friedman#/media/File:Portrait_of_Milton_Friedman.jpg

Friedman argued against the Keynesian theory of economics and postulated a

macroeconomic alternative known as monetarism. In his works, he cited the
importance of monetary transactions, taxation, deregularization, and privatization in
balancing the economy. According to numerous surveys, Friedman is ranked second
to John Maynard Keynes in the ranking of the most popular economists of the 20th
century.

33
 Check Your Understanding

A. Identify each statement if it is true or false.

1. A free market involves the participation of the government and private institutions.
2. Demand refers to the quantity of goods or services that are available to sell at a given
price and period of time.
3. The Kapauku people of Indonesia had their own system of market transactions using
shells and necklaces.
4. Putting money in banks or purchasing goods and services are ways by which money
flows consistently in the circular model of the economy.
5. Milton Friedman was ranked second to John Maynard Keynes in the ranking of the most
popular sociologists of the 20th century.

B. Compare and contrast Keynes’ and Friedman’s approaches to market transactions.

Keynes Friedman

34
C. Research on the concept of free market. Discuss its main tenets and importance in the
field of economics. Cite relevant examples to support your discussion.
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________
______________________________________________________________________________________________

Putting Value

Engage your classmates in a system of market exchanges. Divide the class into four to five
groups. Using chocolate coins or candies as a substitute for real money, create scenarios by
which people utilize a system of market transactions. Each group may research on possible
scenarios and available products to exchange. After the activity, discuss among your
classmates the relevance of market transactions at the macro- and micro- level.

35
 Lesson 5: Economic Institutions: Markets
and States
How are markets and states related?

Starting Out

You already know that markets and states are two different social institutions. Being under
the umbrella of economics, markets exist in a capitalist sense: that is to maximize financial
resources and open new economic opportunities. States, on the other hand, are focused on
multiple processes—keeping diplomatic relations, providing programs and projects for the
benefit of its citizens, and specifying the rule of law, among others.

Fig. 14. Monitoring market activities

Accessed February 28, 2018. https://pixabay.com/en/business-america-american-3187086/

Despite their differing functions, markets and states meet halfway in terms of economics. In
your opinion, how do markets affect states and vice versa? What mechanisms are available in
maintaining the relationship between markets and states?

36
 Learn about It!

The emergence of capitalism began a few centuries ago when societies were introduced to
new technologies and opportunities that made earning capital or income easier. These events
paved the way for the development of more economic activities that gave focus to income
generation and the balancing of the economy. In this lesson, we will discuss the relationship
of states and markets as well as discuss their impact on one another.

The Interaction of States and Markets

Providing an in-depth concept of the state requires a look at markets and vice versa. States
need to foster economic growth to provide a good standard of living to its citizens. At the
same time, markets exist because of the economic activities done by the state. As such, we
could easily conclude that markets and states are dependent on each other.

This interaction between states and markets opens up the field of international political
economy. This phenomenon also drives changes to the holistic development of a nation. One
prominent example of the effects of the interactions between states and markets is the case
of China where developments on both their market and state needs were emphasized and
utilized in their reform programs. As an effect, the country developed societal and economic
growth over the past two decades. The market-based and state-based reforms and
developments that China implemented rested highly upon the transformation of people’s
communes, state-owned enterprises, decentralization, price reform, and capital market
development.

In your opinion, which aspect of a nation is more important: the state or the market?

37
Reviewing the steps that China did to achieve economic and societal growth and progress, we
could easily conclude that the best way to uplift the economy and the state itself is for the two
entities to complement each other in their respective political and economic processes. For
instance, to ensure the successful market transactions, states need to be positive catalysts in
ensuring an environment that is highly beneficial for market activities.

Conflicts between Market and State Functions

While some societies can move past the different focus of markets and states, there are still
ongoing debates about their theoretical and practical components. For instance, the abrupt
rise of globalization has led academicians to suggest the end of the dominance of states in
exchange for the emergence of global markets.

