The Last Instance: Are Institutions

the Primary Cause of Economic

Development?
Adam Przeworski
Department of Politics
New York University

Abstract
Following North, neo-institutionalists claim that institutions
are the ”primary” cause of economic development, ”deeper” than
the supply of factors and methods for their use, what marxists
would call ”forces of production.” Yet while the conclusion is
di¤erent, the historical narratives di¤er little accross these per-
spectives. How, then, are such conclusions derived? Can any-
thing be said to be ”primary”? I conclude that ”causal primacy”
is an answer to an incorrectly posed question. Institutions and
development are mutually endogenous and the most we can hope
for is to identify their reciprocal impacts.

This paper was originally prepared for a meeting on Insti-

tutions, Behavior, and Outcomes, CEBRAP, Sao Paulo, March
12-14, 2003. I appreciate comments by Neal Beck, John Ferejohn,
Jack Gladstone, Fernando Limongi, and Ken Shepsle.

1
 ”That institutions a¤ect the performance of economies is hardly
controversial. That the di¤erential performance of economies over
time is fundamentally in‡uenced by the way institutions evolve
is also not controversial.” (North 1990: 3)

1 The new institutionalism

The new institutionalism is founded on two propositions: (1) Institutions
matter, (2) Institutions are endogenous.
The central claim of ”new institutionalism” is that institutions are
a ”deeper,” ”primary” cause of economic development. The theoretical
program has been laid out by North (1997: 224; italics supplied): ”To
make sense out of historical and contemporary evidence, we must re-
think the whole process of economic growth.... The primary source of
economic growth is the institutional/organizational structure of a po-
litical economy....” Speci…cally, we learn that ”Third World countries
are poor because the institutional constraints de…ne a set of payo¤s to
political/economic activity that do not encourage productive activity.”
(1990: 110).
The quest for the last instance pervades economics. Thus, in a pa-
per entitled, ”Institutions Rule: The Primacy of Institutions ....,” Ro-
drik, Subramanian, and Trebbi (2002: 2; italics supplied) observe that
”Growth theory has traditionally focused on physical or human capital
accumulation, and, in its endogenous growth variant, on technological
change. But accumulation and technological change are at best proxi-
mate causes of economic growth.” Acemoglou (2003a; italics supplied)
repeats: ”poor countries ... often lack functioning markets, their popula-
tions are poorly educated, and their machinery and technology are out-
dated or nonexistent. But these are only proximate causes of poverty....”
This theoretical claim has practical, policy, consequences: it licences
institutional engineering. If di¤erent institutions generate di¤erent out-
comes, then one can stick any institutions into any historical conditions
and expect that they would function in the same way as they have func-
tioned elsewhere. Install independent judiciary, establish clear prop-
erty rights, create independent central banks, and manna will fall from
heaven. In the language of Washington Consensus, this is the ”third
stage of reforms.” As Kindleberger (1952: 391-2) observed some …fty
years ago, ”These [World Bank country reports] are essays in compara-
tive statics. The missions bring to the underdeveloped country a notion
of what a developed country is like. They observe the underdeveloped
country. They subtract the former from the latter. The di¤erence is a

2
program.”1
Yet the new institutionalism also recognizes that institutions are en-
dogenous. As already North and Thomas (1973: 6) observed, ”new
institutional arrangements will not be set up unless the private bene…ts
of their creation promise to exceed the costs.”2 And the embarrassingly
obvious thought is that if endogeneity is su¢ciently strong, institutions
cannot have a causal e¢cacy of their own. Imagine that only those insti-
tutions that generate some speci…c outcomes, say those that perpetuate
the power of the otherwise powerful, are viable under the given condi-
tions. Then institutions have no autonomous role to play. Conditions
shape institutions and institutions only transmit the causal e¤ects of
these conditions.
Imagine a text on the same topic that we would have read some thirty
years ago. ”Institutions are epiphenomenal,” we would have read. They
are a phenomenon that, in a dictionary (Webster) de…nition, ’occurs
with and seems to result from another.” Political institutions can at
most organize power that lies elsewhere: in the relations of military
force, in the economy, in the control over mass media. ”One cannot
stop a coup d’etat by an article in the constitution,” any article in the
constitution, Guillermo O’Donnell once remarked to me.
Suppose we are playing basketball. There are two teams, some per-
fectly universalistic rules, and an impartial referee to administer them.
But one team consists of players who are seven feet tall and the other
of people like me, who barely exceed …ve. The outcome of the game is
predetermined. The rules of the game treat everyone equally, but this
only means that the outcome depends of the resources participants bring
to it, ”brute,” extra-institutional, power. This was Lenin’s (1919) un-
derstanding of democracy: ”if the rich can buy elections, democracy will
serve the rich,” we would have read.
You may retort ”We could change the rules, say lower the height of
one of the baskets, and equalize the chances.” But if tall people are the
ones who decide what the rules should be, if the people who have brute
power are the ones who mold the institutions, they will not agree to it.
After all – we can go back to Rousseau for this observation – institutions
function in societies that have de…nite power relations and they must
1
For evidence that little has changed since then, see Carothers (2002).
2
There is nothing new about the claim that institutions are endogenous. Mon-
tesquieu as well as Rousseau, the latter in his folkloric description of Poland, claimed
that particular institutions can function only if they correspond to cultures, mores,
religions, or geographic conditions. J.S. Mill considered the issue of endogeneity in
the …rst chapter of Considerations, entitled ”To What Extent Forms of Government
are a Matter of Choice.”

