Institutions and Economic Development: Structure, Process, and Incentive

  • John Adams
Part of the Recent Economic Thought book series (RETH, volume 31)


Institutional economists have made important contributions to the study of economic development. At the same time, many development economists have stressed the importance of institutions in shaping national rates of growth and profiles of development. This affinity has meant that, in the field of development economics, many of the divisions that exist between institutionalists and orthodox economists are muted or absent. This chap- ter discusses the origins of economic development as a subject, arguing that its emergence grew from acceptance of the proposition that institu- tional differences are fundamental in explaining national development paths.


Economic Development Institutional Structure Institutional Economic Economic Progress Neoclassical Economist 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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  1. 1.
    The best set of essays on classical development economics remains Bert F. Hoselitz, ed, Theories of Economic Growth (New York: The Free Press, 1960). Joseph J. Spengler’s essay on John Stuart Mill is a true gem that has high pertinence. He says, “Mill believed that noneconomic factors played an important role in human affairs, which involved economic progress. Among these factors he included beliefs, habits of thought, customs, and institutions” (pp. 118–119).Google Scholar
  2. 2.
    The first true textbook to survey and synthesize development economics was Benjamin Higgins, Economic Development (New York: W.W. Norton, 1959). Higgins drew heavily on standard ideas from classical and neoclassical economics, including public finance, in which he had a background. The text surveyed in a mostly sympathetic fashion the then recent contributions of the early development economists. He provided chapter-length case studies of several countries, including Indonesia and Libya. Although he insisted on the global relevance of standard economics, he recognized country differences and incorporated the role of social and cultural factors in development. Among the first journals in the field was Economic Development and Cultural Change, which took a broad multidisciplinary view of the subject, as its title suggests.Google Scholar
  3. 3.
    Economists’ changing views of economic development are well described in H.W. Arndt, Economic Development, The History of an Idea (Chicago: University of Chicago Press, 1989). The cross-currents are much more complex than suggested by the simple pro and con polarity I have used.Google Scholar
  4. 4.
    Two recent compendia that review the dimensions of development economics are: Gustav Ranis and T. Paul Schultz, eds., The State of Development Economics, Progress and Perspectives (Oxford: Basil Blackwell, 1988); Hollis Chenery and T.N. Srinivasan, eds., Handbook of Development Economics, Volumes I and II (Amsterdam: North Holland, 1989).Google Scholar
  5. 5.
    W. Arthur Lewis, The Theory of Economic Growth (London: George Allen & Unwin, 1955), pp. 11–12.Google Scholar
  6. 6.
    The conventional references are: A.O. Hirschman, The Strategy of Economic Development (New Haven: Yale University Press, 1958); Harvey Leibenstein, Economic Backwardness and Economic Growth (New York: John Wiley & Sons, 1957); Hla Myint, Economics of the Developing Countries (New York: Praeger, 1965); John C.H. Fei and Gustav Ranis, Development of the Labor Surplus Economy (Homewood, IL: Richard D. Irwin, 1964); Gunnar Myrdal, Economic Theory and the Under-developed Regions (London: Gerald Duckworth, 1957); Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries (New York: Oxford University Press, 1953).Google Scholar
  7. 7.
    Irma Adelman and Cynthia Taft Morris, Society, Politics, and Economic Development: A Quantitative Approach (Baltimore: The Johns Hopkins University Press, 1967). Their second book, Comparative Patterns of Economic Development, 1850–1914 (Baltimore: The Johns Hopkins University Press, 1988), investigates the influence of institutional patterns on national growth during the period of the global spread of industrialization.Google Scholar
  8. 8.
    Adelman and Morris (1967), p. 150.Google Scholar
  9. 9.
    The substantiation of universal modes of premarket exchange-reciprocity, redistribution, and householding—is the subject of Karl Polanyi, Conrad M. Arensberg, and Harry W. Pearson, eds., Trade and Market in the Early Empires (Glencoe, IL: The Free Press, 1957). The emergence in the economy of a separate sphere of monetary, price-guided production and exchange is interpreted in Karl Polanyi, The Great Transformation, The Political and Economic Origins of Our Time (Boston: Beacon Press, 1957; c. 1944).Google Scholar
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    John Adams, “Galbraith on Economic Development,” Journal of Post-Keynesian Economics 7 (Fall 1984): 91–102. Galbraith wrote a short textbook on development economics and, in India, gave many talks on the subject. He recalls that it was at his initiative, taken in response to expressions of student interest, that Harvard initiated graduate courses in development economics.Google Scholar
