Economic Performance Through Timet

I Economic history is about the perfor- mance of economies through time. The ob- jective of research in the field is not only to shed new light on the economic past, but also to contribute to economic theory by providing an analytical framework that will enable us to understand economic change. A theory of economic dynamics comparable in precision to general equilibrium theory would be the ideal tool of analysis. In the absence of such a theory we can describe the characteristics of past economies, exam- ine the performance of economies at vari- ous times, and engage in comparative static analysis; but missing is an analytical under- standing of the way economies evolve through time. A theory of economic dynamics is also crucial for the field of economic develop- ment. There is no mystery why the field of development has failed to develop during the five decades since the end of World War II. Neoclassical theory is simply an inappro- priate tool to analyze and prescribe policies that will induce development. It is con- cerned with the operation of markets, not with how markets develop. How can one prescribe policies when one doesn't under- stand how economies develop? The very methods employed by neoclassical econo- mists have dictated the subject matter and militated against such a development. That theory in the pristine form that gave it math- ematical precision and elegance modeled a frictionless and static world. When applied to economic history and development it fo- cused on technological development and more recently human-capital investment but ignored the incentive structure embodied in institutions that determined the extent of societal investment in those factors. In the analysis of economic performance through time it contained two erroneous assump- tions: (i) that institutions do not matter and (ii) that time does not matter. This essay is about institutions and time. It does not provide a theory of economic dynamics comparable to general equilib- rium theory. We do not have such a theory.' Rather it provides the initial scaffolding of an analytical framework capable of increas- ing our understanding of the historical evo- lution of economies and a necessarily crude guide to policy in the ongoing task of im- proving the economic performance of economies. The analytical framework is a modification of neoclassical theory. What it retains is the fundamental assumption of scarcity and hence competition and the ana- lytical tools of microeconomic theory. What it modifies is the rationality assumption. What it adds is the dimension of time. Institutions form the incentive structure of a society, and the political and economic institutions, in consequence, are the under- lying determinants of economic perfor- mance. Time as it relates to economic and