How Institutions Create Historically Rooted Trajectories of Growth

Abstract

This paper is concerned with approaches to growth theory that argue for historically created, institutionally rooted national development trajectories. There are varied ways of organizing market economies, and there is more than just one kind of capitalism. The institutional approach begins with the observation that markets, embedded in political and social institutions, are the creation of government and politics. Indeed all economic interchange takes place within institutions and groups. Markets do not exist or operate apart from the rules and institutions that establish them and that structure how buying, selling and the very organization of production takes place. Consequently there are multiple market capitalisms, and in a global economy international competition among members must be understood as an interplay of these various national market systems. Focus is on the historically rooted national institutions which frame the choices of individuals and structure the terms on which issues such as agency problems and contract problems are confronted. The approach proposed in this paper is a necessary complement to an institutionalism more familiar in economics. This historical institutionalism frames problems and provides answers to puzzles that concern microeconomic-based institutionalism. The particular historical course of each nation's development creates a political economy with a distinctive institutional structure for governing the markets of labor, land, capital and goods. The institutional structure induces particular kinds of corporate and government behavior by constraining and by laying out a logic to the market and policy-making process that is particular to that political economy. These typical strategies, routine approaches to problems and shared-decision rules create predictable patterns in the way governments and companies go about their business in a particular national political economy. The paper then applies these notions to the debate about national systems of innovation. Empirically there is evidence of distinct national technological trajectories. The questions are why the trajectories exist and why they have particular form. National systems arguments need an institutional theory that would permit us to apply both evolutionary and new growth arguments about economic development to particular national cases.