Institutions provide the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange. Together with the technology employed, they determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity. They connect the past with the present and the future so that history is a largely incremental story of institutional evolution in which the historical performance of economies can only be understood as a part of a sequential story. And they are the key to understanding the interrelationship between the polity and the economy and the consequences of that interrelationship for economic growth (or stagnation and decline). But just why are some forms of exchange stable while others lead to more complex and productive forms of exchange? I have discussed the theoretical issues of institutional change. Here I wish to explore the specific characteristics of historical change.

In examining stability and change in history, the initial issue is the same one posed at the beginning of this study (see Chapter 2). What combination of institutions permits capturing the gains from trade inherent in the standard neoclassical (zero transaction cost) model at any moment of time? The issue is complicated enough in an ahistorical context. It is vastly more complicated in history, because rather than starting with a tabula rasa, history is always derived from past history.