Academic journal article
By Nelson, Richard R.
Journal of Economic Issues , Vol. 41, No. 2
After a long hiatus, "institutions" again is a fashionable term in the vocabulary of professional economists. Indeed, there is widespread agreement that the right institutions are the key to economic productivity and progressiveness, but beneath this apparent consensus lies something of a muddle. There are several different definitions of what institutions are and what they do. Most analyses that purport to identify the "right" institutions are superficial and unpersuasive. And, there are serious questions regarding why societies have the institutions they do at any time and their ability to deliberately improve them.
My argument is that the conglomerate of things different economists have called institutions largely reflects the fact that many different kinds of structures and forces mold the way individuals and organizations interact to get things done. Many different institutions are needed, and the institutions that are effective are very context dependent.
I argue that economic growth involves the co-evolution of technologies and the institutions needed for their effective operation and advancement. Some institutions provide the broad background conditions under which technological change can proceed, and others come into existence and develop to support the important new technologies that are driving growth. Institutional change, and its influence on economic activity, is much more difficult to direct and control than technological change, and hence prevailing institutions are often drags on economic productivity and progressiveness.
Unpacking the Concept of Institutions
First of all, there is the question: what are institutions? Many scholars of institutions propose that institutions should be understood as "the basic rules of the game," the broad legal regime and the way it is enforced, widely held norms that constrain behavior, etc. (North 1990). Other scholars associate institutions with particular governing structures molding aspects of economic activity, like a nation's financial "institutions," or the way firms tend to be organized and managed (Williamson 1975; 1985). Still other social scientists associate the term institutions with customs, standard and expected patterns of behavior in particular contexts, like the acceptance of money in exchange for goods and services (Veblen 1899). The conception here is with the ways things are done, rather than broad rules or governing structures that constrain behavior; although these things are connected, they are somewhat different. Also, while many authors use the term "institution" to refer to somewhat abstract variables, like the consistency and justice of the rule of law in a society, or the general use of money in exchange, other scholars associate the term with particular concrete entities, such as the Supreme Court of the United States, or the Federal Reserve System.
Certainly we have a wide range of "things" here. This diversity of meanings, and analytic foci, makes coherent discussion about the nature and role of institutions difficult.
If the research by individual economists and other social scientists on the nature and role of institutions in long run economic development is to go forward in a way that is coherent and cumulative, there clearly needs to be more shared agreement regarding just what the term "institutions" is presumed to mean, and how they affect economic activity. The position I want to espouse here is that the most useful conception of what institutions are would encompass a wide range of somewhat different things, but with different ones relevant in different analytical contexts. The unity and focus of the research program would be provided by agreement on what institutions broadly do.
Bhaven Sampat and I have proposed (Nelson and Sampat 2001) that despite the diversity in the literature regarding how institutions are defined, a large share of the writing is intended to illuminate the factors molding the goal oriented behaviors of economic agents in contexts where the actions of several parties determine what is achieved. …