About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline

LOG IN
LOG IN


11 Cato J. 477 (1991-1992)
Institutions, Ideology, and Economic Performance

handle is hein.journals/catoj11 and id is 483 raw text is: INSTITUTIONS, IDEOLOGY, AND ECONOMIC PERFORMANCE Douglass C. North The central argument of this essay is that institutions and ideology together shape economic performance. Institutions affect economic performance by determining (along with the technology used) the cost oftransacting and producing. Institutions are composed of formal rules, informal constraints, and characteristics of enforcing those constraints. While formal rules can be changed over night by the polity, informal constraints change very slowly. Both are ultimately shaped by people's subjective perceptions of the world around them; those perceptions, in turn, determine explicit choices among formal rules and evolving informal constraints. In succeeding sections I will develop this analytical framework, which I will use to diagnose the contrasting performance of Western market economies with those of Third World and socialist economies. Institutions and Transaction Costs Institutions are the rules of the game in a society; more formally, they are the humanly devised constraints that shape human interac- tion. Thus, they structure incentives in exchange, whether political, social, or economic. Institutional change shapes the way societies evolve through time and, hence, is the key to understanding histori- cal change. That institutions affect economic performance is hardly controver- sial. That differential performance of economies over time is funda- mentally influenced by the way institutions evolve is also not controversial. Yet Western neoclassical economic theory is devoid of Cato journal, Vol. 11, No.3 (Winter 1992). Copyright @ Cato Institute. All rights reserved. The author is the Luce Professor of Law and Liberty in the Departmentof Economics and Director of the Center of Political Economy at Washington University. This essay is drawn, in part, from North (1990b). 477