Page 1
The role of culture and institutions in economic
history: can economics be of any help?*
“… economists are notoriously uninterested in how people actually think or feel.”
Paul Krugman, Development, geography, and economic theory (Cambridge, Mass.
1995) 74.
1. Introduction
In 1996 The Economist published an article in which it was claimed that Goering,
who supposedly reached for his gun every time he heard the word culture, would
have an aching hand today.
The Economist, as usual, was right. References to
culture have indeed become en vogue even amongst economists. Of course they
have not taken over mainstream economics, but in many analyses so-called prox-
imate causes, like presence and nature of the forces of production, and technology,
have been losing pre-eminence to ultimate causes like culture and institutions. It is
too early yet to talk of a cultural turn in economics but there clearly are signs of
The theme of this conference, the place of culture in economic history,
therefore, is well chosen. But personally I think there is no harm in broadening the
subject and include economic and political institutions. I do not mean to say that
I thank Nathalie Duval for her comments
The Economist, “Cultural explanations. The man in the Baghdad caf(c)”, November 9th
1996, 25-32.
For literature see R. Klump, ed., Wirtschaftskultur, Wirtschaftsstil und Wirtschaftsord-
nung. Methoden und Ergebnisse der Wirtschaftskulturforschung (Marburg 1996); V. Kunz,
“Kulturelle Variablen, organisatorische Netzwerke und demokratische Staatsstrukturen als
Determinanten der wirtschaftlichen Entwicklung im internationalen Vergleich”, Kölner
Zeitschrift f1/4r Soziologie und Sozialpsychologie 52 (2000) 194-225 and H. Siegenthaler,

Page 2
these are a direct and unequivocal reflection of culture.
On the contrary, I think
that this is hardly ever the case. But mostly culture and institutions are so strongly
intertwined that it is extremely difficult, as well as not very enlightening, to try and
disentangle them. Institutions do have dynamics and logics of their own that can-
not directly be reduced to the culture of the individual participants involved, but
on the other hand, they simply cannot be understood nor explained without refer-
ence to that culture. In a sense culture can be regarded as the software of institu-
tional arrangements that, in turn, play a big part in determining culture.
awkward this may be for the theoretician: we are discussing a tight and dialectical
relationship between elements that are almost impossible to keep apart. Institu-
tions as structures and culture as their software in the end are two sides to the same
I will come back to this point repeatedly.
This article will be fairly idiosyncratic. In the end it is the result of my search, as
an historian writing a book on the rise of the West, for general information about
the role of culture and institutions in promoting or hindering economic growth. In
my reading on the rise of the West I found numerous references to the role of
culture and institutions. It does not always, however, become clear how exactly to
interpret, assess, and combine them. So I thought that throwing a glance at the
literature on these themes by economists or theoretically-informed economic his-
torians might be of some avail. The more so as these topics are vigorously debated
by them. This article in no way pretends to be exhaustive. Nor does its author
pretend to be an expert in economics. I just want to shed some light on some
problems involved in trying to integrate culture and institutions in studying a spe-
cific question in economic history: why was the Western world the first region in
the world to have modern economic growth? I believe my remarks have a wider
application than only this specific topic. In this article the following topics will be
discussed in this order: Culture and institutions in current economics and econom-
ic history; The role of culture, institutions and the state in explanations of ‘the rise
of the West(tm); The role of culture in explanations of the rise of the West: some
methodological comments; Economics on the role of culture; Economics and in-
stitutions; Institutions and the explanation of “the rise of the West”; Institutional
economics; Institutional economics, economic history and “the rise of the West”;
“Geschichte und -konomie nach der Kulturalistischen Wende”, Geschichte und Gesells-
chaft 25 (1999) 276-301.
As North, for example, suggests in D.C. North, Structure and change in economic
history (New York 1981) 59"60 and in D.C. North, Institutions, institutional change and
economic performance (Cambridge 1990) 137 and as does Landes in his discussion with
me in Itinerario. European Journal of Overseas History 23 (1999) 8-16, 8.
A recent and very interesting analysis of the effects of economics on culture can be
found in R. Sennett, The corrosion of character. The personal consequences of work in the
new capitalism (New York and London 1998).

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An effort to integrate culture, institutions and the state in economics. At the end of
the article I will present some concluding remarks.
2. Culture and institutions in current economics and economic history
It does not take much effort to show that culture and institutions are on the rise in
economics and economic history. Economics has increasingly been plagued by
unease with the so-called “mainstream approach” that many feel has turned into a
kind of higher cryptology, with a sophistication in methods that is only matched by
a lack of realism in presuppositions. An increasing number of critics is claiming
that economists do not have the slightest idea what is going on in the real world,
and that economics, purportedly a social science, has nothing informative to say
on that world.
With the bluntness that has become characteristic of current schol-
arly debates the end of economic man and of economics has been proclaimed and
talk about a crisis of economics is rife. By paying more attention to culture and
institutions one hopes to mitigate this crisis. So-called “institutional economics”,
in its old as well as in its new variety, has played a major role in this development.
The best-known exponent of this approach undoubtedly is North, who won a No-
bel prize for his work. But I could also refer to Coase, another winner of the Nobel
prize, whose article on the nature of the firm already dates from 1937, and to
Williamson. Two other people who spring to mind, as they, like North, have a very
direct influence in economic history, are Chandler and the political scientist Ol-
Not surprisingly the primary focus of the work of all these authors has al-
ways been on the role of institutions in economic life, in the case of Olson prima-
F. Fukuyama, Trust; The social virtues and the creation of prosperity (New York and
London 1995) 34: “…values and ideas shape concrete social relationships and vice ver-
For the claim that something is fundamentally wrong with economics see, for exam-
ple, G.P. Brockway, The end of economic man (New York and London; 3e edition 1995);
E. Engelen, De mythe van de markt. Waarheid en leugen in de economie (Amsterdam
1995); R. Heilbroner and W. Milberg, The crisis of vision in modern economic thought
(Cambridge 1995); T.W. Hutchinson, Knowledge and ignorance in economics (Oxford
1977); A. Klamer and D. Colander, The making of an economist (Boulder 1990) and P.
Ormerod, The death of economics (London 1994).
7 For introductory information on the new institutional economy see J.S. Cohen, “Institu-
tions and economic analysis” in: Th.G. Rawski, ed., Economics and the historian (Berke-
ley 1996) 60-84; J.N. Drobak and J.V.C. Nye, eds., The frontiers of the new institutional
economics (San Diego and London 1997); B. Gustafsson, ed., Power and economic insti-
tutions. Reinterpretations in economic history (Aldershot and Brookfield 1991); Th. van
de Klundert, Groei en instituties. Over de oorzaken van economische ontwikkeling (Tilburg
1997); J. Maloney, What(tm)s new in economics? (Manchester 1992); North, Structure and

