We cannot see, feel, touch, or even measure institutions; they are constructs of the human mind. But even the most convinced neoclassical economists admit their existence and typically make them parameters (implicitly or explicitly) in their models. Do institutions matter? Do tariffs, regulations, and rules matter? Does government make a difference? Can we explain the radical change in economic well-being when we step across the boundary between the United States and Mexico? What makes markets work or not work? Does honesty in exchange make a difference; does it pay? I hope that the analysis of the previous chapters has provided a convincing framework to shed light on the consequences of institutions.

But I wish to assert a much more fundamental role for institutions in societies; they are the underlying determinant of the long-run performance of economies. If we are ever to construct a dynamic theory of change – something missing in mainstream economics and only very imperfectly dealt with in Marxian theory – it must be built on a model of institutional change. Although some of the pieces of the puzzle are still missing, the outline of the direction to be taken is, I believe, clear.

In the sections that follow I (1) specify what changes must be made in neoclassical theory to incorporate institutional analysis into that theory, (2) outline the implications for the static analysis of economic performance, and (3) explore the implications of institutional analysis for the construction of a dynamic theory of long-run economic change.