3
re‡ect the distribution of this power.3 Otherwise, they will not last. In
the political science jargon, they will not be ”self-enforcing.”4
If this is true, if institutions are endogenous, it may be that the
”institutional constraints de…ne a set of payo¤s to political/economic
activity that do not encourage productive activity” precisely in those
countries where returns to productive activity are relatively low. When
returns to producing are low, those who populate political institutions
prefer to engage in rent seeking (Acemoglou 1995, Murphy, Shleifer, and
Vishny 1993). North’s explanation of the poverty of the Third World is
then circular.
Moreover, the institutional reforms program may be doomed to fail-
ure. For example, one of the main items on the agenda of institutional
reforms is making the judiciary independent of political control. Yet
if judges receive low salaries, making them independent just lowers the
cost of bribes: when the judiciary depends on political control, politi-
cians have to share bribes with judges and perhaps with fellow politicians
who provide the cover, while independent judges can be bribed one by
one. At least one systematic review of attempts to promote the rule of
law abroad concludes that, ”simplistic assertions ... to the e¤ect that
’the rule of law’ gross modo is necessary for development are at best
badly oversimpli…ed and probably misleading in many speci…c ways”
(Carothers 2002: 5). Berkovitz, Pistor, and Richard (2003) found that
transplanted legal systems do not take roots and have weaker e¤ects than
home-grown ones. Even communists could not reform their institutions:
the Polish Communist regime desperately tried one institutional reform
after another and nothing would budge. The cemetery of institutional
reforms must be enormous. After all, the idea of imposing democracy
on Afghanistan or Iraq does sound ludicrous.
As one reads this literature, the sentiment of deja vu overwhelms:
”In the last instance, the forces of production are primary, etc.”5 Then
comes the surprise: the data are the same, yet the conclusion di¤ers.
Natural endowments (material conditions) determine economic and po-
litical institutions (relations of production, superstructure), which repro-
duce themselves, and generate particular patterns of development: the
3
For a discussion of this theme in Rousseau, see Holmes (2003).
4
While the requirement that institutions be self-enforcing is generally shared (Hur-
wicz 1994, Diermeier and Krehbiel 2001: 11, Greif 2002), this notion is far from
self-evident. I like to think about ”self-enforcing” institutions as follows: Suppose
a game theorist writes down a model of institutions (say of separation of powers)
and solves for the equilibrium. If we observe that people regularly behave in a way
consistent with the equilibrium, the institution is self-enforcing.
5 For the most careful analysis of this thesis, see Cohen (1973).

4
givens di¤er only in the language in which they are described. So what
is then the ”deeper” cause: institutions or material conditions? How are
such conclusions derived? Is anything ”primary”? This is the topic of
what follows.
The paper begins with the description of the data as they are pre-
sented by the neo-institutionalist economic historians. I continue by
observing that the institutionalist narrative is essentially the same as
those provided by writers inspired by marxism and that both end in the
same impasse. I conclude that something is wrong with the question
to which the primacy of anything is the answer. Everything, and thus
nothing, is ”primary.” The only motor of history is endogeneity. And
this is not a pleasant conclusion, since it implies that testing alternative
theories of development is di¢cult.

2 Institutionalism and economic history

2.1 Geography vs. Institutions
Institutionalists take as their rival the view that patterns of develop-
ment are shaped by exogenously given natural environment, ”geogra-
phy.” Hence, to understand where institutions come in, this is a good
place to begin.
While the view that geography plays an important role in shaping
the patterns and the rhythm of development dates back to Montesquieu
(1748), this perspective has been recently revitalized under the in‡uence
of Diamond (1997) and applied to explain long-term patterns of economic
growth by Sachs and his collaborators. According to Sachs (2001): (1)
Technologies, particularly in food production, health, and energy are
ecologically speci…c. They do not di¤use easily across ecological zones.
(2) By the start of modern economic growth, if not much earlier, tem-
perate zone technologies were more productive than tropical-zone tech-
nologies. (3) Technological innovation is an increasing-returns-to-scale
activity. It ampli…ed the original di¤erences. (4) Societal dynamics –
especially the processes of urbanization and demographic transition –
are two further ampli…ers of the development process. (5) Geopoliti-
cal factors – temperate-zone imperial domination of tropical regions and
rich-country control of the institutions of globalization – amplify the
initial di¤erences even further.
The fact which Sachs adduces to support these hypotheses is that
while in 1820 average per capita income in the tropical zone amounted
to 70 percent of that in the non-tropical zone, by 1992 this proportion
fell to 25 percent. According to Gallup, Sachs, and Mellinger (1998),
the African income in 1992 was same as Western European income in

5
1820. Even though colonialism had negative e¤ects on the colonies,
colonialization does not explain these patterns: (1) Countries in the
tropical areas that were never colonized do not di¤er from those that
were. (2) Performance did not improve after decolonialization.
While Sachs (2001) says next to nothing about institutions, Gallup,
Sachs, and Mellinger (1998: 29) claim that some e¤ects geography are
mediated by policies and institutions: ”Good policy and good geography
may have a tendency to go together.... The result is that natural di¤er-
ences in growth potential tend to be ampli…ed by the choice of economic
policies.” Yet their central claim remains that geography matters, even
when controlled for policies and institutions.
The main fact cited against the geography perspective is what Ace-
moglou, Johnson, and Robinson (2002; henceforth AJR) term ”the re-
versal of fortunes.” Thus, AJR (2002: 1233) observe: ”The simplest
version of the geography hypothesis emphasized the time-invariant ef-
fects of geographic variables, such as climate and disease, on work and
productivity, and therefore predicts that nations and areas that were
relatively rich in 1500 should also be relatively prosperous today. The
reversal in relative incomes weighs against this simple version of the
geography hypothesis.” According to AJR, countries that were wealth-
ier in 1500 (as measured by population density or urbanization rates)
are the ones which are less developed now. This view is supported by
Engerman and Sokolo¤ (1997, 2001; also Sokolo¤ 2000) with regard to
the Americas, where the initial date is mid-eighteenth century. Finally,
Banerjee and Iyer (2002), having gone back to mid-nineteenth century,
found a reversal among districts within India.
The reversal motivates the institutional perspective. Note that the
geography perspective is committed to the fact that initial income di¤er-
ences are at least preserved, if not ampli…ed, across time. As Banerjee
and Iyer (2002: 1) put it, ”In the new institutionalist view, history
matters because history shapes institutions and institutions shape the
economy. By contrast, in what one might call the ’increasing returns’
view, historical accidents put one country ahead in terms of aggregate
wealth or human capital ... and this turns into bigger and bigger di¤er-
ences over time because of the increasing returns.” Hence, the reversal,
if it is a fact,6 is mortal to this perspective.
6
Since this paper deals with epistemological issues, I do not want to get mired in
facts. If one takes Maddison’s (2003) data on development, one will discover that
the Caribbean islands which were wealthy around 1700 were eventually passed by
other countries in the Americas. But the only spectacular reversal was that the four
British o¤shoots (Australia, Canada, New Zealand, and the United States) passed
their mother country and the rest of Europe. Tropical countries were poorer as far