Page 4
rily on the state. But they also have been instrumental in introducing culture into
economics. That is especially the case with North, who increasingly stresses the
significance of culture, or as he prefers to say “ideology.”
But these scholars are
part of a wider trend. Temin is right on target when he claims that in economics it
has become kosher to talk about culture.
Concepts like “business culture”, “cor-
porate culture”, “identity” or “synergy” have become stock in trade in discussions
about modern economic life. Fields like economic anthropology or economic psy-
chology have come into existence. In the Netherlands, one of the most corporatist
countries in the world and the homeland of the “poldermodel,” thinking about
economics has always been heavily institutional and impregnated by cultural con-
siderations. But matters have become even “worse”: the Dutch economist who
was cited most, by far, last year is Hofstede, famous for his publications on cultur-
al differences and their impact on economic organisation.
This shift toward cultural and institutional explanations is even more blatant in
general discussions on economic development. I just mention the debates on “Asian
values,” “Japan Incorporated”, the economic order and policy of the Newly Indus-
trialising Countries, the Anglo-Saxon model and the Rhineland model, or trust as
a source of economic progress. Even a hard-nosed economist like Alan Greenspan
maintains that capitalism is a matter of culture, not of human nature.
The Amer-
ican scholar Lawrence Harrison has probably found the smallest nutshell when he
simply states: “Underdevelopment is a state of mind”.
The most influential works
in this field have not always been written by top professional economists. But
then, how many professional economists nowadays write for a wider audience and
play any role in public intellectual debate? Publications like those by Fukuyama,
Putnam, Huntington, and, most recently, Harrison and Huntington, however, are
change; North, Institutions, institutional change and economic performance; M.C. Olson,
The logic of collective action (Cambridge 1965); M.C. Olson, The rise and decline of
nations (New Haven 1982); M.C. Olson and S. Kähkönen, eds., A not-so-dismal science.
A broader view of economies and societies (Oxford 2000); W. Plumpe, “Gustav von
Schmoller und der Institutionalismus. Zur Bedeutung der historischen Schule der Nation-
alökonomie fur die moderne Wirtschaftsgeschichtsschreibung”, Geschichte und Gesell-
schaft 25 (1999) 252-275; J.J. Vromen, Economic evolution. An enquiry into the founda-
tions of new institutional economics (London and New York 1995) and Cl. Wischermann,
“Der property-rights Ansatz und die “neue” Wirtschaftsgeschichte”, Geschichte und Ges-
ellschaft 19 (1993) 239-258.
See North, Structure and change and Institutions, institutional change, and economic
performance, in the index.
P. Temin, “Is it kosher to talk about culture?”, The Journal of Economic History 57
(1997) 267-287. For that wider trend see the literature referred to in note 2.
10 G. Hofstede, Culture(tm)s consequences. International differences in work-related values
(Beverly Hills and London 1980) and G. Hofstede, Cultures and organizations: software
of the mind (Maidenhead, Berkshire England 1991).

Page 5
widely read and extremely influential.
Mainstream classical economics is far
from dead and one can also find scholars who, instead of turning to culture or
institutions, think economics could profit from paying more attention to geogra-
phy, ecology or demography.
The new approaches have not taken over the disci-
pline, but they surely are making important inroads.
Undeniably economic history too is witnessing an increasing sensitivity to cul-
tural and institutional matters. Expressions like “institution”, “transaction costs”,
“property rights”, “interest group”, “logic of collective action”, “visible hand”,
“human capital”, “social capital”, and “trust” pop up in almost every text in the
field. The situation in the Netherlands is no exception to this rule, as shows in
work of, for example, Davids, Noordegraaf, De Vries and Van der Woude, Van
Zanden and Van Riel.
In this article references to economic history will be con-
fined to literature addressing the question of what made “the West” grow rich,
while “the rest” stayed so much poorer. In debates on this problem the role of
culture and institutions has always been prominent, and it still is. Again, that does
not mean they monopolise current explanations. Materialism still has its staunch
defenders in scholars like Blaut, Frank and Snooks.
Explanations that emphasise
geography and ecology, are presented by, to name a few, Diamond, Pomeranz and
11 L.E. Harrison and S. P. Huntington, eds., Culture matters: How values shape human
progress (New York 2000).
12 L.E. Harrison, Underdevelopment is a state of mind (Cambridge Mass. 1985).
13 Fukuyama, Trust; R. Putnam, with R. Leonardi and S.Y. Nanetti, Making democracy
work. Civic traditions in modern Italy (Princeton 1993); S. Huntington, The clash of
civilisations and the remaking of world order (New York 1996) and Harrison and Hunt-
ington, Culture matters.
14 See for example P. Krugman, Development, geography and economic theory (Cam-
bridge Mass. and London 1995) and J. Sachs, “Notes on a new sociology of economic
development” in: Harrison and Huntington, Culture matters, 29-43.
15 C.A. Davids, De macht der gewoonte? Economische ontwikkeling en institutionele
context in Nederland op de lange termijn (Amsterdam 1995); L. Noordegraaf, Overmoed
uit onbehagen. Positivisme en hermeneutiek in de economische en sociale geschiedenis
(Amsterdam 1991); J. de Vries and A. van der Woude, The first modern economy: success,
failure and perseverance of the Dutch economy, 1500-1815 (Cambridge 1997) and J.L.
van Zanden and A. van Riel, Nederland 1780-1914. Staat, instituties en economische
ontwikkeling (Uitgeverij Balans 2000).
16 J.M. Blaut, Eight eurocentric historians (New York 2000); A.G. Frank, ReOrient.
Global economy in the Asian Age (Berkeley 1998); G.D. Snooks, The dynamic society.
Exploring the sources of global change (London and New York 1996); idem, The laws of
history (London and New York 1998). In J.R. Goody, The East in the West (Cambridge
1996) and E.L.Jones, Growth recurring. Economic change in world history (Cambridge
1988) as well a more materialist approach is favoured, or in any case one in which not too
much is made off culture.

Page 6
Demography plays a big role in the analysis of, for instance, Macfar-
lane and North and Thomas.
3. The role of culture, institutions and the state in explanations of “the rise of
the West”
As indicated, as an explanation for the rise of the West, culture has always been
popular. Landes is his book " of which, I am afraid, more copies were sold during
the last two years than of all other books on economic history together " flatly
claims that “the Weber thesis” is correct and that culture makes all the differ-
Fukuyama refers to Weber approvingly on various occasions and has writ-
ten an entire book on trust and social virtues in the creation of prosperity.
has already published three best-selling volumes in which cultural factors receive
prime coverage when it comes to explaining prosperity.
A similar focus can be
found in Fromkin(tm)s work.
Jay presented a series on BBC TV, now just appearing
in print, that also focuses on culture and institutions as the explanation for the
Western road to riches.
In France Peyrefitte wrote two books on economic de-
velopment in which culture, or as he prefers to say “mentalit(c)” appears as the
major explanatory factor for Western prosperity.
The Indian economist Deepak
Lal wrote a complex book on the impact of factor endowments, culture, and poli-
tics on long-run economic performance. And the list could go on. Apparently there
17 J. Diamond, Guns, germs and steel. A short history of everybody for the last 13.000
years (London 1998); K. Pomeranz, The great divergence. China, Europe, and the making
of the modern world (Princeton 2000) and St.K. Sanderson, Social transformations. A
general theory of historical development (Oxford and Cambridge 1995).
18 A. Macfarlane, The savage wars of peace. England, Japan and the Malthusian trap
(Oxford 1997) and D.C. North and R. Thomas, The rise of the Western world. A new
economic history (Cambridge 1973).
19 D.S. Landes, The wealth and poverty of nations. Why some are so rich and some so
poor (New York 1998) 516.
20 Fukuyama, Trust. I want to emphasise that Weber is much less of an idealist than most
of his followers make him. See R. Collins, Weberian sociological theory (Cambridge 1986).
21 Th. Sowell, Race and culture; Migrations and cultures; Conquest and cultures (New
York 1994, 1996 and 1998).
22 D. Fromkin, The way of the world (New York 1998).
23 P. Jay, Road to riches or The wealth of man (London 2000).
24 A. Peyrefitte, Du miracle en (c)conomie. Leçons au Collège de France (Paris 1995) and
A. Peyrefitte, La soci(c)t(c) de confiance. Essai sur les origines et la nature du d(c)veloppe-
ment (Paris 1995).

