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 3: The Old and New Institutional Economics

Ashok Chakravarti

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


The old and new institutional economics literature, particularly the former, is vast. In this chapter, therefore, we shall only consider the major themes and major studies which form part of this literature. Following Williamson (2000), we would also note that the new institutional economics operates at two levels. The first is the macro level, which deals with the institutional environment or rules of the game. The second is the more micro-level, dealing with the structures of governance within which transactions occur and the management of these transactions. Since our focus in the book is to assess whether this body of thought provides an alternative model of the functioning of the economic system as compared with the neoclassical model, and whether this model is a better basis for understanding the problems of growth and development, this chapter will limit its review to those studies where the approach or findings are relevant to the institutional environment or institutional change at the macro level. Micro-level studies will only be considered where it is believed that they will contribute to our understanding of the macro-level. In the previous chapter we noted that both the classical liberal thinkers, and their protagonists in the Marxist and historical schools, recognized the role of institutions in the functioning of the economic system. However, they saw this role as being a secondary one, with hard resources such as land, labour and capital being the primary determinants of wealth creation in a country. Menger ([1883]1963), although very much part...

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