Markets and states are macro-level institutions that impact society as a whole.

A widely-supported belief on states and markets is their inability to complement each other in
macro-functions. According to supporters of the contractualist notion and liberal views, states
are unnatural entities occurring within societies because they are primarily built by strict
delegations of power by citizens. In addition, liberal notions emphasize that because states
are basically built by citizens, the only power it has over society is to enforce its law and
ensure that group members are receiving equal rights. Thus, this perspective argues for a
minimal role of states and its inability to handle, control, and utilize markets.

Despite ongoing debate over the relationship markets and states, some contemporary
scholars suggested and provided empirical proof that the two entities are indeed linked to
each other and are equally important to societal development.

38
Types of State According to Market Roles

As earlier mentioned, according to scholars, relationships between the state and market vary
in terms of degree of interdependence. Some views argue for less state intervention in market
activities, while other perspectives see the necessity of state actions in managing the market.
In these varying perspectives, the state plays different roles in relation to the market. There
are at least three types of states depending on their role or relationship to the market,
namely: the laissez-faire state, the interventionist or developmental state, and the welfare
state. Let us discuss each type in detail.

Laissez-Faire State

Laissez-faire is derived from French words that mean "to leave alone." According to the
principle of laissez-faire, the economy functions best when the government does not intervene
through regulations, subsidies, privileges, and other types of intervention. The laissez-faire
state, therefore, completely does not have any role in managing the market.

Interventionist or Developmental State

The developmental or interventionist state is a state that intervenes in the market and sets
the direction and pace of economic development. To bring about economic development,
developmental states implement policies, such as subsidies, protection of tariffs and local
industries, and prioritization of some industries over others. In these types of states, the state
and the market are closely intertwined, and their relationship is managed by a special bureau
or department that coordinates the developmental efforts of the state on the economy.

Welfare State

The welfare state is one that plays an important role in the achievement and protection of the
economic and social well-being of its citizens. In contrast to the developmental state, the
welfare state’s involvement is aimed at achieving a good quality of life for the citizens, rather

39
than merely driving economic development. Examples of programs of the welfare state are
the provision of health services, low-cost housing, and basic education. Within the welfare
state, the government itself is not the only actor tasked with providing welfare. Businesses
and organizations may also contribute to providing welfare services.

Various forms of state-market relationships can bring about different effects on the lives of
the citizens in a country. Some states are a combination of these types. For example, some
states can play the role of the developmental state and the welfare state. In some cases,
states transform from being developmental states to welfare states after considerable
economic development has been reached.

Fig. 15. Globalization is related to market-state activities

Accessed March 1, 2018. https://pixabay.com/en/handshake-business-hand-2998302/

In the Philippine setting, the market and the state are also entities that greatly
influence our economic and political capabilities. While our country participates in
international trade agreements and market opportunities, it seems that the state is
complementing this through the adaptation of relevant economic policies that drive
reforms and developments. In your opinion, what makes our state-market relations
effective?

40
John Maynard Keynes (1883 – 1946) was a British economist famous for his works and
writings on macroeconomics and governmental economic policies. His school of thought is
recognized as Keynesian economics, and is used even until today.

Fig. 16. John Maynard Keynes

Accessed February 19, 2018. https://commons.wikimedia.org/wiki/File:Lopokova_and_Keynes_1920s_cropped.jpg

Keynes’ works laid out the foundation for modern macroeconomic theories. He argued
against neoclassical economics and the role of free markets in full employment. Even after
his death, Keynes’ works continued to provide inspiration to many policy-making bodies,
especially between the Great Depression and the mid-1970s.

41
 Check Your Understanding

A. Write the correct answer on the blank provided below.

1. This type of state does not intervene in the economy or the

market.

2. This type of state plays an important role in the achievement

and protection of the economic and social well-being of its
citizens.

3. This country developed societal and economic reforms over the

past two decades due to a good balance between market and
state functions.