Page 7
is a wide range of cultural features that count as distinctively Western.
maybe not all of these authors count as the crème de la crème of serious scholar-
ship, but their works sell. And they are not alone: respected scholars like Gold-
stone, Hall, Jacob, Mann, and the late Gellner, are not loathe to enthusiastically
voice their opinion that there is something special to Western culture that is good
for Western economy.
Similar claims have been made for Western institutions. It will not come as a
surprise that North claims that the rise of the West was caused by its more efficient
economic institutions.
Notwithstanding their idiosyncrasies, he and Thomas, can
be included in the large group of scholars who believe that the rise of the West
basically was the rise of capitalism, and who tend to identify this with the rise of
“the market.”
Overall capitalism can be defined by the presence of private prop-
erty, private enterprise, commodification, the allocation of goods and services via
a market, and a drive for capital accumulation. Some kind of political backing,
obviously, is a necessary precondition for this mode of production, as it is for any
other. In (early) modern capitalism that backing increasingly tended to be provid-
ed by the state that defined and protected property. As economists strongly influ-
enced by neo-classical thinking, North and Thomas and a large group of kindred
spirits tend to identify capitalism with a specific kind of market economy, to wit,
one that is characterised by perfect and free competition and all that implies, like
fully defined property rights, the presence of a large number of individual actors,
market clearing and price-taking. Of course its markets were never operating per-
fectly and completely unhampered, but the West came closest, and in its rise ever
closer to this ideal. This view is shared by many scholars in the field. Landes is
only one of the most recent and most outspoken among them.
On the other hand
25 Deepak Lal, Unintended consequences. The impact of factor endowments, culture,
and politics on long-run economic performance (Cambridge 1998).
26 E. Gellner, Plough, sword and book. The structure of human history (Glasgow 1988);
J.A. Goldstone, “Cultural orthodoxy, risk, and innovation: the divergence of East and
West in the early modern world”, Sociological Theory 5 (1987) 119-135; J.A. Goldstone,
Revolution and rebellion in the early modern world (Berkeley 1991); J.A. Hall, Power &
liberties. The causes and consequences of the rise of the West (Oxford 1985); M.C. Jacob,
Scientific culture and the making of the industrial West (New York and Oxford 1997) and
M. Mann, The sources of social power. Vol I. The history of power from the beginning to
A.D. 1760 (Cambridge 1986).
27 For North(tm)s claim that institutions explain the great divergence see his Institutions,
institutional change and economic performance, 3-10 and Rise of the Western world, chapter
28 North and Thomas, Rise of the Western World.
29 Landes, Wealth and poverty; Fromkin, Way of the world; Jay, Road to riches; E.L.
Jones, The European miracle. Environments, economies and geopolitics in the history of
Europe and Asia (second edition; Cambridge University Press 1987) and Growth recur-

Page 8
there are a lot of opponents to this identifying of the rise of the West with the rise
of perfect and free competition. They too tend to blame or praise “capitalism” for
Western economic supremacy and prosperity, but for them this capitalism is not
tantamount to ideal market economy that is so dear to mainstream economists.
One could think of scholars like Wallerstein, Braudel, Pomeranz, and various
Marxist authors.
Widely differing as these interpretations of the political econo-
my of the West may be, they all put heavy emphasis on the fact that institutionally
the West was unique and that this was fundamental in its rise.
In line with the “Smithian” view of capitalism, there are authors who connect the
rise of the West to the presence of free competition in all walks of life, not just in
the sphere of economics. As Mann puts it, in the various Western countries that
were heirs to the last European empire, that of the Romans, the sources of social
power " political, ideological, economic, and military " were not monopolised.
This is supposed to have promoted a specific, Western dynamism and individual-
ism, strengthened by a family structure in which already at the beginning of the
early modern period nuclear families were the rule. In this perspective Western
society was socially and geographically more mobile and open than other major
societies in the world. The diffusion of social power is also thought to have caused,
and been caused by, the existence of a so-called “civil society”, another popular
topic in discussing the uniqueness of the West. There society had countervailing
power against government. Despotism and under-government were thereby ruled
out, with all the beneficial effects that it is supposed to have had for development
and growth. In such conditions, with a network of mutual arrangements and a gov-
ernment that was held in check, trust could arise, which could also enhance oppor-
tunities for growth.
It will be obvious that scholars who do not buy the story of
the West as the home ground of perfect and free competition, will have their doubts
about all this talk about mobility, dynamism and voluntary co-operation as well.
Discussing institutions inevitably leads to discussing the state, the super- and
supra-institution in the Western world. Two features are mentioned in almost eve-
ring; J.P. Powelson, Centuries of economic endeavor. Parallel paths in Japan and Europe
and their contrast with the third world (University of Michigan Press 1994) and N. Rosen-
berg en L.E. Birdzell, How the West grew rich: the economic transformation of the indus-
trial world (New York 1986).
30 F.Braudel, Civilisation mat(c)rielle, (c)conomie et capitalisme, XVe-XVIIIe siècle (Paris
1979); Pomeranz, Great divergence and I.M. Wallerstein, The modern world-system I.
Capitalist agriculture and the origins of the European world economy in the sixteenth
century (New York 1974). For a classic Marxist approach see for example the work of M.
Dobb. His ideas are discussed in Gustafsson, Power and economic institutions, 38-40.
31 Mann, Sources of social power, 22-33.
32 P.H.H. Vries, “Governing growth: a comparative analysis of the role of the state in the
rise of the West”. To be published in Journal of World History.

Page 9
ry analysis of the question to what extent it could have helped the West in acquir-
ing its leading position. The first one is its state system, the second one the nature
of the individual states. Again, overall, two lines of interpretation can be distin-
guished. One in which the Western state is regarded primarily as lean and clean
and gravitating towards laissez-faire, and one in which emphasis is laid on its
strength and its tendency to interfere in the economy. So we are confronted with
literature in which “weak” governments and “strong” governments, laissez-faire
and mercantilism, fight for prominence in explaining the rise of the West.
These few examples more than suffice to show that references to culture and insti-
tutions abound in analyses that try to explain the economic phenomenon called the
rise of the West. They also suffice to show that these references are anything but
unproblematic. A closer look is needed at what is meant by culture and institutions
and how they are supposed to influence the economy. In trying to answer the last
question we obviously will take a look at economics to see whether this discipline
can be of any help to historians.
4. The role of culture in explanations of “the rise of the West”: methodolog-
ical comments
Culture has become a buzz-word among social scientists and historians. It is not
that long ago that it was still rejected as a notoriously vague category that serious
scholars had better avoid. I will not bother to try and answer the question " that is
unanswerable anyhow " what culture really is and just start from the definitions I
encountered in the literature. Landes, who makes extremely far-reaching claims
for the role of culture in economic history in saying that it makes all the difference,
puts surprisingly little effort into defining it. To him in the end it amounts to “the
inner values and attitudes that guide a population.”
Huntington, who together
with Harrison wrote a manifesto Culture matters: how values shape human progress,
describes culture as “values, attitudes, beliefs, and underlying assumptions preva-
lent among people in a society.”
Fukuyama defines it as “inherited ethical hab-
North seems to prefer the expression “ideology”, by which he means “the
subjective perceptions (models, theories) all people possess to explain the world
around them.”
Olson distinguishes between two kinds of culture: marketable
33 See for an analysis of both these points of view, ibidem.
34 Landes, Wealth and poverty, 516.
35 Huntington in Harrison and Huntington, Culture matters, XV.
36 Fukuyama, Trust, 34.
37 North, Institutions, institutional change and economic performance, 23.

Page 10
human capital or personal culture, and public-good human capital, that is knowl-
edge about what public policy should be.
For the sake of convenience and to
exclude no interpretation that I have come across, I opted for an extremely broad
definition, to wit the socially acquired set of dispositions of a group of people with
regard to describing, interpreting and valuing the social and natural world.
Those who fear that introducing culture into debates on economic development
is a sure recipe for vagueness, can find ample confirmation in texts that deal with
the emergence of modern economic growth in the West. Unclear interpretations of
the concept abound. Its precise meaning is often left unspecified, distinctions ac-
cording to place and time are often lacking. Authors do not hesitate " as Hunting-
ton does for the contemporary world
" to call civilisations “Christian”, “Confu-
cianist” or “Muslim”, and then take this to have extremely far " reaching
consequences for their economic performance. It would have been very surprising
indeed if no author would have tried to see some connection between Christianity
and the specific economic feats of the Western, Christian world. And indeed many
did. Some to emphasise that in the Christian conception the world is regarded as
something that may be used and changed. Others to emphasise it functioned as a
basis for trust among co-religionists.
That Protestantism, and especially Calvin-
ism, has been credited with special effects in the realm of the economy needs no
further comment. Neither does the topos that Confucianism in China, Islam in the
Muslim world, and Hinduism in India, were bad things from an economic point of
As Japan industrialised relatively early, its culture almost had to be a kind
of exception to the Asian rule, and indeed positive interpretations of it are not
Fortunately, I am tempted to say, reference to culture does not always hover at so
lofty heights. Going through the literature one can collect a whole list of more
specific and concrete cultural traits that are supposed to have played a leading role
in creating economic growth in the West. To begin with those features that are
summarised under the concept of a (good) work ethic: frugality and industrious-
ness, thrift, tenacity, patience.
Then there is of course “rationality”, a word with
38 M.C. Olson, “Big bills left on the sidewalk: why some nations are rich and others
poor” in: Olson and Kähkönen, A not-so-dismal science, 37-60, p 52.
39 Huntington, Clash of civilisations.
40 See for Christianity as a provider of, among other things, trust Hall, Power and liber-
ties and Mann, Sources of social power. For its supposedly different attitude towards na-
ture see Landes, Wealth and poverty, 58-59. For a fierce critic of the idea that Christianity
would in any way have been conducive to economic growth, see D. Cosandey, Le secret de
l(tm)Occident. Du miracle pass(c) au marasme pr(c)sent (Paris 1997) 23-32.
41 I only refer to Landes, Wealth and poverty, the chapters on the history of China and the
Muslim world, and his remarks on India and the Weber-thesis.
42 Ibidem, chapter 22 on Japan(tm)s industrialisation.
43 See for example Landes, Wealth and poverty, chapter 29 and M. Egnal, Divergent

