An introduction to institutions and institutional change

Abstract

Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and hence is the key to understanding historical change. That institutions affect the performance of economies is hardly controversial. That the differential performance of economies over time is fundamentally influenced by the way institutions evolve is also not controversial. Yet neither current economic theory nor cliometric history shows many signs of appreciating the role of institutions in economic performance because there as yet has been no analytical framework to integrate institutional analysis into economics and economic history. The objective of this book is to provide such an underlying framework. The implications of the analysis suggest a reexamination of much social science theorizing in general and economics in particular, and provide a new understanding of historical change. In this study I examine the nature of institutions and the consequences of institutions for economic (or societal) performance (Part I). I then outline a theory of institutional change not only to provide a framework for economic (and other) history, but also to explain how the past influences the present and future, the way incremental institutional change affects the choice set at a moment of time, and the nature of path dependence (Part II).