INSTITUTIONS, IDEOLOGY, AND ECONOMIC-PERFORMANCE

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 of transacting 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 tum, 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.