Institutions: Their Role in shaping societies

Yesterday, Prof. Lall gave a lecture on Institutions, their relevance to a nation's prosperity and why some of them are critical in the overall progress of societies. Since all activities---economic, political, social, etc., involve human interaction therefore it is pertinent to have set of rules which can "structure incentives in human exchange". It is in setting these incentives that societies differ. Hence the differential performance of nations.

Setting up institutions entails costs---of formulating, of monitoring and of enforcing them. Again, various organizations within a society compete with one another to have institutions/rules favoring activities that help them fulfill their objectives. Since not all organizations (within the political, educational, social or economic gamut) share a common set of objectives, there is bound to be friction within them. Institutions help minimize this friction, since it cannot be eliminated, keeping in mind the socio-economic interests of the society at large. An important point to bear in mind is that "institutions provide a stable and not necessarily efficient structure to human interactions".

Institutions and organizations have a symbiotic relationship and influence each other's evolution. Both in turn are affected by the prevalent norms in a society. It's another thing that institutions work towards changing the acceptable norms by changing the incentives. For eg., attitude towards slavery, women, untouchables, homosexuals, et al are the offshoots of institutional intervention.

But what is most puzzling is that why institutions don't follow the Darwinian principles of evolution? It's quite logical to think that inferior institutions ought to give way to better ones, albeit, in an incremental manner. But the economic historical data does not support this fact. May be it has to do with the norms, beliefs and culture evolved in a particular society over a period of time. Douglass C. North, the '93 Nobel prize winner, who has done seminal work in the field of Economic Performance through Time says, "Societies that get 'stuck' embody belief systems and institutions that fail to confront and solve new problems of societal complexity."

As societies around the globe grapple with the complexities arising out of "complex interplay between institutions, technology, and demography in the overall process of economic change," it necessitates an analytical understanding of the way economies evolve through time.

Ref.:
Prof. Lall's lecture notes
http://nobelprize.org/economics/laureates/1993/north-lecture.html