The Geography of Economic Freedom

The idea that economic institutions are determinants of long-run economic performance is largely associated with the work of Douglass North and several other economists in the post-War period. Although the importance of institutions has been recognized by many authors since at least Adam Smith (1776), much of post-War economics research ignored the importance of institutions for economic growth and development. The seminal textbook of the post-war period, Samuelson’s Economics: An Introductory Analysis (1946), does not even include the word “institutions” in its index. Much of economics in the postWar decades was following Samuelson’s path and thus also ignored institutions. North’s less mainstream research over several decades provides the primary arguments for why institutions matter. “The evolution of institutions that create an hospitable environment for cooperative solutions to complex exchange provides for economic growth” (North 1990, vii). According to North, institutions are the “rules of the game” in an economy or “the humanly devised constraints that shape human interaction” (North 1990, 3). The broad, yet vague, nature of this definition simultaneously reveals the importance of institutions and the difficulty of integrating them into mainstream economics research. The lack of concrete empirical approaches to the topic of institutions helped ensure that they were absent from most of the economics literature of the twentieth century. Several important events helped institutions gain a more prominent role in the economics literature in recent years: 1) the collapse of the Soviet Union and its intellectual foundations (economic theorists were ‘mugged by reality’), 2) North’s