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Economic Development and Growth: A Survey



Economic history has taken a more micro and theoretical approach. The resulting work has shed considerable light on the functioning of institutions, on which institutions matter, and to some extent on why. However, it has paid insufficient attention to the nature of the overall economic process within which institutions are embedded. What is needed, therefore, is a more Smithian understanding of the economy — one that sees it not as a machine but as an evolving organism (a biological rather than a mechanical analogy). If this can be done, a theory founded on the lessons of economic history offers the greatest promise of answering the basic questions of economic development and growth.
Economic Development and Growth:
A Survey
Meir Kohn
The most basic challenge for economics is to understand the
nature and causes of economic progress. But what exactly is to be
explained? What are the facts? One very striking fact is historical
the rapid acceleration in the rate of economic progress since the
early 1800s. Another is geographical—the huge differences in levels
of economic progress in different parts of the world today. The ques-
tions virtually ask themselves. Why did economic progress acceler-
ate? Why is it not universal? On the whole, these two questions have
been addressed by two different specialized fields within economics.
Economic history has addressed the question of change over time,
and development economics has addressed the question of contem-
porary differences across countries.
The theory that until recently guided work in both fields—the
Ricardian theorymeasures economic progress in terms of the
quantity of output produced by the economy. It sees the economy as
a kind of machine that transforms inputs (labor, natural resources,
capital) into output: the amount of inputs and the technology of the
machine determine the quantity of output. If output increases more
rapidly, it is either because of larger amounts of inputs or because of
better technology. If output is low in some countries, it is because
inputs or technology are lacking. Since Solow (1957) showed that
increases in physical inputs explain only a small part of observed
Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009). Copyright © Cato Institute. All
rights reserved.
Meir Kohn is Professor of Economics at Dartmouth College.
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changes or differences in output, Ricardian theory has focused pri-
marily on the nonphysical in explaining growth—on technological
change and on increases in human capital in the form of skills and
knowledge ( Lucas 2002, Galor 2005).
The Deficiencies of the Ricardian Theory
The Ricardian theory of growth has been found wanting both by
economic historians and by development economists. The problem
for economic historians is that the Ricardian theory offers no expla-
nation for why the accumulation of human capital and technological
progress accelerated in the West in the early 1820s. There have been
attempts at purely Ricardian explanations: Pomeranz (2000) has sug-
gested that it was the discovery of new resources in the Americas and
in Englands coalfields that did the trick; Clark (2007a), that human
evolution in England came to favor human capital accumulation and
technological progress. However, both of these explanations have
been challenged on the facts, and neither has achieved wide accept-
ance (Broadberry 2007, Broadberry and Gupta 2006).
The problem for development economics, a more practical field,
is that the Ricardian theory has proven itself to be a treacherous
guide to policy. For decades after World War II, development econ-
omists advocated a series of dirigiste policies for the less developed
countries (LDCs) aimed at making up perceived deficiencies in
resources and technology: physical capital, technology, and human
capital all had their day. The results, to put it mildly, were disappoint-
ing: Lal (2000) and Easterly (2001, 2006) have documented the sorry
The failings of the Ricardian theory have caused economists to
look further afield for explanations of growth and development. In
particular, many have come to challenge a fundamental assumption
of the Ricardian theory—that an economy’s potential, defined by its
resources and technology, is fully realized. To development econo-
mists in particular this assumption has seemed increasingly far-
fetched: surely, the problem of the LDC economies is not a lack of
potential but an inability to achieve that potential (see de Soto 2000,
Parente and Prescott 2000, and Guest 2004). The obstacle to their
development is not a lack of resources or technology, but a failure to
exploit the resources and technology available. In development eco-
nomics and in economic history, attention has therefore shifted to
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how and to what degree economies succeed in realizing their poten-
tial. Grantham (1999) has labeled this approachmore in the spirit
of Adam Smith than of David Ricardo—Smithian.
A Role for Institutions
With this shift of perspective and understanding has come a
change in focus from the process of production to the economic
environment in which that process takes place. Rather than looking
only at resources and technology, economists have started to take an
interest in institutionsin the social and political structures that
facilitate, or impede, productive economic activity. In particular, eco-
nomic development and political development are increasingly seen
as being closely related. This revival of interest in institutions was
pioneered by economic historiansparticularly North and Thomas
(1970) and Jones (1988). But many others have made important con-
tributions—economists such as Buchanan and Tullock (1965) and
Olson (1982), and historians such as McNeill (1982) and Macfarlane
(2002). Development economists, too, have begun to take an intense
interest in economic and political institutions (see Shirley 2005).
