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 10: Mechanisms of Institutional Transition

Ashok Chakravarti

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


Our final task is to apply the ‘visible hand’ or ‘made order’ perspective of this study, and the generalizations arrived at through the theoretically informed inductive approach, to the process of institutional change. The purpose is to attempt the construction of a theory of institutional change which provides a more coherent explanation for the observed transitions that have occurred in the past hundred years or so, particularly in the developing world. Such a framework is necessary, because the presence of low-level equilibrium traps and dysfunctional institutions which encourage rent-seeking and predatory behaviour in large parts of the developing world, challenges the classical notion (Hayek 1973, Smith [1776]1904) that the necessary beneficent order will emerge spontaneously, or evolve naturally through some adaptive process, to facilitate productive economic activity. In Chapter 6 we found that the favourable institutions underlying modern economic growth in Western Europe emerged in a manner that could be interpreted as being spontaneous and evolutionary. However, this has not been the case in the non-Western world. As the case studies of Japan, India and Botswana showed, in the context of the non-Western world, societies do not seem to have the necessary endogenous forces to bring about the emergence of institutions that encourage good economic and political governance in a gradual, incremental, evolutionary manner. It has generally been the case in these societies that elite behaviour has tended to be dominated by predation rather than rational self-seeking. In these circumstances unless the forces in society that support favourable change...

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