ABSTRACT
Understanding the institutional foundations of the economy poses a conceptual challenge for many economists. Contemporary economics has come to be defined as the study of self-interested individuals choosing among alternatives so as to maximize utility. In such choice-theoretic manifestations, institutions are treated as constraints on individual maximization algorithms. Therefore, it is common, even among those who study institutions, to regard them as constraints on individual action. For instance, one common definition insists that ‘Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction’ (North 1990:3) (emphasis added). This treatment of institutions as constraints reveals something important about efforts within the ‘new institutional’ economics to fashion a theory of institutions, and of institutional change. Notice that if institutions are seen as constraints then the intellectual problem becomes one of trying to explain why these pernicious constraints exist in a democratic market economy. More seriously, this view of
institutions seems to suggest that markets are natural human phenomena against which these ‘humanly devised constraints’ impose conditions that impede the otherwise beneficent properties of presumptively ‘free markets.’ We see a version of this when ‘new institutionalists’ such as North express puzzlement as to why political entrepreneurs do not emerge to drive out ‘inefficient’ institutions that merely serve redistributive purposes rather than the more ‘natural’ purpose of economic growth. Notice the teleology here-that the purpose of the nation state is to foster growth, and institutions ought to be crafted to promote that purpose.
