11 Cato J. 477 (1991-1992)
Institutions, Ideology, and Economic Performance

handle is hein.journals/catoj11 and id is 483 raw text is: INSTITUTIONS, IDEOLOGY, AND ECONOMIC
PERFORMANCE
Douglass C. North
The central argument of this essay is that institutions and ideology
together shape economic performance. Institutions affect economic
performance by determining (along with the technology used) the
cost oftransacting and producing. Institutions are composed of formal
rules, informal constraints, and characteristics of enforcing those
constraints. While formal rules can be changed over night by the
polity, informal constraints change very slowly. Both are ultimately
shaped by people's subjective perceptions of the world around them;
those perceptions, in turn, determine explicit choices among formal
rules and evolving informal constraints. In succeeding sections I will
develop this analytical framework, which I will use to diagnose the
contrasting performance of Western market economies with those of
Third World and socialist economies.
Institutions and Transaction Costs
Institutions are the rules of the game in a society; more formally,
they are the humanly devised constraints that shape human interac-
tion. Thus, they structure incentives in exchange, whether political,
social, or economic. Institutional change shapes the way societies
evolve through time and, hence, is the key to understanding histori-
cal change.
That institutions affect economic performance is hardly controver-
sial. That differential performance of economies over time is funda-
mentally influenced by the way institutions evolve is also not
controversial. Yet Western neoclassical economic theory is devoid of
Cato journal, Vol. 11, No.3 (Winter 1992). Copyright @ Cato Institute. All rights
reserved.
The author is the Luce Professor of Law and Liberty in the Departmentof Economics
and Director of the Center of Political Economy at Washington University. This essay
is drawn, in part, from North (1990b).

477

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