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    Clarence E. Ayres, The Theory of Economic Progress, 2nd ed. (New York: Schocken Books, 1962); 1st ed. (Chapel Hill, University of North Carolina Press, 1944).Google Scholar
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    Ayres, pp. xxiv–xxv.Google Scholar
  13. 14.
    No social science tradition has a patent on the use of institutional analysis to study social systems. Although one may favor one standpoint or another, a particularly lucid exposition is still Bronislaw Malinowski, A Scientific Theory of Culture and Other Essays (New York: Oxford University Press, 1960; c.1944). The bridges between Malinowski’s sociological representation and the American institutionalists may be found in Walter C. Neale, “Institutions,” in Marc R. Tool, ed., Evolutionary Economics, Volume I, Foundations of Institutional Thought (Armonk, NY: M.E. Sharpe, 1988), pp. 227–256.Google Scholar
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    Ayres, p. 182.Google Scholar
  15. 16.
    Ayres’s position on progress, and that of institutionalists, derives from the instrumental theory of value of pragmatic philosophy. There are many treatments on instrumentalism; for a recent example, see Philip Mirowski, “The Philosophical Bases of Institutional Economics,” in Tool, Evolutionary Economics, I, pp. 51–88. A longer discourse is Wendell C. Gordon and John Adams, Economics as Social Science, An Evolutionary Approach (Riverdale, MD: The Riverdale Company, 1989), especially chs. 1–8.Google Scholar
  16. 17.
    Another weakness of a purely structural formulation is that it unduly favors the formal or high culture of a civilization because it is the apex elites who leave behind the extant law codes, religious and ethical writings, and massive architectural remains. The people of the mass, folk, or low culture did not have the means to depict and pass down the patterns of their lives. This skewedness needs correction; it is now widely recognized and has created many avenues for revisionist history. A related criticism of overly formal social history is made by the French historians of the Annales School. Many dimensions to their contributions have much in common with the work of Karl Polanyi and the substantivist historians and with American institutionalists. Among these touchstones are the importance of everyday working and exchange patterns, the material culture, and the importance of institutions. Initial references are Carole Fink, Marc Bloch: A Life in History (New York: Cambridge University Press, 1989), which has an excellent list of Bloch’s writings, and the works of Fernand Braudel-for example, The Identity of France, Volume I, History and Environment (New York, Harper & Row, translated by Sian Reynolds, 1988; published in French in 1986).Google Scholar
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    An excellent thoughtful essay is R.C.O. Matthews, “The Economics of Institutions and the Sources of Growth,” The Economic Journal 96 (December 1986): 903–918. Matthews welcomes the renewal of interest but does not agree with the extreme position of many neoclassical economists that relative costs, prices, and incentives, including unrealized gains of exchange, will prompt institutional change in directions favorable to market transactions. He writes, “Recapitulating, then, I have suggested a number of reasons why institutional change is not likely to be merely a matter of Pareto-improving innovations and adaptations: the involvement of the state, non-voluntary interactions (externalities), and inertia and complexity, with their tendency to produce a random walk” (p. 915).Google Scholar
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    Douglass C. North, “Institutions,” Journal of Economic Perspectives 5 (Winter 1991): 97–112. This article is a curious mixture of error and wisdom, sometimes hard to distinguish because of an incredible clumsiness of language.Google Scholar
  19. 20.
    A good assessment of the formalist battles is Anne Mayhew, “Atomistic and Cultural Analyses in Economic Anthropology, An Old Argument Repeated,” in John Adams, ed., Institutional Economics, Contributions to the Development of Holistic Economics, Essays in Honor of Allan G. Gruchy (Boston and The Hague: Martinus Nijhoff Publishing, 1980), pp. 72–81. Although I have characterized the debate as formalist versus structuralist, it was more complicated than that. In addition to throwing rocks at the functional structuralist tradition in anthropology, the formalists attacked the substantivist work of Karl Polanyi in economic history; this battle line became known as the substantivist-formalist controversy.Google Scholar
  20. 23.
    Kusum Nair got the strongest blows in, in her now classic ripostes. See, for example, Kusum Nair, In Defense of the Irrational Peasant: Indian Agriculture after the Green Revolution (Chicago: University of Chicago Press, 1979).Google Scholar
