Institutions, Economic Performance and the Visible Hand

Institutions, Economic Performance and the Visible Hand

Theory and Evidence

Ashok Chakravarti

The book challenges the conventional wisdom on the determinants of economic performance and provides an alternative vision of the functioning of an economic system. The author provides a structured survey which critically evaluates the theory and evidence of neoclassical approaches to growth and development. He then skillfully integrates insights from the old and new institutional economics into an original and comprehensive vision of the relationship between institutions, growth and economic development.

Chapter 2: The Neoclassical Model and its Critique

Ashok Chakravarti

Subjects: development studies, development economics, economics and finance, development economics, institutional economics


INSTITUTIONS IN CLASSICAL ECONOMIC THOUGHT The historical origins of the neoclassical model are to be found in the works of the classical economists. To establish what the classical thinkers said about the role of institutions in the functioning of an economy and how economic change occurs, we shall consider here the works of a number of key scholars in this tradition. These will include those who emphasized the natural liberty of an individual as being central to the functioning of an economic system, such as Adam Smith and John Stuart Mill, but also the ideas of those who were at the other end of the classical spectrum, such as Karl Marx and Frederick Engels. The latter group of thinkers – though they subscribed to many of the key concepts and theories of the classical liberal economists – emphasized the importance of social and historical forces in bringing about economic change. Finally, we shall consider the works of some of the flag bearers of the marginalist revolution, such as Jevons and Marshall, in order to understand the extent to which their ideas conformed to or differed from those of the classical thinkers. Adam Smith argued that based on the principle of self-interest and the operation of the invisible hand ‘the natural effort of every individual to better his own condition when suffered to exert itself with freedom and security, is so powerful a principle, that it alone and without any assistance … is capable of carrying on the society to wealth and prosperity’ (Smith...

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