Mechanisms of Institutional Change and Contingency

Key Insight

While extractive institutions, once established, tend to persist through 'vicious circles,' transitions towards inclusive institutions are possible, though not historically predetermined. Major institutional change, which is a prerequisite for significant economic transformation, occurs through the interaction between existing institutions and 'critical junctures.' These are major events that disrupt the prevailing political and economic balance in societies, such as the Black Death in the fourteenth century, the opening of Atlantic trade routes, or the Industrial Revolution.

Differences in existing institutions, which shape a society's response to critical junctures, result from 'institutional drift.' Similar to genetic drift in isolated populations, societies slowly diverge institutionally due to random mutations or contingent outcomes of conflicts over income and power. These initially small differences, accumulated through institutional drift, can become critically important during a critical juncture, leading otherwise similar societies to diverge radically, as illustrated by the distinct impacts of Atlantic trade on England compared to France and Spain.

This theory rejects any form of historical, geographical, or cultural determinism. For instance, Peru's current poverty relative to Western Europe is attributed to its historical institutional development rather than inherent geography or culture. Contingent outcomes during critical junctures, such as the differing colonization patterns of North and South America, or even the possibility of different historical paths for Europe itself (e.g., if feudalism, city development, and responses to trade had transpired differently), underscore that current global disparities were not inevitable.