World Economic History�

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Topic 4: Institutions

Altuğ Yalçıntaş, Ankara University, PolEcon

2025/2026 Academic Year

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Setting the stage

Since we started:

• We have made progress.
• We have moved toward upper levels of understanding.

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And now:

• We are at a further stage.
• We are advanced economics students.

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Setting the Stage

Rapid, sustained growth in average living standards since 1700.

How did this happen?

Important factors

These cross-country differences can be explained by:

• Institutions – inclusive trade unions (represent many firms and sectors) choose not to exercise maximum bargaining power because wage increases affect job creation in the long run.
• Policies – well-designed unemployment insurance schemes and job placement services can achieve low unemployment rates.

No magic formula: Institutions and policies used differ across successful countries and over time

Examples

1. Norway: Inclusive trade unions and employers’ associations set wage demands in accordance with the productivity of labour, and also supported legislation and policies that shifted the wage-setting curve downwards, further expanding long-run unemployment.

2. Japan: Employers’ associations coordinate wage setting across firms. Corporations deliberately do not compete in hiring workers, to avoid raising wages.

3. Spain: A combination of non-inclusive unions and government legislation that protects jobs rather than workers may help to account for Spain’s ‘poor’ labour market performance.

Changing labour market performance

Institutions and policies make a big difference for employment and wage growth, but changing institutions or policies is difficult because it creates winners and losers.

Example: The Netherlands and the UK both had increased unemployment rates in the 1970s due to the oil price shocks and the increased bargaining power of labour.

Both countries managed to shift the wage-setting curve down:

• Netherlands – institutions became more inclusive (as in Norway)
• UK – policies reduced the power of non-inclusive unions

Setting the stage

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(1) Diversity among institutions tends to increase

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• Continuous progression is a myth.
• Evolution does not only lead to “a state of flux” (or a process of change) but also a state of inertia (or a process of non-change).
• Contingencies matter.

Setting the stage

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(2) A critique of human-centred economic history

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• Differences and similarities among human societies are obvious.
• Differences and similarities among human societies and non-human societies should also be obvious.

Douglass C. North (1920-2015)

• American economic historian
• Structure and Change in Economic History (1981); Institutions, Institutional Change, and Economic Performance (1990).
• Nobel Prize, 1993

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“Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North. 1991. “Institutions” J of Economic Perspectives 5(1): 97-112).

Institutions

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• Institutions are the “rules of the game”.
• They govern the interactions between individuals.
• They provide the constraints and the incentives.
• They specify who can do what, when they can do it, and how the actions of players (in game theory terminology) affect their payoffs.

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Power

• Power is the ability to do and get the things we want in opposition to the intentions of others.
• Power in voluntary economic interactions takes two forms:
• Structural power - When we consider conflicts over how something of value will be divided, a person’s structural power is the value of their next best alternative. A person’s structural power is limited by the structural power of the other.
• Bargaining power - A person exercising bargaining power may set the terms of an exchange and/or impose, or threaten to impose, heavy costs.

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Daron Acemoğlu (b. 1967)

• Turkish – American institutional economist
• Why Nations Fail (2012); The Narrow Corridor (2019); Power and Progress (2023)
• Nobel Prize, 2024
• His views on institutions, democracy, prosperity, and power

Daron Acemoğlu (b. 1967)

• Inclusive institutions: secure private property, the rule of law, freedom to choose and contract
• Extractive institutions: Lack of private property and the rule of law

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“Inclusive economic institutions foster economic activity, productivity economic growth, and economic prosperity. Secure private property rights are central , since only those with such rights will be willing to invest and increase productivity” (Why Nations Fail, 75).

Daron Acemoğlu (b. 1967)

Daron Acemoğlu (b. 1967)

• Is technology necessarily for the common good?
• Power relations? Techno-elites?
• Do new technologies mean better technologies?
• Is progress possible?

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Your reading responsibility: The first seven chapters.

A theory of path dependence

Source: Georg Schreyögg and Jörg Sydow 2011 “Organizational Path Dependence: A Process View” Organization Studies 32 (3): 321-335.

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What is a contingency (“small event”)?