4. He laid out the foundation of modern economic models and

served as the inspiration to contemporary policy-making bodies.

5. This notion emphasizes that states are unnatural entities built

by strict delegations of power.

B. In your own words, differentiate markets and states from each other. You may research
on relevant academic articles to support your definitions.
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________
_______________________________________________________________________________________________

42
C. List three examples of market-state interactions. Detail and discuss each example.
1. __________________________________________________________________________________________
2. __________________________________________________________________________________________
3. __________________________________________________________________________________________

Putting Value

Choose one particular country aside from the Philippines. Research about the country in
terms of its market-state interactions, possible conflicts of interest, and current political and
economic activities. Using the table below, list down the information you have acquired from
your research. Key in your knowledge about the current political and economic system. Once
done, compare and contrast the market-state characteristics of the two countries.

Chosen Country:
Philippines
_____________________

State
Characteristics

Market
Characteristics

43
 Real-world Challenge
Divide the class into five groups. Read the GRASPS situation below and perform the following
tasks. Make sure to read the rubrics for the activity.

Goal:
• Your task is to differentiate between the five economic institutions
discussed in this unit.
• The goal is to show different situations that distinctively characterize each
economic institution.
• The problem or challenge is to make your classmates realize that economic
institutions are different among societies.

Role:
• Each group is assigned one topic: reciprocity, redistribution, transfers,
market transactions, and markets and states.
• All members of the group should be able to showcase the assigned topic.

Audience:
• The target audience is your classmates and your teacher.

Situation:
• You are part of different social situations and activities (e.g. at a local fast
food chain, members of a tribe, government employees)

Product/Performance and Purpose:

• You will enact and address the situation based on your assigned topic.
Props could be used in order to enhance the storyline and performance
quality.
• You need to be as authentic as possible in presenting your skit. Arguments
and dialogues should therefore showcase your chosen topic. Post-
performance discussions could be presented using Powerpoint
presentations.

Standards & Criteria for Success:

• Your work will be judged by the following standards on the next page.

44
 Criteria Beginning Developing Accomplished Score
(17-20 points)
(0-12 points) (13-16 points)

Content
(Focus on details are clearly
evident; it is clearly related
to the topic.)

Organization
(Logical progression of
details; clear transitions
Presentation

between ideas.

Conventions
(mechanics, grammar and
usage)

Creativity
(shows resourcefulness in
presentation and activities)

Audience Impact
(interesting presentation to
get the attention of
students)

Team Work
(contributions from all
Task-specific

members to the fruition of

the work)

Total Score:

45
 Society and I: Self-Check

Check I can…

differentiate between the different economic institutions.

explain the different types of reciprocal exchanges.

provide examples that showcase the concept of redistribution.

discuss the key elements of market transactions.

differentiate between the roles states and markets.

apply what I learned to my personal experiences.

Reflect

I find __________________________ the most interesting because ______________________.

I got ____ checks because _______________________________________________________.
I need to improve on _______________________because _____________________________.
I need to practice _________________________ because _____________________________.
I plan to _____________________________________________________________________ .

46
 Wrap Up
● In society, human interactions could be accounted for by exchanges in various cultural
and economic transactions.
● Reciprocity, transfers, redistribution, market transactions, and markets and states are
types of economic institutions.
● Transfer payments could be considered as a variant or type of redistribution.
● Some exchanges are done using goods and services, while others make use of
monetary resources.
● Societies resort to different economic institutions depending on their needs.

Economic Institutions

Market Markets and

Reciprocity Transfers Redistribution
Transactions States

Understanding The Interaction of

The Meaning of The Meaning of The Meaning of
Market States and
Reciprocity Transfers Redistribution
Transactions Markets

Elements of Conflicts between

Forms of Transfers and the Issues in
Market Market and State
Reciprocity Government Redistribution
Transactions Functions

The Impact of Market Types of State

Transfers to Transactions and According to
Economy the Economy Market Roles

47
 Bibliography

Caldentey, Esteban Pérez. "The Concept and Evolution of the Developmental State."
International Journal of Political Economy 37, no. 3 (2008): 27-53.