Page 11
a very wide meaning. For Weber, in whose work it is a central concept and whose
work has been immensely influential " and for mainstream economists! " it means
thinking in terms of the methodical, calculable and the predictable.
Its highest
materialisation in early modern Europe appears to have been double-entry book-
keeping, but it was expressed in an overall inclination to “measure” reality.
meaning of the word “rationality” often, I think incorrectly, tends to be widened to
comprise the whole gamut of characteristics expected of an entrepreneur. Here
Schumpeter(tm)s characterisation of the entrepreneur, especially in capitalism, as the
creative destructor comes to mind.
It then also encloses “risk taking” and a feel
for innovation. Jay claims that “risk” is a Western word and that Western society
was a society of risk-taking entrepreneurs.
There are, however, other scholars
who think that it was risk-avoidance and manipulation of the economy that laid the
ground for Western wealth.
Other traits I have come across " all smacking heav-
ily of the American way of life " are competitiveness and individualism, accept-
ance of success and consumption, a positive attitude toward change, dynamism
and mobility. To end this list that has no pretence of being exhaustive but just
hopes to present the most important items, I want to mention trust and confidence,
cultural capital, literacy and scientific culture.
The big “civilisational” concepts, exemplified par excellence in religions or
belief-systems, also reflect par excellence the vagueness that cultural interpreta-
tions are accused of. They are (too) large, diffuse, under-specified. When it comes
to categories like Christianity, Protestantism, Calvinism, Hinduism, Confucianism
et cetera, the question simply cannot be suppressed what exactly it is that makes
them assets, or liabilities, for an economy. How exactly to connect lofty things like
religious beliefs to such prosaic matters like production? Not surprisingly opin-
ions differ widely on how to interpret the putative connections and to show that
they really exist. Interpretations of the supposed effects of Christianity on eco-
nomic development vary immensely, from those who think it was one of the most
paths: how culture and institutions have shaped North American economic growth (Ox-
ford 1996) “Preface” and “A concluding note.”
44 Collins, Weberian sociology, chapter 2.
45 A.W. Crosby, The measure of reality. Quantification and Western society, 1250-1600
(New York 1997).
46 J.A. Schumpeter, Capitalism, socialism and democracy (New York 1942).
47 Jay, Road to riches, TV broadcast.
48 See for this thesis for example the way Braudel defines capitalism in his Civilisation
mat(c)rielle and Pomeranz, Great divergence, chapter 4.
49 For literature on the rise of the West, apart from that mentioned in this article, see
P.H.H. Vries, “The rise of the West in economisch perspectief “, Theoretische Geschiedenis
25 (1998) 291-321. The shortest overview of the role that culture is supposed to have
played in the rise of the West is provided by the reviews of Blaut in his Eight eurocentric

Page 12
important assets of the West, to those who see no connection at all, to those who
think the effects were much more often negative than positive.
Opinions are not
so extremely diverse when it comes to the debate on Calvinism and capitalism, but
here too scholars are torn on the question of the connection " if any " and its exact
nature, as the immense literature on the Weber-thesis proves. The same applies to
the relationship between Confucianism and economy.
This is not the place to solve these riddles. What is clear, however, is that in this
context the easy macro descriptions should at least be disaggregated and trans-
formed into manageable categories that can be defined in a empirically meaning-
ful sense. Cultures are very diffuse and comprise various sub-cultures. They change
and interact with what is going on in the world. Much more attention should be
paid to looking for good, empirical indicators. What should concern us here are
their implications for practical life, not their spiritual principles. This not only
applies to religion but also to the many references to Western rationality and the
scientific inclinations of the Westerner. Giving an operational definition of the
small “traits” at first sight might seem to be easier. Although on second thought
appearances may be very deceptive. How do you determine empirically that one
culture has a better work ethic than another one? How do you measure thrift on a
society-wide scale, or mobility? Fundamental categories like trust, are also hard to
pin down precisely. Where measuring is so extremely difficult, it is not clear how
authors can be so adamant in their claims that the West had so much of these good
things that it, and not any other advanced region in the world, would be the first
one with modern economic growth. Especially as so little systematic comparative
research has been undertaken.
Moreover, it is far from obvious how the various traits that are supposed to have
set the West on its specific trajectory, can be combined in one consistent story-
line. I will restrict myself to just a few examples. How exactly to combine the
thesis that the virtues of the bookkeeping petit bourgeois (being frugal and indus-
trious, thinking in terms of the calculable and the predictable, avoiding risks) are
conducive to economic growth, with the thesis that it is entrepreneurial virtues
(like a willingness to take risks, deal with uncertainty and look for innovation) that
have this effect? The bookkeeper can easily become the enemy par excellence of
the entrepreneur, although Sombart thought they both were part of the history of
Der Bourgeois.
Taking risks and venturing into the unknown can be very sensi-
50 In case anybody would want to know, I think the last group has history on its side. See
note 40.
51 I only refer to Harrison and Huntington, Culture matters chapters 16 to 20.
52 One can harbour serious doubts whether it will ever be possible for historians to con-
duct the kind of empirical research that is done by those who research contemporary rela-
tions between economics and culture. See for example Klump, “Witschaftskultur” and
Kunz, “Kulturelle Variablen”.
53 W. Sombart, Der Bourgeois: zur Geistesgeschichte des modernen Wirtschaftsmen-

Page 13
ble in that this is the only way to keep abreast in a competitive environment. Per-
sonally, however, I would not call it rational. You simply cannot calculate and
predict that what you are about to do is the right thing to do. Risk, according to the
prevailing definition, might be measured, in the sense that ideally one could insure
oneself to make it less risky, but uncertainty can not, and innovating is by defini-
tion uncertain.
To give but one, final, example of conflicting interpretations:
traits like competitiveness, individualism, mobility and dynamism, are not always
easy to combine with trust and confidence. Institutional economists have not by
accident focused on the question how co-operation of economic actors can be
accomplished where it might, at least in the short run, often be more rational to be
a free rider.
These (apparent?) inconsistencies form an additional, but forceful reason to
try and figure out the exact mechanisms that are supposed to make all these cultur-
al traits into explanatory variables in a story about economic growth. Many of
them tend to be regarded as good because they are considered good from a moral
point of view " somehow we like people to work hard, to save, to be individualis-
tic, et cetera " and we tend to think that behaviour of that kind ought to be reward-
ed. But that does not necessarily mean that these private, moral virtues would be
public, economic virtues too. Individuals usually work for personal net income,
however defined, not for gross national product. Normally they do not really both-
er about GNP. If they do, that, by the way, might be a very forceful cultural factor
in explaining why some countries have had such high growth rates.
that are economically rational from a personal point of view and increase or even
maximise a private income, can be socially inefficient. Smith(tm)s optimistic inter-
pretation of the working of the invisible hand, is simplistically over-optimistic,
even in the best of all markets. Individual behaviour can very well be rational from
the perspective of personal self-interest but irrational from the perspective of eco-
nomic development.
schen (M1/4nchen 1913). Compare the remarks in R. Grassby, The idea of capitalism be-
fore the industrial revolution (Lanham and Oxford 1999) 47-59.
54 For the “irrationality” of risk taking and especially acting in a context of uncertainty
see R. Brenner, History. The human gamble (Chicago and London 1983) and Goldstone,
“Cultural orthodoxy, risk, and innovation.” For the current definition of risk and uncer-
tainty see also H. Pellikaan and W. Hout, eds, Economische modellen en politieke besluit-
vorming. Inleiding in de rationele"keuzetheorie (Bussum 1998) 56-60.
55 One might think for example of Japan(tm)s industrialisation, the German “Wirt-
schaftswunder” after World War Two, and the economic recovery of the Netherlands dur-
ing that same era.
56 Maloney, What(tm)s new in economics, 104.

