To understand economic growth we must understand economic institutions
and how they develop. Institutions are the rules of theeconomic game. They determine
the incentive structure organizations face. Institutions are often inefficient. Societies
do not developoptimal institutions because institutions and organizations evolvein
random. Economic growth throughout human history, therefore,has been sporadic.
Recent economic development has taught us twolessons about institutions. First, the
same formal institutions canhave very different effects depending on the
accompanying informalinstitutions. Second, it is politics, not economics, that matters
ineconomic development.