A theory of institutional change is essential for further progress in the social
sciences in general and economics in particular, because neo-classical theory (and
other theories in the social scientist's tool bag) at present cannot satisfactorily
account for the very diverse performance of societies and economies both at a moment
of time and over time. North sketches out a framework for analyzing institutions.
This framework builds on the economic theory of choice subject to constraints. However
it incorporates new assumptions about both the constraints that individuals face
and the process by which they make choices within those constraints. Among the traditional
neoclassical assumptions that are relaxed are those of costless exchange, perfect
information, and unlimited cognitive capabilities. Too many gaps still remain in
our understanding of this new approach to call it a theory. North presents a set
of definitions, principles, and a structure, which provide much of the scaffolding
necessary to develop a theory of institutional change.
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