In the study of institutions and their role in economic progress
there are two fundamental questions: How do different institutional
arrangements affect economic development and growth? And how
and why do “good” institutions arise? In addressing these questions,
economists have largely relied on the two principal methods of mod-
ern economics—econometrics (statistical analysis) and mathematical
The Macro-Econometric Approach to Institutions
Development economics has largely taken the econometric route.
Work in this area has analyzed country-level data on GDP and vari-
ous measures of legal, financial, and political institutions in an
attempt to uncover which institutions are associated with more rapid
economic growth. Some important contributors to this literature
include Levine, Shleifer, Glaeser, and Acemoglu and their various
collaborators (for two surveys of this literature see Levine 1997 and
Shleifer et al. 2003). This work has been suggestive and has offered
some valuable insights, but it does suffer from some serious limita-
tions. As with all statistical work, a fundamental problem is establish-
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ing causality. While it is easy to show that certain institutions are asso-
ciated with economic growth, it is not at all easy to show that growth
is a result of good institutions rather than vice versa (Glaeser, et al.
(2004)). In addition, the quality of the data limits what can be
learned: there is only so much information in aggregate data at the
level of entire countries. Moreover, institutions do not lend them-
selves to quantification, so that the numerical measures used are
always problematic.
There is, however, a deeper problem with this literature: it does
not, and indeed cannot, shed any light on how different institutions
affect economic growth (as opposed to whether they do) or, con-
versely, on how growth might affect the evolution of institutions. The
work is essentially atheoretical: it is not based on any theory of how
institutions and economies function or of how they interact with one
another. Indeed, such a theoretical understanding would be point-
less, since data at this level of aggregation cannot get at the underly-
ing processes: these are micro issues and they cannot be addressed
with macro data.
The Micro-Theoretical Approach to Institutions
While development economics has taken a macro and economet-
ric approach to institutions, economic history has largely taken a
micro and theoretical one. In this it is part of a wider movement,
known as the new institutional economics (NIE) that has grown out
of the rediscovery of institutions (see Ménard and Shirley 2005). The
modifiernewdistinguishes this movement from the school of insti-
tutional economics that predated the mathematical and statistical
revolutions in economics (see Samuels 1987). While the old institu-
tional economics largely abjured and even rejected formal theoreti-
cal analysis, the new institutional economics embraces it.
Practitioners of NIE, therefore, attempt to explain the existence and
function of economic and political institutions in terms of rational
behavior, sometimes with the aid of mathematical models. Two
recent and very fruitful applications of this approach to economic his-
tory are of particular interest.
A recent book by Greif (2006) brings together much of his semi-
nal work on medieval institutions. Greif calls his approach the “ana-
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lytical narrative.”
It involves a detailed study of a particular historical
institution—informal order among Maghribi traders in medieval
Egypt, for example, or the political arrangements of the Genoese
republic—together with a game-theoretical analysis of the case in
question. Greifs work provides valuable insight into the microeco-
nomics of the institutions he examines and, by extension, of institu-
tions in general. The method of the analytical narrative does not,
however, permit him to address directly our two fundamental ques-
tions—how institutions affect economic outcomes and how good
institutions arise.
Another recent book, by North, Wallis, and Weingast (2009)
(NWW), does address these questions. It is broader in its scope and
more ambitious in its aims—offering no less than an institutional
explanation of the entire evolution of human history. Its analysis is
“macro” rather than micro, and it does not employ explicit mathe-
matical modeling. The authors argue that economic and political
organization are not only interdependent but, more than this, they
are two parts of an organic organizational whole that addresses a sin-
gle fundamental problem—how to coordinate the activity of large
numbers of people. The incentive for achieving such coordination is
that it delivers far greater productivity. The role of political organiza-
tion is to provide the conditions under which economic organization
is possible. More specifically, the role of political organization is to
prevent or to contain violencethe primary obstacle to productive
economic organization. The principal vehicle of political organization
is the state, and the evolution of the state is therefore at the center of
economic and political development. This work represents a major
step forward in our understanding of institutional development.