6
2.2 The institutionalist narrative
AJR and Engerman and Sokolo¤ o¤er a similar historical account:
(1) The choice of commodities to produce, the form of the productive
units (plantations, latifundia, family farms) and the initial institutions
were determined by the conditions Europeans encountered during colo-
nialization. When Europeans colonized the world, they found natural
endowments di¤ering in terms of climate, quality of soil, availability of
mineral resources, and the size of native populations. Those areas which
had humid climate and appropriate soil as well as a small native labor
force were best for and ended up with plantations operated by imported
slaves. Those areas which had a large native population or mineral re-
sources were best for and ended up with latifundia operated by enslaved
indigenous population, encomiendas. Finally, those areas which had a
moderate climate, small native population, and the soil appropriate for
intensive agriculture became populated by family farms. Slavery and
encomienda were forms of legal inequality, while family …rms were as-
sociated with legal equality. These choices were locally optimal, in the
sense that ”equilibrium institutions are likely to have been designed to
maximize the rents to European colonists, not to maximize long-run
growth” (AJR: 1263).
(2) The initial institutions shaped the evolution of the conditions
under which subsequent development would occur, so that some condi-
tions became endogenous with regard to institutions. Even when legal
inequality was abolished, it left as a legacy a high degree of income in-
equality. Institutions were reproducing the conditions which originally
gave rise to them and, in turn, were reproducing themselves under these
conditions: ”Not only were certain fundamental characteristics of the
New World economies and their factor endowments di¢cult to change,
but government policies and other institutions tended to reproduce the
conditions that gave rise to them” (Sokolo¤ 2000: 5). ”The organization
of society and institutions also persist....” (AJR: 1263)
(3) Inequality was adverse to development. The reason was that the
poor did not have the access to productive resources: ”the greater in-
equality in wealth contributed to the evolution of institutions that com-
monly protected the privileges and restricted opportunities for the mass
of the population to participate fully in the commercial economy even
after the abolition of slavery” (Sokolo¤ 2000: 4). Moreover, ”greater
equality provides support, if not impetus, to self-sustaining processes
whereby expanding markets induce, and in turn are induced by, more
e¤ective or intensi…ed use of resources, the realization of scale economies,
back as the data go. See Przeworski (2004a).

7
higher rates of inventive activity and other forms of human capital ac-
cumulation, as well as increased specialization by factors of production”
(Engerman and Sokolo¤ 2001: 35).
(4) The role of institutions became crucial when new forms of pro-
duction, namely industry, emerged on the historical horizon, rendering
the traditional activities less pro…table. ”The institutions hypothesis
also suggests that institutional di¤erences should matter more when
new technologies that require investments from a broad cross section
of the society become available” (AJR 1236). When new opportunities
emerged, the e¤ect of institutions was to block industrialization.7 ”The
elites may want to block investments in new industrial activities, because
it may be that these outside groups, not the elites themselves, will ben-
e…t from these activities.... they may want to block these new activities,
fearing political turbulence and the threat to their political power that
new technologies will bring” (AJR: 1273).
In the end, the reversal occurred because areas that were originally
wealthier adopted worse institutions. These institutions persisted (”re-
produced themselves”), blocking the opportunity that was o¤ered by
industrialization. As a result, the initially wealthier areas ”fell behind,”
to use the phrase of Haber (1997).

2.3 ”Blocking” and ”reproduction”

Engerman and Sokolo¤ never specify any institutional alternatives. All
they can muster as a counterfactual is that ”New World economies might
have been able to realize growth in much the same way as the United
States if not for their initial factor endowments and the governmen-
tal policies that upheld their in‡uence” (1997: 291), but note that the
counterfactual entertained here includes the initial factor endowments. I
cannot …nd any alternatives in North (1990) either. Once ”institutions”
become populated by ”organizations,” their response to any exogenous
change is uniquely determined: ”Path dependence means that history
matters.” (p. 100) and ”Because the bargaining power of groups in one
society will clearly di¤er from that in another, the marginal adjustments
in each society will typically be di¤erent as well.” (p.101) Hence, time
paths are determined by the initial conditions. Indeed, I cannot …nd an
7
It is not quite clear who was there to ”block”. When …rst countries were un-
dergoing the industrial revolution, the Caribbean islands, except for Haiti, remained
under colonial rule: there were local elites but the institutional framework was con-
trolled by the metropolia. In turn, Latin America was …ghting for independence from
1810 to 1824 and in no country were stable political institutions established until the
1830s. Hence, as the United States took o¤ to surpass England, institutions in other
countries were either controlled by colonial powers or simply did not exist.

