Perspectives from New Institutional Economics
Edited by Claude Ménard
Chapter 9: Dogs and tails in the economic development story
Harold Demsetz INTRODUCTION In his inspiring Presidential address to the International Society for New Institutional Economics in St. Louis in 1997, R.H. Coase noted the importance of institutions in affecting levels of transaction costs. A similar message is given by Furubotn and Richter in their new book Institutions and Economic Theory (1997); in the very ﬁrst pages they identify the central message of the new institutional economics as ‘Institutions matter for economic performance’. The emphasis in both messages is on the important consequences that emanate from the institutional arrangements on which a society rests. No one, certainly not I, seriously doubts the validity of this claim. Institutions serve as ﬁlters that determine which opportunities are readily available to decision makers and which are not. Those that are not bear an ‘institutional tax’. The tax is so weighty in some cases that passage through the ﬁlter is completed blocked. The opportunity set faced by a society, then, is partly deﬁned by its institutions. This is their primary consequence, and modifying them brings forth a new mix of opportunities. There is, however, a second aspect of institutions, one that is slighted if our focus is mainly on the consequences that ﬂow from institutions. Whence institutions? What causes institutional arrangements to emerge and change over long periods of time, and to do so differently across societies? Change in economic institutions in some instances results from political forces. To understand economic institutional change in these instances is to understand the underpinnings of political...
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