Page 14
It does not take an awful lot of imagination or technical economic schooling to
think of situations in which one or more of the character traits mentioned above
indeed might foster economic growth. But, and that is the problem, it does not take
much imagination either to think of circumstances in which they would not. Hard
work can delay mechanisation and economic innovation. It can, by the way, be-
come irrational, as Weber already knew. There is nothing rational, in an economic
sense, for people who have accumulated more than they can ever spend, to contin-
ue working. Any entrepreneur faces the problem that he can never maximise profit
and utility both at the same time. But, why does Bill Gates continue working? His
time must be scarcer than his money. What we call thrift today may be under-
consumption tomorrow. Becoming a mafioso definitely is a risky enterprise, but
would Schumpeter endorse it? Being rational and calculating can be a brake on
innovation. Individualism and a thoroughly rational approach can lead to a lack of
trust or co-operation. National economic mobilisation can create growth, but it
can also create havoc, for example when it turns into fierce nationalism and war.
What could be more rational when one is confronted with predicaments like
these than to turn to economics? Might one not expect that this most prestigious of
all social sciences could help us and tell what cultural traits are beneficial to growth,
and in what circumstances? After all explaining economic growth ought to be its
major field of interest.
5. Economics on the role of culture
Economics as a discipline has never been noted for its interest in culture and any-
one who has ever leafed through economics textbooks can confirm that almost all
the concepts we have just referred to, are completely lacking there. In a way, how-
ever, the popular critique that economics neglects culture is completely beside the
point: the whole field of economics is “subjective”. It is entirely about choosing on
the basis of the preferences you have and the restraints you see. Value, its central
concept, is not an objective category but a subjective one, just like commodity,
labour and labour force, money et cetera.
According to mainstream economics
the value of a good or service, from the consumer(tm)s point of view, is the extent to
which it satisfies a want. We then speak of utility. From the producer(tm)s point of
view the value of a good would be the extent to which it generates profit. The
wants of consumer and producer themselves are regarded as data: to the economist
they are as they are. The primum movens in economics, the reason people want to
acquire goods or produce them in the first place, is outside economics. The much-
57 For the subjective nature of economic facts see, for example, F.A. Hayek, The counter-
revolution of science. Studies on the use and abuse of reason (New York 1952) chapter 3.

Page 15
discussed rationality of the homo economicus, and of the economist, normally
only considers the ordering of the means, not of the ends. In the range of prefer-
ences there must be some order. If not, you cannot say anything systematic about
them. Mainstream economists take that order to be rational, which implies, in the
“thin” meaning of the word, that it is complete and transitive, and in the “thick”
meaning, that the preferences are also ordered according to effectiveness and effi-
ciency. The goal of this ordering is maximalisation. The consumer is supposed to
be a maximiser of his utility, which of course depends on what his preferences are.
With the producer things are less complicated. He is supposed to be a profit max-
imiser, which means that, in principle, it can be objectively verified whether this
goal has been reached. So he can even be rational in the thick meaning of the word.
Economists start from the premise that any rational person would want to maxi-
malise utility and profit. Which implies that consumers and producers know " or
at least act as if they knew " what they want and how much they want it as com-
pared to something else. Notice that this concept of rationality is adaptive, being
rational is making the best of the situation as it is and in principle being able to do
that unequivocally.
Differentiating between thin and thick rationality, is talking about method. One
can also differentiate between the different fields of reality to which rational-choice
theory might be applied. Economists preferably discuss their homo economicus,
busy with optimising his economic pleasures and minimising his economic pains,
i.e. basically making a pecuniary cost-benefit analysis. One might of course go
further and apply the principle of economic reasoning, with its thick or thin ration-
ality and its pleasure-and-pain principle, to a much wider range of subjects. Con-
sidering, for example, how far one may get in analysing marriage as if it were a
rational choice, and in that sense an economic activity. Think of the work of Beck-
er and others who promote the economic approach to human behaviour more in
general. But even in these types of approaches culture, although fundamental, still
is external: a set of given, stable preferences. Economics does not bother why
culture is as it is. It focuses on looking at the world from the vantage point of
describing, explaining, and predicting rational choices made in a given setting.
In principle there is nothing wrong with such a formalistic approach that postu-
lates utility and profit maximising. The proof of the pudding should be in the eat-
ing. If not, then economics is not an empirical science. That point of view might be
defended, but in the end I personally doubt whether that would be very fruitful.
Well then, how fruitful are this set of premises and the models built on it in con-
58 G.S. Becker, The economic approach to human behavior (Chicago 1976). My analysis
of rational-choice in mainstream economics is inspired by Engelen, Mythe van de markt,
passim and Pellikaan and Hout, Economische modellen en politieke besluitvorming, chap-
ters 1, 2 and 3.

Page 16
fronting the reality of economic history? Let us begin our short evaluation with the
individual decision-maker, the atom of economic analysis. In the real world pro-
ducers often, for one reason or another, do not want to be maximisers but prefer to
be satisficers, or, to think in terms of a target-income, market share or continuity.
Neoclassical economists, rightly, often react to such objections that in a situation
of competition you will be forced to be rational, otherwise you will be wiped out.
That may very well be true, in a situation of fierce competition. These are anything
but universal. Consumers in their turn may not always make the best choices, but
then, neo-classical economists will suggest, they will have to pay dearly for their
irrationality. Again that may very well be true. But historians know that not every-
body in the past " or in the present " seems to mind.
But let us suppose an economic agent wants to be rational, could he? Even in the
best of all worlds being rational is a hell of a job. Economists admit that in real life,
rationality very often is beyond the grasp of decision-makers who nevertheless
have to make some decision. There is a wide range of possible reasons for that. I
just mention having too much or too little relevant information, lacking time and/
or resources to make all the necessary calculations, and operating in a situation of
risk or uncertainty. In practice this means that economists know that individuals
are hardly ever rational in the formal, thick, cost-benefit sense, even in the so-
called modern, calculating times we are now living in. Suggesting that whatever
people have chosen, reveals their preferences, and is therefore “rational,” deprives
the concept of all meaning. The rationality of the individual actor is not only “bound-
ed” by his personal abilities or proclivities. Making rational choices also implies
being in the position to be able to strictly compare and order options and of having
any options. It implies comparability or preferably calculability, freedom to act
and the availability of alternatives. It is hard to be systematically rational and, for
example, produce efficiently, when the environment is constantly changing, when
there is no yardstick to compare the things you want , when you are not allowed to
choose, or when there simply is nothing to choose, only one pub in the entire town.
In mainstream economics your window of opportunities simply is a function of
your budget. In reality it is conditioned by the entire context in which you live. The
choices people make, whether we consider them rational or irrational not, eco-
nomic or not, never are individual choices made in a vacuum. They are made in
societies with a certain culture, certain institutions and a specific history. In real
life these play a fundamental role in every decision-making process. That does not
necessarily make them irrational. On the contrary, it can very well make them
rational in the context of a set of overall preferences. In every society the econom-
ic is “embedded” in culture, even in capitalist society where the economic is said
to have been more detached from society than in any other type of society. Even
now there are many cultural reasons for not allowing activities that would be prof-
itable or satisfy wants. Even now there are values that overrule the economic. As
we see for example in laws against dealing in drugs and weapons, or against child