8
explicit speci…cation of alternative paths in any of the institutionalist
writings.
This silence is not an omission. Once institutions are in place, they
reproduce themselves, and block any change. To develop new activities,
the argument goes, political, educational, and legal institutions would
have to had changed so as to allow access of poor people to produc-
tive assets. Yet the established elite needed inegalitarian institutions to
defend its privileges. Hence, this elite was unwilling to change the insti-
tutions and without the institutional change the new development path
could not be pursued. Questions such as ”When and how were the po-
litical institutions of Cuba transformable? ”Why would the Cuban elite
extend su¤rage and public education to former slaves?” cannot even be
posed.
How do institutions ”block”? A recent paper by Acemoglou (2003b)
goes some way to clarify this mechanism. But before we get to it, we
need to clear some underbrush.
Note …rst that the institutions that matter for development in the
neo-institutionalist perspective are always those institutions that ”safe-
guard property rights.” AJR’s de…nition goes as follows: ”We take a
good organization of society to correspond to a cluster of (political, eco-
nomic, and social) institutions ensuring that a broad section of society
has e¤ective property rights” (AJR 2000: 1262). Operationally, almost
everyone uses as measures of institutional quality assessments of pro-
tection against the risk of expropriation, as measured by a Washing-
ton consulting …rm, Political Risk Services and/or ”constraints on the
chief executive,” from the Polity data set (AJR, Easterly 2002, Hall and
Jones 1999, Kaufmann, Kraay, and Zoido-Lóbaton 1999, Rodrik, Sub-
ramanian, and Trebbi 2002). This idea goes back to North and Thomas
(1973; see also North and Weingast 1989) and has become the New Tes-
tament ever since. 8 But we also have the Old Testament, drafted by
Rosenstein-Rodan (1943; for a formal model see Murphy, Shleifer, and
Vishny 1989) which says that institutions that matter are those that co-
ordinate development. The main point of Bardhan (2004) is that the new
institutionalists got their institutions wrong. Hence, even if institutions
are the primary cause, North and company may be looking at wrong
institutions. But, to follow the literature, let us stick with protection of
property rights.
As invoked by this literature, the idea that secure property rights are
8
In fact, this reasoning can be found already in Machiavelli: ”For everybody is
eager to acquire such things and to obtain property, provided that he be convinced
that he will enjoy it when it has been acquired.” (Discourses on Livy. II.2, cited
after Holmes 2003)

9
the secret of development is pure ‡u¤. For one, property can be secured
by might, without any rights. 9 What the neo-institutionalists mean by
”secure property rights” is indeed protection against the risk of expropri-
ation (of alienable productive assets or income) via the political process.
Yet, here we are approaching Acemglou (2003b), institutions can also
protect property without protecting rights, by creating barriers to entry.
Acemoglou’s example is access to credit, but one can cite many more. For
example, controlled by wealthy landowners, the Chilean state …nanced
between 1855 and 1885 the development of the railroad to the latifun-
dia located in the South of the country, while neglecting the copper
and nitrate rich North, rendering the costs of transport exorbitant, and
copper mining unpro…table for small producers (Fox-Przeworski 1981).
Indeed, according to Stigler (1975) almost everything governments do
creates barriers to entry: licensing doctors or issuing taxi medallions,
prohibiting hazardous products, zoning, etc. And protecting property
by erecting barriers to entry is highly ine¢cient. As we will see below,
it can be worse than the risk of expropriation.
According to Acemoglou, blocking operates as follows. If the ini-
tial institutions grant political rights only to owners of property (such a
regime is called ”oligarchy”), these will use their power to erect barriers
to entry and to prevent redistribution. If the institutions grant political
rights to everyone (”democracy”), then there will be no barriers to entry
but incomes or assets will be equalized to some degree. Both barriers to
entry and redistribution are distortionary, so that both reduce e¢ciency.
But, Acemoglou shows, while oligarchy initially generates higher aggre-
gate income, it prevents talented potential entrepreneurs from entering
as such into productive activities, and over time the income generated
by oligarchy may fall below that of democracy. Hence, ”blocking” con-
sists of using political power to defend monopoly pro…ts by maintaining
barriers to entry and to prevent redistribution. And blocking creates a
reversal: inegalitarian institutions generate higher income at the initial
stage but then fall behind egalitarian ones.
The particular assumptions of Acemoglou’s model – one person can
own only one …rm and cannot hire managers, there is no market in …rms
– leave several questions unanswered. Why the producers of crops that
became less pro…table did not or would not move to other activities,
rather than just passively witness the reversal of their fortunes, if they
could, that is if natural endowments allowed it?10 If slaves imported
9
See, for example, Hafer (2003) for an account in which those who end up with
property are those who are better at defending it physically.
10
As Sa¤ord (1972) points out with regard to Colombia during the …rst half of the
nineteenth century, the same individual was often landowner, mechant, and lawyer

10
from Africa could cut sugar or enslaved Indians could mine silver, why
could not these same slaves be used to produce textiles? If for some
reason the landed elite could not shift to a new activity, why would it
not merge with the emergent bourgeoisie rather than maintain barriers
to entry into activities it would not undertake? After all, this was an
in‡uential explanation of the English success.11 And if the established
elite obstinately clings to obsolete activities, why would it not be po-
litically displaced by an aspiring new elite? Yet, in spite of all these
questions, by emphasizing the role of barriers to entry, Acemoglou does
o¤er a clear and plausible mechanism of blocking
How then does a country change institutions? In Acemoglou’s story,
if a country begins as a democracy, it never changes its institutions. In
turn, those countries that begin as oligarchies can remain as such, transit
to democracy only temporarily, or transit to democracy permanently.
Yet the mechanism of this escape remains mysterious: all we are told that
the change from oligarchy to democracy happens with some probability
that depends on income inequality.
I am not saying that institutional change is inconceivable. Acemoglou
and Robinson (2000) o¤er a story in which there are conditions when
elites extend su¤rage to thwart the threat of revolution. According to
Galor and Moav (2001), capitalists supported public education to in-
crease the rate of return to physical capital. I am certain one can …nd
other similar stories. But they cannot be couched in the language of
”reproduction” and ”blocking.”

