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Institutional Change: A Framework Of Analysis

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Author Info

  • Douglass C. North

    (Washington University)

Abstract

A theory of institutional change is essential for further progress in the social sciences in general and economics in particular. Essential because neo-classical theory (and other theories in the social scientist's toolbag) at present cannot satisfactorily account for the very diverse performance of societies and economies both at a moment of time and over time. The explanations derived from neo-classical theory are not satisfactory because, while the models may account for most of the differences in performance between economies on the basis of differential investment in education, savings rates, etc., they do not account for why economies would fail to undertake the appropriate activities if they had a high payoff. Institutions determine the payoffs. While the fundamental neo-classical assumption of scarcity and hence competition has been robust (and is basic to this analysis), the assumption of a frictionless exchange process has led economic theory astray. Institutions are the structure that humans impose on human interaction and therefore define the incentives that (together with the other constraints (budget, technology, etc.) determine the choices that individuals make that shape the performance of societies and economies over time. In the following pages, I sketch out a framework for analyzing institutions. This framework builds on the economic theory of choice subject to constraints. However it incorporates new assumptions about both the constraints that individuals face and the process by which they make choices within those constraints. Too many gaps still remain in our understanding of this new approach to call it a theory. What I do provide are a set of definitions, principles, and a structure which provide

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Bibliographic Info

Paper provided by EconWPA in its series Economic History with number 9412001.

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Length: 12 pages
Date of creation: 14 Dec 1994
Date of revision: 14 Dec 1994
Handle: RePEc:wpa:wuwpeh:9412001

Note: ascii text 12 pages, PostScript (23 pages) available, words 4729
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Web page: http://128.118.178.162

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Cited by:
  1. Marco Grasso & Enzo Di Giulio, 2003. "Mapping sustainable development in a capability perspective," HEW 0309001, EconWPA.
  2. Monasso, Ton & van Leijden, Fabian, 2007. "Telecommunication regulation as a game: deepening theoretical understanding," MPRA Paper 7625, University Library of Munich, Germany.
  3. Ahrens, Joachim & Jünemann, Patrick, 2010. "Transitional institutions, institutional complementarities and economic performance in China: A 'Varieties of Capitalism' approach," Discourses in Social Market Economy 2010-11, OrdnungsPolitisches Portal (OPO).
  4. Stefano Pareglio & Alessandro Vaglio & Marco Grasso & Stefania Migliavacca & Enzo Di Giulio, 2005. "Modelling sustainable human development in a capability perspective," Public Economics 0504008, EconWPA.
  5. Gérard Charreaux, 1996. "Pour une véritable théorie de la latitude managériale et du gouvernement des entreprises," Working Papers CREGO 0960601, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.

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