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• Opposite of necessity
• In Turkish: «Olumsal» or «Başka türlü de olabilecekken olmuş olduğu gibi olan şey»

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Why do we use QWERTY’s?

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• Sunk costs
• Habits of conduct
• Contingencies (or “small events”)
• History and institutions matter!

The Theory of Path Dependence

What is a contingency (“small event”)?

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• Chance events🡪 Super Lotto
• Random events 🡪 «bingo» or «Tombala»
• Probabilistic events 🡪 You pass an exam or you fail
• Unpredictable events🡪 Earthquakes

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• An important element is the mechanisms of positive feedback and self-reinforcement

What is a positive feedback mechanism?

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«Small» events 🡪

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Mechanisms of

Positive feedback or self reinforcement

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🡪 «Big» consequences

An example to positive feedback mechanism:

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Imagine you’re in a music studio, a small bar with live music, or a «köy düğünü»

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A small (smaller) sound

A big (bigger) sound

An example to positive feedback mechanism:

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Imagine you’re in a music studio, a small bar with live music, or a «köy düğünü»

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BOOM!

An example to positive feedback mechanism:

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Imagine you’re in a music studio, a small bar with live music, or a «köy düğünü»

No feedback in between

Output

Input

So what?

Emergence of capitalism

• Why did capitalism emerge in Northern Europe?

Colonialism

• Why are some countries rich and others poor?

Political economy of the European Union

• Is the full adoptation of different law systems, customs, and rules possible?

What other cases of path dependence can we think of?

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• Language?
• University?
• Family?
• Science?

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• How about your own private lives?

In these cases:

• Does history matter?
• Can you observe small events?
• Can you observe positive feedbacks?

Setting the stage

Since we started:

• We have made progress.
• We have moved toward upper levels of understanding.

​

And now:

• We are at a further stage.
• We are advanced economics students.

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Sencer Divitçioğlu (1927-2014)

• PhD in economics, University of Paris (1957)
• Professor of economics, Istanbul University (1957-1982)
• Dismissed from the university by the military rule in 1982

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Asiatic Mode of Production and Underdeveloped Countries (1966, not translated)

Asiatic Mode of Production and the Ottoman Society (1967, not translated)

Source: Wikipedia, June 2023

Asiatic Mode of Production (AMP-argument)

In Asiatic societies

• No (or limited) private property
• Powerful (and despotic) state
• Stagnant and underdeveloped
• No transition to capitalism

Multiple pathways of development

Focus: China, India, Russia, Iran, and Turkey (among others)

Why is the AMP-argument so important?

“Our argument in this book is that for liberty to emerge and flourish, both state and society must be strong. A strong state is needed to control violence, enforce laws, and provide public services that are critical for a life in which people are empowered to make and pursue their choices. A strong mobilized society is needed to control and shackle the strong state … without society’s vigilance, constitutions, and guarantees are not worth much more than the parchment they are written on.”

Acemoğlu and Robinson. 2019. The Narrow Corridor. Penguin Books. From “Preface”

Setting the Stage

Rapid, sustained growth in average living standards since 1700.

How did this happen?

So what?

Let’s try to think like an economist:

∑ K

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Properties of a graph like this:

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• Continuous
• Progression, advancement, growth etc.
• A single pathway

So what?

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• Dialectics (Friedrich Hegel): Negation of ideas
• Rational Choice Theory: Utility maximization
• Critical Rationalism (Karl Popper): Trial and error

So what?

Let’s try to think like a historian:

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Properties of a graph like this:

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• Progress, advancement, growth

BUT

• Discontinous
• Multiple pathways

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So what?

Let’s try to think like a historian:

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This graph may represent:

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• Social revolutions

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15,000-10,000 BC The Neolithic Revolution

1789 The French Revolution

1917 The Russian Revolution

1923 The Turkish Revolution

1970s The Digital Revolution

Thomas Kuhn (1922-1996)

• Philosopher of science
• Best known for his work The Structure of Scientific Revolutions (1962)
• In Turkish: Bilimsel Devrimlerin Yapısı (1982)

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• Paradigm

So what?