3 The same quandary: New institutionalism and

marxism
Having slipped into the marxist language, one rediscovers old debates.
Indeed, Elster (1985: 268) began his discussion of the primacy of pro-
ductive forces in an exactly the same way as I did here:

If Marx believed in this primacy of the productive forces, he

faced the following dilemma. On the one hand, he was then
committed to the view that (1) The level of development
of the productive forces in a society explains its economic
structure. On the other hand there is abundant evidence
that he also believed that (2) The economic structure of a
society promotes the development of its productive forces.
at the same time, and if he was not, he had family members engaged in all these
activities.
11
This issue is important and controversial in the Chilean historiography. The
classical study is Edwards (1928), a recent one is Contreras (2002).

11
 Moreover, marxism and institutionalism have undergone the same
evolution. ”Early” North maintained that only those institutions that
are optimal for development can survive. The same was true in Cohen’s
(1973) reconstruction of marxism: when social relations fetter the de-
velopment of productive forces, they ”burst asunder.” Yet both institu-
tionalists and marxists were forced to admit that suboptimal institutions
can survive if they protect interests of the powerful.
Consider a summary, even more schematic than that of Engerman
and Sokolo¤, of Cardoso and Faletto (1969): (1) Natural endowments
determine the ”modes of insertion” of particular countries into the world
economy, as plantations, mineral enclaves, or population colonies. (2)
Economic structure shapes interests that become politically organized
as classes or fractions thereof. (3) These organized groups enter into
con‡icts and form political alliances. (4) Institutions – the state – are
but a ”pact of domination” of the victorious alliance; they are endoge-
nous. (5) The state reproduces the economic structure in the interest of
the dominant classes. (6) The results is ”associated dependent develop-
ment.”
I do not want to claim that these theories are identical. For one,
dependency theory places emphasis on the international division of labor,
arguing that those countries that were early exporters (countries that
adopted the pattern of development oriented ”to the outside,” desarrollo
hacia afuera), fared less well than those that were inward oriented. If a
reversal did occur, dependency theory would claim that countries that
exported less should pass those which exported more. 12
More importantly for the issues at hand, Cardoso and Faletto aban-
don the peculiar …ction of the ”elite” in singular that haunts the neo-
institutionalist literature (but see Acemoglou 2003b). Assuming con‡icts
among competing interests is not only historically more accurate, but it
points to the potential mechanisms of institutional change. I return to
con‡icts below.
Cardoso and Faletto were ambivalent about alternatives, but the
issue was raised by We¤ort (1972) and led to an acrimonious debate.
One counterfactual mentioned by Cardoso and Faletto (138) is socialism:
public ownership of the means of production with state management
of the economy. The other is national economic independence (148):
expropriation of foreign monopolies and economic independence. But
12
The issue of openness to trade does appear in most recent institutionalist writings
but the …ndings appear inconclusive. Hall and Jones (1999) …nd that the longer a
country was open to trade the faster it grows, but Easterly (2002) as well as Rodrik,
Subramanian, and Trebbi (2002) …nd that trade does not matter once geography and
institutions are considered.

12
whichever it is, how does one get to it? Cardoso and Faletto wanted to
allow for indeterminacy, but then quickly closed the gate to alternative
paths. The relevant passage merits citing in extenso, since the di¢culty
it reveals is generic:

clearly, the con‡icts or agreements among these di¤er-

ent forces do not obey a deterministic mechanic. The result
of their interactions in speci…c situations could enable his-
torical events completely distinct from those analyzed here,
for example in the Cuban case. But to the extent that the
system of social relations expresses itself in the system of
power, it historically instates a set of speci…c structural pos-
sibilities. This framework of structural possibilities, itself a
consequence of anterior social actions, de…nes speci…c trajec-
tories and excludes other alternatives (1969: 136).

The notion of causality used in this passage was formulated by Poulantzas

(1973) under the term of ”double articulation.” Poulantzas argued that
the current historical conditions determine the limits within which ac-
tions can alter these conditions. Applied to the role of institutions, this
principle would assert that the state of the development of forces of pro-
duction determines the limits within which institutions can alter these
forces. Yet, as Wright, Levine, and Sober (1992: 130)13 observe, this
notion of causality does not take us very far: If the limits are tight,
institutions are impotent; if they are wide, institutions are omnipotent.
Hence, we are back where we started: when do historical conditions
permit institutions to alter these conditions?
The causal relations between ”forces of production” and the ”rela-
tions of production” that together constitute the ”base,” and between
the ”base” and the ”superstructure” are the cornerstone of marxist the-
ory. Marxism o¤ers a magnifying glass for detecting the di¢culty facing
the new institutional economics. Let us, therefore, step back.
Marx thought that capitalist social relations reproduce themselves
spontaneously. At each repetition, this process of reproduction consists
of three stages: (1) At the level of production, ”capitalist production ...
produces not only commodities ... but it also produces and reproduces
the capitalist relation: on the one side the capitalist, on the other the
13
Wright, Levine, and Sobell (1992: 130) do not invoke Poulantzas. Indeed, their
own notion of ”structural limitation,” according to which ”class structure determines
the limits of possible variation in state policies, while political institutions and prac-
tices only select policy outcomes within these limits,” does not include the dynamic
aspect of ”double articulation.”