Conrad Phillip Kottak. Cultural Anthropology: Appreciating Cultural Diversity (14th ed). New York,
New York: McGraw-Hill, 2011.

Chunlin Zhang. “The Interaction of the State and the Market in a Developing Transition
Economy: the Experience of China.” Asia-Latin America Cooperation – ALAC, 2002.

“Exchange and economic systems.” Retrieved from http://fasnafan.tripod.com/economics.pdf.

Hill, Aaron. "Laissez Faire Economics: Definition & Examples." Study.com. Accessed March 5,
2018. https://study.com/academy/lesson/laissez-faire-economics-definition-
examples.html

Jose Reis. “The State and the Market: An Institutionalist and Relational Take.” RCCS Annual
Review, 4, 2002.

Joseph E. Stiglitz. “Markets, states and institutions.” Roosevelt Institute Working Papers.
Roosevelt Institute: 2017.

Sean O’Riain. “States and Markets in an Era of Globalization.” Annual Review of Sociology, 26.

"Welfare State." Encyclopedia Britannica. Accessed on March 5, 2018.

https://www.britannica.com/topic/welfare-state.

48
 Answers to Check Your Understanding
Lesson 1: Economic Institutions: Reciprocity
Part A.
1. reciprocity
2. generalized reciprocity
3. negative reciprocity
4. Stone Age Economics
5. wasi

Lesson 2: Economic Institutions: Transfers

Part A
1. True
2. True
3. True
4. True
5. True

Lesson 3: Economic Institutions: Redistribution

Part A.
1. redistribution
2. potlatch
3. tribute
4. Karl Polanyi
5. Erik Bähre

Lesson 4: Economic Institutions: Market Transactions

Part A
1. False
2. False
3. True

49
 4. True
5. False

Lesson 5: Economic Institutions: Markets and States

Part A
1. Laissez faire state
2. Welfare state
3. China
4. John Maynard Keynes
5. Contractualist

Glossary
Balanced reciprocity – exchange occurs between groups or individuals with the donor
expecting to receive something of equal or similar value
Circular Flow Model of Economy – details the process of the economy and how it impacts
individuals, the market, consumption, and production of goods
Economic institution – how people produce goods and the processes tied in together with
their production, as well as the act of consumption
Free market – no third-party institution sets or controls the prices, and no single supplier
controls the market to make people purchase from him or her
Generalized reciprocity – the exchange of goods and services without a definite time frame
of when the favor should be returned
Interventionist or developmental state - a state that intervenes in the market and sets the
direction and pace of economic development.
Laissez-faire state - the type of state that leaves the economy to function alone without
government intervention
Market – a bigger setting where buyers or sellers simultaneously trade or exchange goods or
services
Market exchange – refers to the organized process of sale and distribution at money price
Market principle – implies that the market is responsible for the sale and distribution of
goods and services
Negative reciprocity – groups try to maximize their gains while giving as little as possible
Potlatch – a practice where individual resources are ceremonially given away according to

50
social status, with the hopes that community members will also give away part of their
resources in the future
Reciprocity – the voluntary giving or taking of objects without the use of money in the hopes
that, in the future, it could be given back in return
Redistribution – occurs when individuals’ goods or services are pooled together by a central
authority to be used later in time
Sahlins’ Typology – the collective term for the different forms of reciprocity
Trade agreements – one member of a group has a designated partner in another whom he
or she chooses to trade goods with
Transfers – redistribution of wealth and income where no goods or services are being given
to the donor in return
Tribute – when the subjects of a chief contribute products under a central authority
Utang na loob – an act of kindness or favor that is expected to be given in return
Welfare state - a state that plays an important role in the achievement and protection of the
economic and social well-being of its citizens

51