However, it falls short of its very ambitious goal, because of two fun-
damental weaknesses that it shares with much of the NIE program.
The model of human behavior on which NIE rests is the model of
the atomistic rational individual. In a recent critique, Field (2007)
reviews evidence from psychology, anthropology, and behavioral eco-
nomics that refutes this model (see also Baumeister 2005). He argues
that humans have evolved as social and cultural beings with an innate
tendency to cooperate with one anotherfor example, to demon-
For other examples of this approach, see Bates et al. (1998).
See the review of Greif’s book by Clark (2007b).
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strate reciprocity and to exhibit moral outrage at “cheaters. This
more realistic model of human nature undermines NWWs rather
Hobbesian understanding of the essential role of the state in restrain-
ing a violent and selfish human nature. Humans, having evolved to
be naturally cooperative, are often able to create a viable social order
without a coercive state having to impose it on them.
Fields critique
also casts doubt on the usefulness of the analytical part of the
method of analytical narrative as a way of understanding institutions
(it does not, however, detract from the value of the narrative part).
More generally, the “rational” model of human behavior is a gross
simplification that provides a workable foundation for the Ricardian
theory of production. However, it is not an adequate foundation for
a study of economic and political institutions.
A second weakness of NWW, again characteristic of NIE in gen-
eral, is its treatment of the economy. In fact, the book has very little
to say about the economy as such. But we cannot really understand
how institutions affect the economy—or how the economy affects
institutionswithout a detailed understanding of how the economy
actually works. NWW, and NIE, implicitly assume a Ricardian theo-
ry of production—a theory of resources and technology. They simply
add to this a “social technology” of institutions.
One danger of merely tacking on institutions to a Ricardian theo-
ry of the economy is that it practically invites yet another dirigiste fad
in development economicsaimed this time at making up deficien-
cies in institutions.
So where does this leave our quest to understand the nature and
causes of economic progress? We began by recognizing the failures
of the Ricardian approach both in economic history and in develop-
ment economics. We saw that there has consequently been a move-
ment in a Smithian directionexpressed particularly in recognizing
the importance of institutions. This has found expression in develop-
ment economics in a program of econometric analysis of cross-coun-
try data aimed at unraveling the connection between institutions and
growth. This work has been suggestive, but its contribution to our
See Dixit (2008) for a valuable sumarry of how they do so.
See, for example, Rodrik (2007). For a critique, see Lal (2007) and Dixit (2007).
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understanding has been constrained by the limitations of the data
and by a lack of theoretical foundations. It is not clear that much
more can be expected from this line of research.
Economic history has taken a more micro and theoretical
approach. The resulting work has shed considerable light on the
functioning of institutions, on which institutions matter, and to some
extent on why. However, it has paid insufficient attention to the
nature of the overall economic process within which institutions are
embedded. What is needed, therefore, is a more Smithian under-
standing of the economy—one that sees it not as a machine but as an
evolving organism (a biological rather than a mechanical analogy).
this can be done, a theory founded on the lessons of economic history
offers the greatest promise of answering the basic questions of eco-
nomic development and growth.
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... Não obstante a vasta gama de abordagens teóricas e metodológicas que inspiram uma grande diversidade de definições de crescimento e desenvolvimento económico, existem pelo menos três correntes mais proeminentes. Uma, de inspiração principalmente positivista, considera o crescimento como sinónimo de desenvolvimento e inclui uma vasta literatura, desde artigos académicos e de investigação (Becker, 1992;Blaug, 1994;Bresser-Pereira, 2011a, 2011b; Bresser- Pereira & Gala, 2008;Friedman, 1957;Kohn, 2009;Lucas, 1988;Todaro, 2000) até manuais de ensino convencional (Diniz, 2006;Figueiredo et al., 2005). Um sinónimo que pressupõe fusão, conjugação ou amálgama entre os dois conceitos, mas, em termos operacionais, enquanto o crescimento económico é geralmente considerado quantitativo, o desenvolvimento económico é considerado qualitativo. ...