13
wage labourer” (Capital, vol I: 578). (2) Competition assures that the
rate of pro…t is equalized across sectors and that all productive activities
are undertaken (vol. III: 244¤ ). (3) The institutional, legal and ideo-
logical conditions necessary for a continued functioning of the capitalist
system also spontaneously reproduce themselves: ”it is in the interest
of the ruling section of society to sanction the existing order as law and
to legally establish its limits given through usage and tradition. Apart
from all else, this, by the way, comes of itself as soon as the constant
reproduction of the basis of the existing order and its fundamental rela-
tions assumes a regulated and orderly form in the course of time.” (vol
III: 793).
The marxist theory of the state that emerged in the 1970s began
by denying that capitalism ever (Poulantzas) or at least in its recent
stage (Habermas 1975, O¤e 1974) reproduces itself spontaneously. In-
deed, Balibar (1971) and Poulantzas (1973) developed an arcane con-
ceptual apparatus for analyzing the ”relative autonomy of instances ”:
economic, political, ideological, etc. The general idea was that power
can be organized only within the state, yet the state can organize only
that power which exists elsewhere, speci…cally, in the economic realm.
In Poulantzas’s rendering of ”relative autonomy of the state,” the state
is needed to coerce the competing bourgeois to act on their common
interest against their class enemy: the state organizes the bourgeoisie as
a class. But under capitalism the state can organize only the bourgeoisie
because this is the class that holds economic power. The economically
powerful cannot pass laws; only a parliament can do this. Hence, the eco-
nomically powerful must become organized within the parliament. This
organization has consequences in that, to be e¤ective as a group, the
economically powerful must discipline their individual interests. But,
organized within the political institutions, the economically powerful
hold political power. And once this power is organized, institutions nec-
essarily reproduce power relations that gave rise to them.
This entire apparatus, whether in Marx’s original or state-modi…ed
versions, hurls itself against the impossibility of conceiving change in
terms other than a breakdown of the extant system. The di¢culty goes
back to Parsonian functionalism and haunts marxism. If ”every act
of production is an act of reproduction of the social relations under
which it takes place” (Marx), how can social relations be changed? A
social system can either reproduce itself or break down, tercerum non
datum.14 The ”breakdown” is not even a unique path: we can under-
14
Attempts to cope with this di¢culty within marxism consisted of introducing a
concept of ”expanded reproduction” but no such processes were ever speci…ed. The
same concept reappears in Greif (2002: 1-20) under the name of ”self-reinforcing

14
stand the emergence of a new system only retrospectively, by studying
the ”genealogy” of its elements (Balibar 1971). And, to return where we
began, this is exactly the same impasse where institutionalists end up.
If ”institutions tend to reproduce the conditions that gave rise to them”
(Sokolo¤), no alternative institutions can emerge from the existing sys-
tem.

4 Primacy vs Endogeneity
If institutions constitute a primary cause, they cannot be caused by
something else. This is why the two central axioms of new institution-
alism do not easily cohabit the same theory.
Now, that ”something else” comes in two varieties. Some features
of particular countries – climate, soil, susceptibility to diseases – are in-
variant or at least can change only very slowly. They constitute the ”ge-
ography” with which we began. Geography is temporally and logically
prior to everything else. If geography uniquely determines the initial
institutions, which subsequently shapes development, geography is still
primary. Reversal is not enough: even if those endowments that made
the particular areas originally wealthy led to the establishment of institu-
tions that hindered subsequent development, as long as institutions were
uniquely determined by the endowments, they cannot constitute the pri-
mary cause of development. To be a primary cause, institutions must
arise at least to some extent independently of the antecedent conditions.
If they are perfectly endogenous, then they are ”epiphenomenal.”
Endogeneity, however, also arises when consequences feed back the
original causes. If institutions shape development but development af-
fects institutions, then institutions are endogenous with regard to their
consequences. The feedback mechanism need not be functionalist: it
need not be that institutions are chosen with a view toward their conse-
quences, nor that only those institutions that promote development sur-
vive. For example, political regimes in which rulers are selected through
elections invariably survive in wealthy countries regardless of their con-
sequences for economic development. 15
Consider a schematic representation of the possible directions of
causality:

Geography —> Institutions —> Development

bj_________j

institutions”: institutions that evolve gradually in response to the outcomes they

generate.
15
For an explanation of why this would be true, see Przeworski (2004b) and the
references therein.

15
 The invariant background conditions, ”geography,” determine the
initial institutions, which give rise to a particular patterns and rhythms
of development, which in turn shapes the evolution of institutions. To
return to the primacy claim with which we began, let us complicate this
picture by introducing what in the marxist language would be ”forces of
production” and in the neoclassical language ”physical or human capital
accumulation and technological change” (see the quote from Rodrik,
Subramanian, and Trebbi at the beginning of the paper). Now we have

Geography —> Institutions —> Forces —> Growth

bj_______________j

Institutions now determine the supply of factors and the technologies

that exploit them, so that these are only the ”proximate” cause. But
institutions are still caused by something else, not only by the invariant
background conditions but also by the wealth they generate.
To see what is entailed, consider an example of purely exogenous in-
stitutions, provided by Banerjee and Iyer (2002). When the British were
conquering India, they set di¤erent tributary systems as the conquest
advanced: during one period they delegated tax collection to landlords,
during another they either charged tax collection to the village as a com-
munity or collected taxes themselves from individual peasants. Since the
tributary systems depended on the date of conquest, rather than on the
characteristics of particular districts, these institutions were exogenous
with regard to geography, endowments, and unobserved characteristics
of the particular districts. The identi…cation strategy adopted by Baner-
jee and Iyer was to: (1) Construct a restricted sample of districts that
are geographical neighbors, but which happened to have di¤erent tax
systems. (2) Use the date of being conquered by the British as an in-
strument for the tributary system. They observe that ”Our strategy
might give biased results if the British decision of which land tenure sys-
tem to adopt depended on other characteristics of the area in systematic
ways.” (p.10-11). But using this strategy allowed them to assume that
”there is no reason to think that the choice of land tenure system at the
district level was closely tied to the characteristics of the district.... It
is therefore probably reasonable to assume that when two districts lying
directly across from each other on either side of the boundary between
two settlement regions ended up with di¤erent types of tenure systems,
it was for reasons mostly unrelated to their innate di¤erences.” Since
institutions were exogenous with regard to background conditions and
since (until independence) they remained the same regardless of the con-
sequences they generated, the observed di¤erences in development can
be attributed to institutions.