Let’s try to think like a historian of economics:

This graph may represent:

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• Paradigm shifts

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Coined by Thomas Kuhn

Newtonian Paradigm in Physics

Neoclassical Paradigm in Economics

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So what?

Let’s try to think like a historian of economics:

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This graph may represent:

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• Gestalt shifts

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What if?

How about this?

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• Progress, advancement, growth 🡪 DIVERSITY
• Discontinous or discreet
• Multiple pathways

Darwin’s “Tree of life”

Source: Charles Darwin. 1859 [2006] On the Origin of Species. In E. O. Wilson. From So Simple a Beginning. W. W. Norton: 525

What if?

How about this?

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• Darwin’s «tree of life»

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• We forget things
• We refuse to remember
• Somethings do not change

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• People are stubborn, stupid, and lazy
• People have habits
• People behave instinctively

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The Theory of Path Dependence

What if?

This graph may represent:

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• The history of economic thought
• Emergence of nations
• Evolution of any social institution:
• Technologies
• Universities
• Habits
• Customs
• Languages
• Religions

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What if?

This graph can explain:

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• Why there are more than one specie
• Why there are more than one theory
• Why there are more than one language
• Why there are more than one religion

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In short:

• Multitude and diversity in the society and economy!

Conclusions

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(1) Diversity among institutions tends to increase

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• Continuous progression is a myth.
• Evolution does not only lead to “a state of flux” (or a process of change) but also a state of inertia (or a process of non-change).
• Contingencies matter.

Conclusions

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(2) A critique of human-centred economic history

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• Differences and similarities among human societies are obvious.
• Differences and similarities among human societies and non-human societies should also be obvious.

Conclusions

Differences and similarities among human societies

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• Democracy vs. totalitarianism
• Prosperous (“developed” / “advanced”) societies vs.

poor (“underdeveloped” / “developing”) societies

• Just societies vs. unjust societies
• Welfare societies vs. corporate societies / corporatism
• Secular societies vs. theologic societies
• …

Institutions of human societies

At the centre of all

Institutions evolve, too.

Differences and similarities among human societies

Institutions evolve, too.

Differences and similarities among human societies

Institutions evolve, too.

Differences and similarities among human societies

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Institutions evolve, too.

Differences and similarities among human societies

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Institutions evolve, too.

Differences and similarities among human societies

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Institutions evolve, too.

Differences and similarities among human societies

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Institutions evolve, too.

Differences and similarities among human societies and non-human societies

• War, reproduction, shelter, leadership, love
• Habits and instincts
• Altruism, protectionism, solidarity, rituals
• Saving, agriculture, immigration, colonisation,

architecture, theft, homosexuality, serfdom

…

Institutions of human and non-human societies in nature

At the centre of all

Institutions evolve, too.

Differences and similarities among human societies and non-human societies

Institutions evolve, too.

Differences and similarities among human societies and non-human societies

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Institutions evolve, too.

Differences and similarities among human societies and non-human societies

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Institutions evolve, too.

Differences and similarities among human societies and non-human societies

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Institutions evolve, too.

Differences and similarities among human societies and non-human societies

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Institutions evolve, too.

A response:

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• Which and how many societies around the globe have established the rule of law?
• When was the first nation state established?
• It is possible to observe the common ancestors (or evolutionary origins) of nation states, fashion, and art among non-human societies.

Institutions evolve, too.

Some conclusions

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• The institutions of human societies are subject to “the laws of evolution” in nature.
• The institutional history of human societies is older than the biological history of humans.
• Common ancestors (or “primitive versions”) of human institutions are existent in non-human societies.
• Humans (homo sapiens) is not superior to any other species in nature.

Institutions – major claims

1. Economies and societies cannot be understood independently from institutions (morality, law, companies, banks, states, military etc.).
2. Institutions do not always perform perfectly (suboptimality, inefficiency, second best solutions etc.).
3. Many human institutions are older than humans (saving, learning, housing, colonizing, competition, cooperation etc.).
1. Human societies and non-human societies share common institutions
2. Many human societies share uncommon institutions
4. Institutions are not always a product of (intelligent) designer(s)