Page 17
labor. Culture as a shared set of dispositions focuses the perceptions and prefer-
ences of people and thereby acts as a filter in the process of economic decision-
It cannot be excluded from economic analysis.
The mainstream economist could of course say, well that is all very fine but that
does not change the fundamental premise that in the short term culture is a datum,
something the economist finds embodied in the preferences of his producers and
consumers but need not research as such. Apart from the fact that the economist
sticking to this point of view would not understand much of what happens to his/
her endogenous variables, the historian or anybody interested in reality could then
reply that in the longer term culture definitely is not a datum. Preferences change.
An economic historian cannot ignore this and the reasons for it. If changes in
preference were always caused by changes in the economy, i.e. if they could be
seen as endogenous, the economist would still have the possibility to completely
do his/her own thing. There would be no necessity to go outside economics. But
that is not the case. Changes of preferences not only are mostly unexplained in
economics, mostly they are inexplicable in economic terms. Culture is the context
in which you can be rational. It is not in itself rational or irrational, but a-rational:
the glass through which you can look rationally or irrationally but that in itself is
neither. One could claim that “In such an environment one could maximally satisfy
certain needs”, but that doesn(tm)t make that environment or these needs rational.
All these comments must not be interpreted as suggesting that a rational-choice
approach, whether it proceeds along thick or thin lines, would be useless and not
informative. Far from, it only has to be applied in a sensible way. As a point of
departure the presupposition of rationality is far more plausible than the presuppo-
sition of irrationality. Looking at economic decision-making as a process of ra-
tional choice under constraints, to me still is by far the most fruitful approach, not
only in economics but in every sector of life where people try to reach a specific
goal and apply a specific strategy.
Besides, we are dealing with a model here.
That it has been turned into a sterile dogma is not its fault. I have always been in
favour of a research strategy that tries to find the logic in what people are doing.
That implies trying to find out a) what they themselves think they are doing b) why
they are doing it " i.e. what their reasons and the causes behind these reasons are
" and c) what the effects are of their acting as they did, in the short as well as in the
long term, intentionally and unintentionally.
This requires having a thorough
59 Fukyama, Trust, 34 and North, Structure and change, 49, where ideology is called “an
economizing device.”
60 I can completely agree with the stance taken in D.N. McCloskey, “The economics of
choice: neoclassical supply and demand” in: Rawski, Economics and the historian, 122-
61 See for this approach R. Boudon, Theories of social change (Cambridge 1991) and J.
Elster, Explaining technical change (Cambridge 1983) chapter 3.

Page 18
knowledge of the context in which people are operating and the ways in which
they think. Only then can one see what they might regard as rational. This suggests
that even if there might be some truth in the claim of some scholars that the funda-
mental concepts of economics and its rational-choice approach are universal, there
is even more truth in the assertion that it is does not make much sense to use them
without any specification of time and context. In different contexts the meaning or
impact of rationality, value, preference, goods, services, labour et cetera can be so
different that they become empty categories that must be filled in with “local knowl-
What has been discussed so far, basically, is a set of premises of mainstream,
(neo-)classical economics. As institutional economics plays a prominent role in
this article because of its increasing popularity in economics and economic histo-
ry, some specific comments on it are in order. I will confine myself to North, as he
is the institutionalist who, as far as I know, has most clearly pronounced himself on
the role of culture in macroeconomics, although, as indicated, he would rather
speak of “ideology” than of “culture.” He regards culture as the informal base of
institutions, and thinks it is more fundamental than institutions and more difficult
to change. Although he started from a neo-classical position, he feels increasingly
uneasy about its strict rationality-postulate and expects to be able to learn a lot
about how really people really think from cognitive science.
It is only to be
welcomed when an economist thinks that culture is so important in economics that
this discipline needs “a theory of ideology” and that human thinking and decision-
making should be analysed much further. But that theory still is, as North himself
admits, wishful thinking. And, I think, it will always be. What gains exactly one
might expect for studies of macro-economic development from explorations into
cognitive science is as yet unclear. Suppose for the sake of argument that “a theory
of ideology” would ever emerge, and that cognitive science would bring new in-
sights, would it then be possible to integrate this into economics in such a way that
for economists culture would become an endogenous factor, i.e. that economic
variables could explain cultural variables? Maybe in some cases and some con-
texts, but overall I do not believe for a moment that this might work, and in any
case North, nor anybody else, has yet shown it to work. The less culture can be
deduced from economic data, the more it will continue to be an exogenous factor
in economic theory and the more the economist, and the economic historian, will
have to depend on knowledge of the extra-economic.
62 See for example Engelen, Mythe van de markt, 83, and Heilbroner and Milberg, Crisis
of vision, 110-111.
63 North, “Prologue” in: Drobak and Nye, Frontiers of new institutional economics; idem,
Structure and change and Institutions, institutional change and economic performance.

Page 19
Taking culture into consideration definitely enriches economics, but it doesn(tm)t make
culture part of economics. Economists do not have any privileged knowledge as
economists about how and why a specific culture comes into existence. The rea-
sons for having a specific culture " to put it somewhat deceptive, as it suggests you
rationally choose your culture " are not necessarily and not even primarily eco-
nomic. Economic developments can of course have a big impact on culture, as for
example the current process of globalisation shows. But we simply do not know
when they do and when they don(tm)t, or how exactly the connection will work out. It
is not inconceivable that economists, of whatever variety, might tell us what type
of culture would be conducive to economic growth or indicate what could bring
about such a culture.
In their line of reasoning in the end that would have to be a
culture that values economic rationality in the two widely differing meanings of
the term we used here, that is being efficient and being innovative. That is " to end
our long detour in search for help in economics " all that mainstream economists
and institutionalists can teach historians about culture and economic growth. Both
“rationalities” are important in economic life. How to bring about the first type of
rationality, at least in principle, is not very mysterious. But Schumpeter definitely
was right when he claimed that in capitalism growth is created by a gale of peren-
nial, creative destruction, i.e. by constant innovation. Before capitalism this gale
may have been only a soft breeze but still: in any competitive environment produc-
ers always have had to be on the alert and willing to innovate, that is, go beyond
known constraints and so to say create their own environment. Economics has not
(yet?) produced a theory of economic macro-inventions. What we have is a set of
empirical generalisations at best.
Whatever else may be needed for an econom-
ically efficient and innovative culture to emerge and exist, it will never thrive with-
out an adequate institutional context. Let us therefore turn to the place of institu-
tions in economic life, economic history and economics.
6. Economics and institutions
Economic choices are always embedded in a cultural and institutional setting, just
like they on the other hand exert their influence on them. Taking this into consid-
eration is what makes these choices rational in real life. We have commented upon
culture as a factor in individual economic behaviour and seen how fundamentally
64 See, for example, Harrison and Huntington, Culture matters, chapters 20-22.
65 J. Mokyr, The lever of riches. Technological creativity and economic progress (New
York and Oxford 1990) en G. Clark, “Economic growth in history and theory”, Theory
and Society 22 (1993) 871-886 and J. Mokyr, “Innovation and its enemies: the economic
and political roots of technological inertia” in: Olson and Kähkönen, A not-so-dismal
science, 61-91.

Page 20
it conditions this behaviour. Culture, however, only becomes influential on a mac-
ro level and in a structural way, and more easily to pinpoint in its effects, when it
“solidifies” in institutions. The culture of an individual or even a group does not
matter very much in general economic history when it is not braced by some kind
of institution. But then, institutional economists stress, it can become extremely
important. It creates a new set of constraining and enabling factors, next to the
“ordinary” economic data like technology or factor endowments. What then can
historians discussing the role of institutions, in general or with regard to the rise of
the West in particular, learn from economics?
If the frequency with which the word “institution” is used in recent economic
publications is something to go by, it has become even more of a buzz-word than
culture. There is even a whole branch of the discipline that goes by the name “new
institutional economics”, where the “new” is meant to indicate that there always
has been a branch of economics where institutions were deemed important.
appears to be not really a separate branch of economics, but rather a particular set
of concerns. It generally focuses on transaction costs and property rights, /political
economy and public choice/ quantitative economic history (usually in institutional
micro-economic context)/ cognition, ideology and the role of path-dependency.
Be that as it may be, one might expect it would not be hard to find a definition of
this new key concept and a small synthesis of the main findings of this type of
North(tm)s work would be the obvious place to look for such a definition. He de-
fines institutions in terms of formal rules (laws, constitutions, rules), informal con-
straints (conventions, codes of conduct, norms of behaviour) and the effectiveness
of their enforcement, all of them instrumental in structuring economic life. In this
definition he distinguishes between the rules of the game and the players, i.e. or-
ganisations. Enforcement of the rules is carried out by third parties (law enforce-
ment, social ostracism), second parties (retaliation) or the first party (self-imposed
codes of conduct).
Other scholars include the players and regard them too or
even primarily as institutions. From this point of view it is only logical to also
include the state, the super- and supra-institution that, even in “minimalistic” in-
terpretations of its tasks, functions as arena of collective action, where govern-
ment provides infrastructure, formulates the rules and acts as referee when it comes
to applying them. Davids presents an even more encompassing definition. To him
the concept “institution” stands for the structures that in the course of time develop
in economic interaction between individuals. They are the power of custom.
66 See for example Gustavsson, Power and economic institutions, “Introduction.”
67 Drobak and Nye, “Introduction” in: idem, Frontiers of new institutional economics.
68 North, “Prologue.”
69 Davids, Macht der gewoonte.

