The Economics Book

206

INSTITUTIONS

MATTER

INSTITUTIONS IN ECONOMICS

S

tandard economics assumes

the existence of markets.

It also assumes that

governments have the policy

levers necessary to encourage

markets towards beneficial kinds of

trade, investment, and innovation.

However, institutional economists

go deeper—they search for the

origin of markets, their involvement

with the state, and the political

and social conditions that help

economic activity.

US economist Douglass North

defined institutions as the

“humanly devised constraints

that shape human interaction.”

These constraints are the “rules

of the game,” and appear in both

formal and informal guises.

Institutions are the laws, customs,

and traditions of a society.

“Bad” institutions

hamper economic

and social progress.

Individuals and firms work within

the bounds of these institutions

when they work, buy, and sell.

“Good” institutions

promote economic

and social progress.

Good institutions

matter.

IN CONTEXT

FOCUS

Society and the economy

KEY THINKER

Douglass North (1920 – )

BEFORE

1904 US economist Thorstein

Veblen argues for the primacy

of institutions in explanations

of economic performance.

1934 US economist John

Commons states that

economies are complex

webs of institutions and

divergent interests.

AFTER

1993 US economist Avner

Greif uses game theory

to analyze the historical

development of institutions

that allowed trade to develop.

2001 Turkish-US economist

Daron Acemog ̆lu explains

institutional differences

between countries in terms

of their colonial origins.