ABSTRACT
A theory of external trade and payments based on the ideas of institutional economics must have characteristics and implications much different than those of the orthodox theory, which is concerned almost exclusively with explaining economic relations among nations operating in a largely interlocked global market environment. The institutional theory must explain trade and payments relations among societies in all epochs, and not merely offer a partial justification for some types of transactional arrangements among modern market economies, as orthodox theory has sought to do since Adam Smith and David Ricardo. The institutional viewpoint sheds light on the vexed contemporary trade and payments connections between the market and non-market economies in the late twentieth century. By focusing on the nature of international exchange systems and recognizing that domestic transactional systems may be very poorly matched up with international ones, the institutional theory offers avenues of explanation for persistent, or growing, income divergencies.