  21. 24.
    In departments of agricultural economics, the burgeoning of the estimation of farm supply functions appeared to grow out of the need to find dissertation topics for the scores of foreign students who had arrived to study the American agricultural miracle. Rather than see how local institutions affected agricultural practices, the motif was rather to demonstrate, using whatever measure of arcane econometrics it took, that farmers were the same the world over. This practice had the effect of maintaining the value-added of a doctorate in farm economics, whatever it did for understanding or effectiveness once the candidate returned home. These points are further developed in: John Adams, “The Analysis of Rural Indian Economy: Economics and Anthropology,” Man in India 52 (January–March 1972): 1–20; idem, “The Emptiness of Peasant ‘Rationality’: Demirationality as an Alternative,” Journal of Economic Issues 16 (September 1982): 663–672.Google Scholar
  22. 26.
    Joseph A. Schumpeter, The Theory of Economic Development, An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, translated by Redvers Opie (New York: Oxford University Press, 1961; published by Harvard University, 1934; first German edition, 1911). Also, Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper & Row, 1962; first published in 1942).Google Scholar
  23. 27.
    James H. Street, “The Institutionalist Theory of Economic Development,” in Marc R. Tool, ed., Evolutionary Economics, Volume II, Institutional Theory and Policy (Armonk, NY: M.E. Sharpe, 1988), pp. 443–469. Also, James H. Street and Dilmus D. James, “Institutionalism, Structuralism, and Dependency in Latin America,” Journal of Economic Issues 16 (September 1982): 673–689.Google Scholar
  24. 28.
    Ibid., p. 463.Google Scholar
  25. 29.
    Richard Bath and Dilmus D. James, “Dependency Analysis of Latin America: Some Criticisms, Some Suggestions,” Latin American Research Review 11 (Fall 1976): 3–54.Google Scholar
  26. 30.
    William P. Glade, “Multinationals and the Third World,” in Tool, Evolutionary Economics, II, pp. 471–502.Google Scholar
  27. 31.
    William P. Glade, The Latin American Economies: A Study of Their Institutional Evolution (New York: Van Nostrand, Reinhold, 1969).Google Scholar
  28. 32.
    Wendell C. Gordon, The Economy of Latin America (New York: Columbia University Press, 1950). At the University of Texas, Austin, a number of theses and dissertations applied institutional theory to Latin American development. A notable example is Milton D. Lower’s doctoral dissertation, “The Institutional Bases of Economic Stagnation in Chile,” University of Texas, Austin, 1970.Google Scholar
  29. 33.
    Gordon, op. cit, p. 39.Google Scholar
  30. 34.
    Hernando de Soto, The Other Path, The Invisible Revolution in the Third World, translated by June Abbott (New York: Harper & Row, 1989).Google Scholar
  31. 35.
    James H. Street, “A Holistic Approach to Underdevelopment,” in Adams, ed., Institutional Economics, p. 241.Google Scholar
  32. 36.
    James L. Dietz and James H. Street, “Latin America’s Economic Development,” in Dietz and Street, eds., Latin America’s Economic Development: Institutionalist and Structuralist Perspectives (Boulder, CO: Lynne Rienner Publishers, 1987), p. 10.Google Scholar
  33. 37.
    James H. Street, “The Latin American Structuralists and the Institutionalists: Convergence in Development Theory,” in Dietz and Street, eds., Latin America’s Economic Development, pp. 101–114.Google Scholar
  34. 38.
    These four studies form a symposium in the Journal of Economic Issues 16 (June 1982): 489–523. Strassman’s writings include The Transformation of Urban Housing (Baltimore: The Johns Hopkins University Press for the World Bank, 1982).Google Scholar
  35. 39.
    Walter C. Neale, Economic Change in Rural India: Land Tenure and Reform in Uttar Pradesh, 1800–1955 (New Haven: Yale University Press, 1962).Google Scholar
  36. 40.
    Walter C. Neale, Developing Rural India: Policies, Politics, and Progress (New Delhi: Allied Publishers; Riverdale, MD: The Riverdale Company, 1990).Google Scholar
  37. 41.
    Walter C. Neale and John Adams, India: The Search for Unity, Democracy, and Progress, 2nd ed. (Princeton: D. Van Nostrand & Co., 1976).Google Scholar
  38. 42.
    John Adams and Sabiha Iqbal, Exports, Politics, and Economic Development, The Case of Pakistan, 1970–1982 (Boulder, CO: Westview Press, 1983; Lahore: Vanguard Books, 1987).Google Scholar
  39. 43.
    Robert Wade, Village Republics, Economic Conditions for Collective Action in South India (New York: Cambridge University Press, 1988).Google Scholar
  40. 44.
    N.K. Nabli and J.B. Nugent, The New Institutional Economics and Development, Theory and Applications to Tunisia (Amsterdam: North-Holland, 1989).Google Scholar


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Copyright information

© Kluwer Academic Publsihers 1993

Authors and Affiliations

  • John Adams
    • 1
  1. 1.Department of EconomicsNortheastern UniversityBoston

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