The Economics of Institutional Change: Achievements and Challenges

How do economists approach the issue of institutional change, and how have their approaches evolved since the Second World War? What are the strengths and limitations of each of them, and how can we define the challenges lying ahead? These are the questions at the center of this chapter, and the attempted answers are based on an assessment that takes into account not only the theoretical soundness of the approaches considered but also their productivity in terms of the empirical body of knowledge generated. We can see that the field of institutional economics has dramatically evolved during the last 70 years and that the perspectives adopted can be schematically described as having shifted from attitudes of initial optimism to dominant pessimism before ending in qualified optimism. We thus travel through the territories of crude evolutionism and induced institutional innovations, through those of the equilibrium-of-the-game and political economy approaches, to eventually land in the domain of the most recent, so-called gradual change approach. The latter rests on rather sophisticated evolutionary and coevolutionary models. At the end of the journey, the main conclusion is that all the existing approaches have their own merits and application domains so that they should be seen as essentially complementary and an eclectic attitude towards them is fully warranted.