WIDER Annual Lecture 1
The Contribution of the New Institutional Economics to an Understanding of the Transition Problem
Institutions and the way they evolve shape economic performance. Institutions affect economic performance by determining (together with the technology employed) the cost of transating and producing. They are composed of formal rules, of informal constraints and of their enforcement characteristics; while formal rules can be changed overnight by the policy, informal constraints change very slowly. Both are ultimately shaped by the subjective perceptions people possess to explain the world around them which in turn determine explicit organizations. The former are the rules of the game; the latter are groups of individuals bound together by a common objective function (economic organizations are firms, trade unions, cooperatives; political organizations are political parties, legislative bodies, etc.). Part 1 of this essay develops this analytical framework which is then applied in Part II to explore the underlying organizational problems of economies in the modern world. Part III analyses the problems these changes pose for Third World and transition economies, and Part IV goes on to apply the analysis in order to improve our understanding of transition economies.The 1st WIDER Annual Lecture was given by Professor Douglass C. North in Helsinki on 7th March 1997, under the title ‘The Contribution of the New Institutional Economics to an Understanding of the Transition Problem’.