Institutions and the Performance of Economies over Time

The discipline of economics is made up of a static body of theory that explores the efficiency of resource allocation at an instant of time and under the restrictive assumptions of frictionless markets. Recent research has explored the nature of the frictions by incorporating institutions, transaction costs, and political economy into economic analysis thereby providing the theory with a bridge to the real world of real economies. But the first constraint of static analysis severely hinders our ability to analyze and improve the performance of economies in a world of continuous change. And, in fact, the employment of static theory as a source of policy recommendation in a setting of dynamic change is a prescription for the policies producing unanticipated and undesirable results. In this essay I intend to provide an approach to the study of the process of economic change. There is still much that we do not understand about the process but this essay provides an analytical framework that does, I believe, highlight the problems that must be confronted in order to understand and improve economic performance. I first describe the intentional nature of human interaction in aworld of pervasive uncertainty (2) before going on to describe the process of economic change (3). I conclude with drawing some implications from this approach to the process of change which highlight the lacunae in our understanding of this process (4).