Institutions are the humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange.
American economist and Nobel laureate (1920–2015)
Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. He was the co-recipient (with Robert Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences.
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Douglass Cecil North
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Economic growth occurs if output grows faster than population. Given the described assumptions about the way people behave, economic growth will occur if property rights make it worthwhile to undertake socially productive activity. The creating, specifying and enacting of such property rights are costly... As the potential grows for private gains to exceed transaction costs, efforts will be made to establish such property rights. Governments take over the protection and enforcement of property rights because they can do it at a lower cost than private volunteer groups. However, the fiscal needs of government may induce the protection of certain property rights which hinder rather than promote growth; therefore we have no guarantee that productive institutional arrangements will emerge.
We are far from understanding how to achieve adaptively efficient economies because allocative efficiency and adaptive efficiency may not always be consistent. Allocatively efficient rules would make today's firms and decisions secure - but frequently at the expense of the creative destruction process that Schumpeter had in mind.