TWO TYPES OF THEORY FOR EXPLAINING DEVELOPMENT

One main argument throughout our survey has been that institutions come first; exchange processes always occur within institutions. The primacy of the institutions is founded both in the cognitive architecture of the human mind, that is, in the way people learn, and in the simple truth that institutions must be shared by all (or almost all) agents. To persuade those still unconvinced of the importance of institutions, one has to answer in a straightforward manner the question: what difference does it make to study institutions before analyzing the economic process?

The best way to answer this question is to provide applications of the institutional theory presented here and to show that one reaches a different set of conclusions when this theory is employed than when the institutions are omitted. Such a series of applications can be easily derived from the theory, the first and most important being that the wealth of a society depends crucially on how institutions channel the economic process. The theory may find another application in the transformation of socialist economies. The institutions of a society cannot be changed overnight because they require a very long time to become anchored in the minds of the people. Therefore, a successful transformation presupposes a long-lasting process of collective learning. Furthermore, the theory can be used on more specific levels, such as antitrust policy or social policy.