A Transaction Cost Approach to the Historical Development of Polities and Economies
/The differential performance of polities and economies over time is fundamentally influenced by the way institutions evolve. We do not, however, have a framework which allows us to integrate institutional analysis into political economy. The key to developing such an analytical framework is, I believe, the underlying costs of exchange. The transaction cost literature has focused on economic exchange and the institutions that shape those costs. In this essay I wish therefore to extend the transaction cost approach to political exchange and to explore the interaction of political and economic institutions in the development of polities and economies. I begin by describing the basic characteristics of political and economic rules. I then elaborate a transaction cost approach to political rules and the implications of the consequent political rules for economic rule formation. The final section analyzes the nature of political and economic institutional change and the way that institutional change shapes the historical performance of economies.