16
 Given that in India history generously produced a natural experi-
ment, we can entertain propositions of the form ”If institutions were
di¤erent under the same conditions, so would be the pace of develop-
ment.” Hence, we can attribute causality to institutions. 16 But what
can we say about causality when institutions are endogenous? The issue
concerns the status of subjunctive conditionals in which the antecedent
cannot or at least is unlikely to be realized. 17 I will refer to such counter-
factuals as being in ”modus irrealis.”18 Another way of saying that the
counterfactual premise cannot be realized, is that the potential causes
cannot be manipulated. But to qualify as causes the particular variables
must be capable of assuming di¤erent values under the same conditions
(Holland 1986). What distinguishes causality from correlation is ma-
nipulability. ”Associational inference involves the joint or conditional
distributions of values of Y and A, and causal inference concerns the
values Y jx; u ¡ Y jx0; u on individual units.” (Holland 1986: 948; A
stands for factors that cannot be manipulated, ”attributes”; u stands
for background conditions.) In the end, ”causes are only those things
that could, in principle, be treatments in experiments” (1986: 954).
Now, if institutions reproduce themselves, if need be by block-
ing exogenously arising opportunities for development, then they can
change only as a result of ”breakdown,” only when the conditions change.
Hence, they are not ”manipulable”: manipulability would require that
di¤erent institutions could exist under the same conditions. If insti-
tutions reproduce themselves, then given the conditions generated con-
jointly by ”geography” and previous development, they are …xed. This is
why the language of reproduction drives both neo-classical and marxist
economic historians to the same impasse. Causality cannot be ascer-
tained in this language.
16
Note that under the regularity conception of causality no reference to counterfac-
tuals is necessary. It is su¢cient that some outcome Y regularly follows some event
X given background conditions U . For Hume, X is the cause of Y if (1) X and Y
are contiguous in space and time, (2) Y follows X; and (3) Y and X always occur
(or do not) together. This conception runs into all kinds of problems. Correlation,
even with temporal asymmetry, is not su¢cient to ascertain causality.
17
On causality in a probabilistic framework, see Rubin (1974), Rosenberg (2001),
and Heckman (2004).
18
There are several terminologies to distinguish conditional propositions. One
distinction is between those in the indicative and subjunctive mood. Another is
between propositions that are ”open,” meaning that they do not specify whether or
not the conditional state will occur, and those that pose an antecedent that cannot
be realized. On these distinctions, see Edgington (2001: 385), who concludes that
”It is controversial how to best classify conditionals.”

17
 The reason for this impasse is that neither perspective o¤ers a the-
ory of institutional change that would treat this process as endogenous,
that is, as responding to conditions, yet not uniquely determined by
these conditions. Note that reproduction is always a conclusion from
some premises. In Marx’s theory of capitalism, these premises were that
the system operates on an auto-pilot: there are capitalists and workers,
competition among workers drives wages down to subsistence, capital-
ists realize pro…ts, workers consume wages, and the story repeats itself.
Class con‡ict plays no role in the development of capitalism: while at
one point (in vol. II) Marx observes that workers in She…eld succeeded in
raising their wages, con‡icts are just temporary deviations from general
laws and theories are about laws, not about deviations.19 In turn, when
Marx analyzes class con‡icts, his conclusions are about revolution (or
counterrevolution, as in France in 1851), not about reproduction. Marx-
ist theory of the state fares even worse: since capitalism is still around,
it must have been reproduced, and since there are con‡icts, they must
somehow invariably end in the state reproducing capitalism.
Since marxist theory of the state was not given to micro-level strate-
gic analyses, these di¢culties are not surprising. Yet neo-classical econo-
mists seem to have fallen into the same trap. The standard story is
that institutions ”reproduce” themselves, ”persist,” and the like because
maintaining them is in the interest of the institutional incumbents. Even
Acemoglou (2003b) does not draw su¢cient conclusions from his correct
observation that ”political regimes matter preciely because they regulate
con‡icts of interests between di¤erent groups.”20 If there are con‡icts,
why should we expect the same side to always win? Those currently
powerful may be more likely to prevail and maintain the institutions
that serve their interests. But they do not win always and sometimes,
as in Acemoglou and Robinson (2000), they may have to transform in-
stitutions to thwart the threat of losing.
The assumption that institutions persist was used in a novel way by
AJR and reapplied in numerous statistical studies to control for the en-
dogeneity of the current institutions. Following AJR, statistical studies
of the impact of institutions adopt the following procedure: (1) Regress
current incomes for a recent date (or an average of recent dates) on
19
As Elster (1985: 300) observes, ”Marx does not specify any mechanism whereby
optimal relations of production come to be realized. In particular, he does not suggest
any link between this process and the class struggle.”
20
In the Acemoglou (2003b) model, which I use repeatedly because I …nd it best
in its genre, while individuals are strategic when they decide whether to become
entrepreneurs and when they vote on policies, institutions either do not change or
their change comes by a throw of dice.

