Analysing Institutional Change: Integrating Endogenous and Exogenous Views

Consensus seems to have emerged among economists, as well as among other social scientists, that ‘institutions matter’ for understanding differences in economic performance among different economies over time and space. But, if institutions are nothing more than codified laws, fiats, organizations and other such deliberate human devices, why cannot badly performing economies design (emulate) ‘good’ institutions and implement them? This question would naturally lead to more fundamental questions: how do institutions change? Or, why do they not change in the ways people would like? An answer depends on the still more fundamental, ontological question of what institutions are. These are thorny questions to economists, who have developed a solid frame of analysis based on the equilibrium principle. Indeed, there does not yet seem to be a clear consensus of what institutions are. Are they exogenous constraints for economic equilibrium or endogenous equilibrium outcomes? If the difference is nothing more than semantic, there would be not much sense in wrangling about the ontological question of defining institutions. However, if it has a bearing on understanding how institutions can or cannot be changed, say, by fiat, then it certainly deserves attention.