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INTRODUÇÃO Qual é a estratégia de crescimento económico prevalecente em Moçambique? Quem procurar na literatura uma resposta simples, resumida e directa a esta pergunta depressa confirmará o que constatamos, que é extremamente difícil encontrar uma. São várias as razões para tal dificuldade: porque a maioria das pessoas não se dedica ao estudo das questões de crescimento e desenvolvimento económico; e não é fácil obter daqueles que se dedicam ao estudo e à investigação de economia do desenvolvimento uma resposta explícita, simples, directa e satisfatória à questão. Quando falamos de resposta satisfatória, de modo algum temos em mente uma resposta incontroversa ou amplamente aceite pelos analistas destas matérias. Mesmo que a resposta se revele totalmente errada, deficiente ou incompleta, o impor-tante, do ponto de vista intelectual e do debate público, é que resulte de uma reflexão cuidada, sistemática e baseada na informação mais representativa e actualizada. Não obstante estarmos conscientes das limitações de respostas simples, sintéticas e directas, preferimos antes correr o risco da simplificação do que refugiarmo-nos em elaborações vagas, rebuscadas e complicadas, alegadamente porque a pergunta colocada envolve processos demasiado complexos para serem reduzidos a uma expressão sintética. Assim, respondendo à questão inicial e para que o leitor acompanhe o argumento principal deste artigo, adianta-mos, desde já, a nossa resposta: «A estratégia de crescimento económico prevalecente em Moçambique é maximizar a substituição da poupança interna pela poupança externa» (Fran-cisco et al., 2016). Em 2015, Moçambique iniciou uma nova legislatura, com um novo Presidente da República e um novo Governo. Sabemos que, no início de uma nova legislatura, o Governo tem de identi-ficar os desafios e obstáculos que quer ou acha possível enfrentar. Tendo decorrido mais de um ano de exercício do novo Governo, achamos que já é tempo de indagar em que medida a estra-tégia de crescimento acima referida é similar ou diferente da que foi implementada pelos
... The works of North (1971North ( , 1981North ( , 1990) and others (e.g., Eggertsson 1990Eggertsson , 2008Toye 1995;Williamson 2000Williamson , 2008Acemoglu, Johnson, and Robinson 2005;Acemoglu and Robinson 2012) have made important contributions to the study of institutions, their role in the development of societies and how they influence economic performance. According to Kohn (2009), the NIE has brought into focus the entire economic environment rather than limiting the scope to the technology and economic resources by which Alnasrawi (1986), before the outbreak of the Iraq-Iran War, Iraq ranked in 1979 as the second-largest OPEC oil producer/exporter after Saudi Arabia. Sources: OPEC 2008OPEC , 2016BP 2016;Zedalis 2009;Alnasrawi 1986. ...
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Iraq, one of the world’s leading crude oil producers with the fifth largest share of proven global oil reserves, recently ranked as the second-largest producer among Organization of the Petroleum Exporting Countries (OPEC) members. Nevertheless, performance of the upstream subsector in terms of oil production volume has been subject to severe disruptions for more than four decades. The main sources for these fluctuations are multi-institutional changes caused by nationalization, wars and United Nations sanctions. This article applies to the Iraqi case an extended version of the multi-cycle Hubbert model, developed by Reynolds and Kolodziej in 2008 and 2009. This econometrics model explores and attempts to quantify statistically the relationship between oil production and multi-institutional changes within Iraq. Findings indicate the negative and significant impacts of abrupt institutional change on the performance of the oil industry where this adverse impact varies in magnitude from one episode to another. As Iraq is still yet in the midst of a turbulent transition, the article also discusses the major challenges of the post-2003 era, associated with the present and potential future development of the Iraqi oil-producing sector. This is especially with regard to the increasing economic and political fragmentation that stems from the absence of a unified oil policy.
... Since the contributions byNorth (1981North ( , 1990), many attempts have been made to verify this hypothesis empirically: see, for example, the co-authored writings of Acemoglu (Acemoglu and Robinson 2012, Acemoglu and Johnson 2005, Acemoglu et al. 2005). Several surveys provide an overview of this vast body of empirical literature (Aron 2000, Jütting 2003, Shirley 2005, Haan 2007, Kohn 2009). Some of these studies deal particularly with institution building and its growth effects in transition countries (Beck and Laeven 2006). ...