18
recent institutions and some control variables, (2) Instrument recent in-
stitutions by instrumenting institutions at some time immemorial. Yet
this assumption is patently false. Here is a crosstab of institutional qual-
ity as measured by the variable used by AJR (”constraints on the chief
executive"), of exit-year institutions (when countries ceased to exist or
information is last available) by entry-year institutions (the year of in-
dependence or soon after) for all countries that appear in the Polity IV
data set (including those that were never colonies).

Table 1: Quality of Institutions By Entry and Exit Years

Entry=Exit 1 2 3 4 5 6 7 All
1 10 5 14 3 5 6 15 58
2 1 3 2 1 0 1 0 8
3 6 5 11 3 8 11 7 51
4 1 0 0 1 1 0 0 3
5 0 2 6 0 6 1 3 18
6 0 0 0 0 0 0 2 2
7 3 3 5 1 4 1 29 46
All 21 18 38 9 24 20 56 186

Note: Higher numbers indicate better institutions.

The crosstab shows a lot of volatility. Of the …fty-eight countries that

entered the world with worst possible institutions, twenty-six ended up
with good institutions (5 or more), while eleven out of forty-six countries
went from best possible to bad institutions (3 or less). The correlation
between entry and exist institutions is only 0.26.
I do not want these observations to be interpreted as implying that
institutions do not persist. Przeworski et al. (2000) found that among
135 countries they studied between 1950 and 1990, 100 had the same
regime, either dictatorship or democracy throughout the period. More-
over, the systems of democratic separation of powers – presidentialism,
semi-presidentialism, and parliamentarism – are almost perfectly stable.
Hence, big institutional changes may be rare. But they occur. And if
the relevant feature of institutions are indeed the constraints on the chief
executive, they occur frequently.21
Endogeneity cannot mean that, once installed, institutions invariably
persist. At most it can mean that institutions are a contigent outcome
of con‡icts that occur under given historical conditions and are more or
less likely to persist given these conditions. The point of departure must
21
I must admit that I have no idea why the constraints on the chief executive
indicate the quality of protection of property rights.

19
be con‡icts and, while the potential outcomes of con‡icts depend on the
conditions and institutions under which they occur, these outcomes are
not predetermined.
Indeed, we know that some strategic situations can generate any of
several outcomes, multiple equilibria. Even if history is path-dependent,
it may exhibit sensitive dependence on in…nitely small, that is, unob-
servable, initial conditions. Here is a story. A scion of a prominent,
wealthy, conservative, Catholic family in Costa Rica was sent in the
1920s to study abroad, just as his family background dictated. Only
that, instead of going to Paris, he landed at the University of Louvain,
at the time when it was the hotbed of social-christian ideology. Perme-
ated with these ideas, he returned to his country, became its President,
allied with the Communist Party, legalized unions, and introduced ex-
tensive social legislation. Alarmed at his alliance with communists, the
United States engineered a coup, led by an anti-communist Social De-
mocrat. From then on, Costa Rica alternated between social christians
and social democrats, all respectful of democracy and all committed to
equality. So, if this story is true, a tiny perturbation had large and
lasting consequences. More generally, there are now several models in
which countries can take o¤ in di¤erent directions from the same observ-
able conditions.22 Hence, even if we cannot determine ex ante whether
particular institutions would succeed under the observable conditions,
we should be prepared to observe ex post that identically looking con-
ditions give rise to di¤erent futures. Imperceptible shocks, whether to
background conditions or directly to institutions, can a¤ect outcomes of
con‡icts in ways that have qualitatively discernible e¤ects.
Yet endogeneity means that nothing is the primary cause. Institu-
tions are not a deeper cause than the supply of factors or the technol-
ogy: institutions, to repeat, may determine the supply of factors and
their use, but these factors, in turn, a¤ect growth and future wealth,
which a¤ect the evolution of institutions. Consider the recent literature
on the impact of inequality on growth. In the …rst studies of the impact
of inequality on redistribution and growth, inequality was taken to be
exogenous and the institutional assumption was that the agent with me-
dian income was decisive regardless of the form of the political regimes
(Persson and Tabelini 1991, Perotti 1993). Benabou (1997, 2000) en-
dogenized the decisive voter by assuming that her income is higher in
more unequal societies. Bourgignon and Verdier (2000) and Benhabib
and Przeworski (2004) made yet another step by endogenizing the mech-
anisms – voting as against force – by which incomes are redistributed.
22
A heuristic exposition of what is involved is by Krugman (1991). Applications
to development theory include Benhabib and Gali (1995) and Ray (2000).

20
Thus, as the theory now stands, inequality a¤ects growth and thus fu-
ture income, income and its distribution a¤ect the political mechanism
by which redistribution decisions are made, and these decisions, in turn,
shape future inequality, thus future income, etc. And this circularity
emerges even without considering the direct impact of growth on in-
equality, say by changing the demand for di¤erent skills (the Kuznets
mechanism).
Hence, in the end, the motor of history is endogeneity. From some
initial circumstances and under some invariant conditions, wealth, its
distribution, and the institutions that allocate factors and distribute in-
comes are mutually interdependent and evolve together. Since we can
never completely specify this process, we observe some randomness. In-
deed, we exploit this randomness to identify the particular models of
this process: for identi…cation, we need to observe di¤erent values of
causes under the same observable conditions. And here we face a para-
dox. The better we specify our models, the more endogenous loops we
consider, the more di¢cult it becomes to identify their causal structure.
As Mariscal and Sokolo¤ (2000: 198) correctly lament, ”When variables
are mutually reinforcing or simultaneously determined, discerning what
is exogenous and what is endogenous is not transparent.”
Lest this paper should appear overly critical, let me emphasize that I
agree with Haber (1997) that neo-classical economics made great strides
forward in studying economic history. It is only the quest for causal
primacy that I …nd futile. Institutions and development are mutually
endogenous and the most we can hope for is to identify their reciprocal
impacts.

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