Page 21
this article I will, for the sake of convenience, use a very broad definition that
encloses all the features mentioned in this paragraph.
The importance of culture for institutions thus defined, is evident. Culture, i.e. in
any case somebody(tm)s culture, is at the basis of institutions. Formal rules, informal
constraints and enforcing agencies: they all refer to peoples(tm) conception of how
things ought to be done. They are expressions, or in any case results, of how peo-
ple see themselves, other people and the world. Organisations, including govern-
ments, are interest groups. So what they do, is heavily influenced by the interests
they have chosen to defend. Which is often related to culture and, by the way,
hardly ever focused on increasing GNP in the long run. This does not mean one
can simply deduce institutions from individual reasons and choices. They clearly
have a status, dynamics, and logic of their own. The same applies to organisations.
But it would be silly to deny that these are heavily intertwined with culture. Every
economic order " as well as every political order " implies a cultural order.
7. Institutions and the explanation of “the rise of the West”
Economic history from the very beginning has always paid attention to institu-
tions. Before the cliometric revolution, it was, if anything, more institutional than
economic. It primarily was economic history with economic theory left out. With
the New Economic History it was just the other way around. It by and large was
economic history (in a neo-classical mould) with history (including culture and
institutions) left out. One would expect the new institutional economics to be very
informative for historians who constantly refer to institutions in their explanation
of economic phenomena.
In debates on the rise of the West we constantly come across references to insti-
tutions, as we already pointed out. It is, for example, claimed that in the West
markets were more competitive and/ or free than elsewhere, that property rights
were better protected, transaction costs lower. To mention only those institutional
traits one might think are fairly easily measurable. Surprisingly a good operational
definition of the variables in case and a systematic measurement of them, are mostly
lacking, even for such a fundamentally quantitative factor as transaction costs.
Where measurement is so difficult, it is very daring or simply imprudent to state
that “the West” had more of an advantageous institution than “the rest.” I will not
dwell on this but just make one comment with regard to the work of North, who
makes very wide-ranging claims with regard to the role of institutions in Western
70 For various contemporaneous authors and their definitions, apart from those already
mentioned, see Cohen, “Institutions and economic analysis”; Van de Klundert, Groei en
instituties, “Inleiding”, as well as Van Zanden and Van Riel, Nederland 1780-1914, “In-

Page 22
economic hegemony: he does so without making any systematic comparison what-
soever with regions outside Western Europe or beyond the period between 900
and 1700, not in his 1973 book, which is hardly surprising, but neither in any of his
later publications. The hypothesis that institutions matter, can best be illustrated
by comparisons.
The question how exactly they matter, of course then still has to
be settled.
The huge problems involved in defining and “measuring” institutions will surely
not be innocent to the fact that there are such immense differences between vari-
ous interpretations of the political economy of the West and its relation to western
economical supremacy. Nowhere this is more evident than in the way in which
capitalism and its role in the rise of the West are interpreted. Almost all the big
narratives on how the West became economically different are spun around a con-
cept of capitalism as an institutional framework. But that(tm)s about where agreement
ends. There is an old and still dominant, tradition of seeing the rise of the West as
a process of emancipation towards perfect and free markets. It is the emergence of
fair competition between all economic agents involved with as little interference
from outside forces as possible that is supposed to have done the trick. In the West
the state and pressure groups presumably interfered less with the market than they
did elsewhere and so helped, willingly or unwillingly, in making it more efficient.
Overall there is a tendency to very easily identify unfettered competition between
individuals, firms, and states, with growth.
But as already indicated, there is also
an impressive array of scholars who, I think with more good reason, claim that as
a description of what actually happened in the West, this is simply not true. To
them, distortion of the market and interference have always been the normal state
of affairs, even when capitalism was at its height. Wallerstein(tm)s modern world-
system may be capitalist according to him, but it definitely would not be to Adam
Smith and his followers.
Braudel goes as far as to characterise his Western cap-
italism as “the anti-market.”
Pomeranz in his book on the great diverging of the
economies of Europe and China, asserts that imperfect competition, coercion and
collusion were far more characteristic of the economy of early modern Western
Europe than full competition and laissez-faire, and even contends that in the Smith-
ian sense of the word China was more capitalist than Europe.
In short, in these
and kindred interpretations, Western economies have never even come close to the
ideal of free and perfect competition and, what is more, that apparently hasn(tm)t
been a handicap. Monopolistic and oligopolistic competition much more than per-
71 See for a fine example Olson, “Big bills.”
72 In this context it is striking that Landes in his Wealth and poverty is not in favour of
free trade. See index under “comparative advantage.”
73 Wallerstein, Modern world-system, see the index under “capitalism.”
74 Braudel, Civilisation mat(c)rielle, volume I, 8, and volume II, 9 and 196-197.
75 Pomeranz, Great divergence, chapter 2.

Page 23
fect competition, mercantilism much more than laissez-faire, characterised early
modern Europe and prepared its d(c)marrage. That applies even to the nineteenth
century. Surprisingly enough when it comes to the role of constant competition
between Western nations, almost all scholars tend to agree. It is regarded as con-
ducive to economic growth. The immense disadvantages of this competition in
terms of war, protectionism, increases in transaction cost et cetera, apparently are
regarded as more than compensated for by the advantages.
This tension between an emphasis on competition and non-interference on the
one hand, and on protection and interference on the other hand, is repeated in
discussions on the mobility and openness of Western society. The view that West-
ern development is directly linked to the status of Western society as a mobile and
open society, the most popular one, competes with the view that this must be taken
with a heavy grain of salt or even denied. Braudel is an explicit supporter of the
latter interpretation. To him Western society wasn(tm)t more mobile and open than
let(tm)s say China or the Ottoman Empire. There, at least in principle, a much more
meritocratic structure existed, with less aristocracy and more careers open to tal-
ent. Capitalism as he sees it, could develop because capitalists, as he defines them,
were protected by the political elite and had the possibility to quietly accumu-
There is a related difference of opinion when it comes to the effects of
having a thriving civil society. In most of the stories on the rise of the West such a
society, which is considered to be a high-trust society, figures prominently as a
“good thing.” But dissenting voices claimed, even before Olson had analysed the
problem from a more theoretical point of view, that what in a positive vein can be
described as “a thriving civil society,” can easily derail into a society where pres-
sure groups become vested interests and block innovation.
Even democracy need
not necessarily be a good thing, at least not for economic innovation.
As indicat-
ed interpretations that stress individualism or mobility as typically Western do not
always combine easily with interpretations that focus on trust.
Big differences of
opinion when analysing what kind of state is conducive to growth have already
been signalled. I would only want to add that scholars not only disagree about
what kind of state promoted growth in the West, but also hold very different view-
points on the role of the state in explaining why “the rest” didn(tm)t rise. That, for
76 Braudel, “À propos des origines sociales du capitalisme” in: R. de. Ayala and P. Brau-
del, eds., Les (c)crits de Fernand Braudel, II, (Paris 1997) 359-371.
77 Mokyr, “Innovation and its enemies”; Olson, Rise and decline of nations; Olson, Log-
ic of collective action; Kunz, “Kulturelle Variablen.”
78 See the previous note; R.J. Barro, Determinants of economic growth (Cambridge and
London 1997) and E. Weede, Economic development, social order and world politics
(London and Boulder 1996) passim, especially chapters 6 and 8.
79 See, for example, Weede, Economic development, 12-13.