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This paper investigates institutional development induced by European integration. We estimate a dynamic panel data model wherein institutional development is measured as positive changes in the Worldwide Governance Indicators, which are explained by the status of the European countries, for example, being a member of the euro area or an EU member state or a candidate country of the European Union, and additional controls. We confirm a positive effect arising from prospective EU membership, although being an EU member state does not influence the institutional development path. For members of the euro area, there is robust evidence for institutional deterioration in one particular area, namely control of corruption.
... Não obstante a vasta gama de abordagens teóricas e metodológicas que inspiram uma grande diversidade de definições de crescimento e desenvolvimento económico, existem pelo menos três correntes mais proeminentes. Uma, de inspiração principalmente positivista, considera o crescimento como sinónimo de desenvolvimento e inclui uma vasta literatura, desde artigos académicos e de investigação (Becker, 1992;Blaug, 1994;Bresser-Pereira, 2011a, 2011b; Bresser- Pereira & Gala, 2008;Friedman, 1957;Kohn, 2009;Lucas, 1988;Todaro, 2000) até manuais de ensino convencional (Diniz, 2006;Figueiredo et al., 2005). Um sinónimo que pressupõe fusão, conjugação ou amálgama entre os dois conceitos, mas, em termos operacionais, enquanto o crescimento económico é geralmente considerado quantitativo, o desenvolvimento económico é considerado qualitativo. ...
... † Maastricht University School of Business and Economics. Email: 1 For an overview of the debates see Aron (2000), Jütting (2003), Shirley (2005), deHaan (2007), Kohn (2009). 1 and scholars have granted to isolating the impacts of political decisions and institutional incentives, as well as to finding precise determinants of high economic performance, turned into a priority the development of methodological techniques designed to overcome endogeneity problems arising from different sources. These techniques have become more refined as the debate on institutions and economic performance evolved, and as data availability increased significantly. ...
This article provides a succinct review of the arguments stressing the mutual relationship between institutions and economic performance, and a scholarly account of some of the most popular econometric strategies used to minimize reversed causality problems in impact estimation. Among the techniques revisited we find the instrumental variables (IV) approach, distributed lags and vector autoregressions (VAR), quasi-experiments, and identification by heteroskedasticity (IH). Ultimately, the review is conceived as a methodological aide to researchers seeking to explore causal relationships through the use of the Institutional Profiles Database (IPD) produced by the Agence Francaise de Developpement (AFD).
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Why has a developing country like Iraq shown a fragile economic development, despite the rosy picture that had been drawn about the potential of the Iraqi economy? To answer this question, an attempt has been made to look at the Iraqi development from the new institutional economic (NIE) perspective. This article contains a brief summary of a Ph.D. dissertation on the economic development of contemporary Iraq. In essence it traces the role of institutions, institutional policies and how the rapid and frequent institutional changes have driven the Iraqi economy for decades. Although applying the NIE to Iraq expands the range of choices of institutions that could be examined, the choices have been narrowed down by focusing on three central issues: agriculture, oil and wars. The picture emerging from the dissertation is one of abrupt and instantaneous institutional changes, through which institutions were repeatedly subject to reshuffle and facing changing circumstances. Consequently these changes have markedly affected the path of economic development in Iraq.
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Contemporary mainstream development economics is an overdetermined product of three historical processes: the late neoclassical turn within mainstream economic theory; transformations within the institutional-discursive matrix of development, from growth-centred policies to poverty alleviation- and good governance-oriented policies; and a broader transition from post-war Keynesian developmentalism (with its variants in the second and third worlds) to existing varieties of neoliberal governmentality. This article assesses the trajectory of development economics through two historical shifts in the theoretical field. The first is from the ‘old’ school of structural transformation with a focus on sectoral balance and shifts to the ‘new’ school of structural adjustment programmes with a focus on micro-level incentive problems. The second shift is from the aggressively neoclassical orientation of the ‘new’ school to that of the contemporary constellation, where what is considered to be ‘good’ development economics has been gradually reduced to micro-level impact appraisals of developmental projects (the so-called ‘randomization approach’), while the broader macro-economic and historical questions are being increasingly handled through methodologically-individualist, late neoclassical models of institutions and growth (the so-called ‘new institutionalism’). The article concludes by insisting on the need for a new paradigm of development economics that would not only unearth the conflictual and antagonistic nature of development, but also render it an indispensable dimension of the study of development in a pluralist manner.
