A general theory of infrastructure and economic development

General equilibrium theory has been a dominant mode of thinking among economists since the mid-nineteenth century. In this chapter we claim that the solutions to the equations of deterministic as well as stochastic general equilibrium models are highly dependent on the structure of the infrastructural arena. In short, with the wrong institutions, insufficient networks for communications and transport or insufficient public knowledge and information, competitive equilibria cannot be found. Inclusion of the infrastructure—material networks, public knowledge and institutions—is a prerequisite for realistic theories, irrespective of whether these theories concern the growth of capital, competitive market equilibria or interactions between information flows and market processes. A fatal flaw in the dominant theory is the absence of institutions, especially the absence of property rights structures. Such institutions are necessary for the determination of initial wealth and income distributions as well as for the creation of mechanisms that ensure the stability and uniqueness of price-setting processes. To solve these problems we propose a general theory of the impacts of the material and non-material infrastructures on short-term market equilibria and information flows and on the accumulation of private capital stocks. This theory also allows for the possibility of occasional bifurcations into new economic structures.