In November 1995, the European Community launched the Barcelona Process, a comprehensive and multifaceted initiative aimed at strengthening political, economic, and social relations between the Community and neighbouring Southern Mediterranean States (MS). One of the initiatives introduced under the umbrella of this Process is the Euro-Mediterranean Partnership. Central to this Partnership is the creation of free trade agreements between the Community (and later the European Union) and each MS, and similar agreements between the MS themselves over the long term, in order to foster prosperity and engender socioeconomic development in the MS. This paper looks at one MS, Morocco, and refers to structural change theory in order to present a case that trade liberalisation is not the most appropriate strategy to help Morocco develop and attain better living standards. Specifically, trade liberalisation would inhibit Morocco's ability to diversify production and industrialise, which is a prerequisite to a successful developmental transition. The paper makes use of an international trade model to provide a theoretical explanation as to why liberalisation would encourage Morocco to specialise in producing and exporting agricultural products and light manufactures, both of which are unlikely to reap a substantial added economic value. This would prevent the Kingdom from attaining higher income levels and enhancing the living standards of its people.
New Institutional Economics (NIE) has skyrocketed in scope and influence over the last three decades. This first Handbook of NIE provides a unique and timely overview of recent developments and broad orientations. Contributions analyse the domain and perspectives of NIE; sections on legal institutions, political institutions, transaction cost economics, governance, contracting, institutional change, and more capture NIE's interdisciplinary nature. This Handbook will be of interest to economists, political scientists, legal scholars, management specialists, sociologists, and others wishing to learn more about this important subject and gain insight into progress made by institutionalists from other disciplines. This compendium of analyses by some of the foremost NIE specialists, including Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson, gives students and new researchers an introduction to the topic and offers established scholars a reference book for their research.
We can now return to some of the more general issues raised by this study of two theories concerning the making of the modern world. These are general reflections, stimulated by the thoughts of Maitland and Fukuzawa, but also drawing on other work I have undertaken over the last ten years. In particular, the chapter also draws on ideas generated by the two other books which I have written exploring these broad themes of the origins and nature of the modern world.1
What makes us human? Why do people think, feel, and act as they do? What is the essence of human nature? What is the basic relationship between the individual and society? These questions have fascinated people for centuries. Now, at last, there is a solid basis for answering them, in the form of the accumulated efforts and studies by thousands of psychology researchers. We no longer have to rely on navel-gazing and speculation to understand why people are the way they are; we can instead turn to solid, objective findings. This book not only summarizes what we know about people; it also offers a coherent, easy-to-understand though radical, explanation. Turning conventional wisdom on its head, the author argues that culture shaped human evolution. Contrary to theories that depict the individual's relation to society as one of victimization, endless malleability, or just a square peg in a round hole, he proposes that the individual human being is designed by nature to be part of society. Moreover, he argues that we need to briefly set aside the endless study of cultural differences to look at what most cultures have in common; because that holds the key to human nature. Culture is in our genes, although cultural differences may not be. This core theme is further developed by a tour through the main dimensions of human psychology. What do people want? How do people think? How do emotions operate? How do people behave? And how do they interact with each other? The answers are often surprising, and along the way, the author explains how human desire, thought, feeling, and action are connected.
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New institutional economics (NIE) studies institutions and how institutions interact with organizational arrangements. Institutions are the written and unwritten rules, norms and constraints that humans devise to reduce uncertainty and control their environment. These include (i) written rules and agreements that govern contractual relations and corporate governance, (ii) constitutions, laws and rules that govern politics, government, finance, and society more broadly, and (iii) unwritten codes of conduct, norms of behavior, and beliefs. Organizational arrangements are the different modes of governance that agents implement to support production and exchange. These include (i) markets, firms, and the various combinations of forms that economic actors develop to facilitate transactions and (ii) contractual agreements that provide a framework for organizing activities, as well as (iii) the behavioral traits that underlie the arrangements chosen. In studying institutions and their interaction with specific arrangements, new institutionalists have become increasingly concerned with mental models and other aspects of cognition that determine how humans interpret reality, which in turn shape the institutional environment they build (North 1990, p. 3–6; Williamson 2000).