Page 24
example, is blamed by some on totalitarianism or oriental despotism, by others on
So we hear dissenting voices when it comes to institutions and their role in the
rise of the West. The point is that the competition, non-interference and small-
government narrative as well as the protection, interference and big-government
narrative " and all their derivatives " as such can be construed in a plausible way.
Although they can, of course, not both be factually true. Again one would expect
economics as a discipline to be of help in getting out of this predicament. Scholars
who present the rise of the West as based on the rise of “the market” and of laissez-
faire can have ample recourse to economic theory to make their account plausible.
They have mainstream economics at their side. Those who claim that in the rise of
the West it was not perfect and free competition that was instrumental but its “op-
posites”, monopolistic and oligopolistic practices, collusion and coercion, and a
large role for the state, face a more difficult task. But they too can find some
support in economic theory. Think for example of Schumpeter and various Marx-
ist scholars as Dobb.
This again induces us to delve somewhat deeper into eco-
nomic theory, more specifically into institutional economics
8. Institutional economics
The simple fact that a group of economists has emerged who are known as (new)
“institutionalists,” suggests that mainstream economics was not institutional, or in
any case not institutional enough. To a certain extent that simply isn(tm)t true. Main-
stream economics is institutional in its very essence. The point is that in the end it
only acknowledges, and deals with, a very restricted and specific set of institu-
tions. It only feels really at ease when discussing a fully competitive market that is
left to its devices. Mainstream economists have always taken this as their point of
departure. The more situations deviate from the model of perfect and free compe-
tition, the more ad hoc they operate. In the end, all adaptations and refinements
notwithstanding, the only thing economic theory can systematically = deductively
handle, is a system based on Smithian premises and tending towards equilibrium.
But even such a “free-market system” cannot exist in vacuo. Its functioning pre-
supposes a large set of institutional and cultural underpinnings. Without them com-
petition and laissez-faire turn into chaos and anarchy. A market economy is some-
thing that has to be created and maintained and that people have to find worthwhile.
80 For an overview see Vries, “Governing growth.”
81 Schumpeter, Capitalism, socialism and democracy, and Th.K. McCraw, “Joseph A.
Schumpeter. Capitalism, socialism, and democracy”, EH. NET Review, on For Dobb(tm)s ideas see Gustafsson, Power and economic institutions, 38-

Page 25
It presupposes, and creates, a specific order. It is not the state of nature, nor is it a
necessary, “logical” phase in history. In fact “the rise of the market” was an ex-
tremely complicated, hazardous and tortuous process. These comments also apply
to non-fully competitive markets and to all kinds of systematic government inter-
ference; they too have to have a base in institutions and thereby in culture.
Simplifying enormously, one might say that neo-classical, mainstream econom-
ics departs from the following premises in its analysis of the working of the mar-
ket: 1) the actors are " a large number of " individual agents 2) who act rationally,
as homines oeconomici 3) in a setting of perfect competition where everyone is a
prize-taker and where there are no returns to scale and 4) with no extra-economic
interference that thwarts or distorts the market, so that in the end it will always be
cleared. Historians would be very hard-pressed to find an economy that comes
sufficiently close to this model for it to be able to say anything non-trivial about
that economy. Economists therefore simply have had to try and come to grips with
institutions and situations that in the best of all classical worlds supposedly were
Economic reality has always had characteristics that deviate from textbook pre-
suppositions and there is no reason to expect that a situation will ever arise where
this would not be the case. Let us confine ourselves to capitalism as it really is. In
the real, sublunar world there are innumerable mechanisms and visible hands that
influence market forces. Simply ignoring them or simply regarding them as distor-
tions or deviations, in the long run turns economic models into scholastic fairy
tales. We already discussed the extent to which, in the real world, economic choic-
es can be irrational. Premise number 1, the idea that economic actors are individ-
uals or in any case monolithic decision-makers, also appears to be not very realis-
tic. Not only are capitalist economies characterised by various complex economic
organisations that do not figure in the analyses of classical economic thinking and
can only with difficulty, if at all, be systematically integrated in its logic of rational
individuals. We also come across entities like classes, ethnic groups, or states, that
are even less suited to be fitted into the neo-classical paradigm. With the increase
of scale and complexity of the economy, transactions become more complicated
and forms of co-operation and co-ordination are called for, as well as informal and
formal rulings. These are the things institutional economics focuses on, by and
large trying to incorporate them in the neo-classical paradigm. Analysis becomes
even more complicated by the fact that “non-perfect” and non-free competition
are rule rather than exception. All in all, even in capitalism and capitalist society,
we see players, plays and referees that are not included in the neo-classical, “ideal
type” model. This puts the question of economic order on the agenda.
Apart from economic power " the ability to have things your way because of
your economic resources " there is, in theory distinguishable, in practice often
82 Compare Gustafsson, Power and economic institutions, 11-12.

Page 26
interacting " what one might call “political power.” Individuals, groups, organisa-
tions, the government, can all “disrupt” the working of the market in the hope of
promoting interests or ideals. Their success depends, to a large extent, on their
power. Again, this is the case in capitalist economies as well as in all other types of
economy history as ever known. This puts the question of political power on the
Economic order and political power raise colossal problems for anyone wanting
to analyse an economy according to the principles of mainstream economic analy-
sis, even in the case of so-called capitalist societies. In other types of society, with
other modes of production, these problems usually are even bigger. Not only be-
cause there the rational homo economicus is even more of a figment than he is in
modern capitalism, but also because the institutional and cultural preconditions of
mainstream economic analysis are (almost completely) lacking. It is with good
reasons that various authors assert that pre-capitalist economies " as well as the
economies of (former) communist countries " do not have an economy in the mod-
ern economist(tm)s sense of the word, and cannot be studied at all according to the
rules of modern economics.
The best studies of non-capitalist societies have
been written with extremely little attention to ideas of mainstream economics, which
does not imply that they cannot be to some extent based on models and on funda-
mental economic reasoning. They just had to incorporate a completely different
societal and cultural logic.
9. Institutional economics, economic history and “the rise of the West”
Simplifying outrageously and with the bliss of ignorance one might say that insti-
tutional approaches are the most systematic effort of economics to engage the
challenge presented by order and power. I am not the person, and this is not the
place to provide an extensive and systematic analysis of institutional economics as
such. I just confine myself to looking whether it can give historians a clue as to
which institutions are conducive and which ones detrimental to development and
growth and whether it can inform them about origin and function of economic
The big underlying debate in the study of the economic history of the West,
when it comes to institutional preconditions for its economic growth, is whether
83 See for example Heilbroner and Milberg, Crisis of vision, chapter 6.
84 See for example M.I. Finley, The ancient economy (Berkeley 1999, updated and with
a foreword by Ian Morris, originally London 1973); W. Kula, An economic theory of the
feudal system: towards a model of the Polish economy, 1500-1800 (London 1976, origi-
nally in Polish 1962) and J.L. van Zanden, The rise and decline of Holland(tm)s economy:
merchant capitalism and the labour market (Manchester 1993).

Page 27
perfect and free competition or rather non-perfect competition and interference,
were characteristic for its political economy, and which of the two was fundamen-
tal in explaining its growth. The historian can only conclude that impressive eco-
nomic growth has been created in situations where there was no perfect competi-
tion and a lot of interference. It is only natural for him to look for support in
economics to decide which of the two explanatory schemes has better credentials.
To put it bluntly, that will be of little avail.
When it comes to economic order, there simply is no theoretical model that can
systematically compare advantages and disadvantages of both types of economic
order " the neo-classical one with its perfect competition or the one characterised
by imperfect competition " and pass some general judgement on their efficiency.
Reading for example Van de Klundert(tm)s book on institutions and growth depressed
me, the parts I understood as much as the parts I did not understand.
There sim-
ply is no such thing as an institutional theory of economic growth that could be of
much use in explaining real economic growth as we have witnessed in history. It
all depends on the circumstances. On what circumstances and how exactly, econo-
mists simply cannot tell us, in any case not better than does common sense. When
it comes to political interference, the situation is no different. Everything from a
complete laissez-faire (the best economic policy is no policy at all) to completely
planning and regulating the economy (give the planners the tools and they will
finish the job) has at one time or another by one economist or another been hailed
as simply the best policy. The range of advises is a clear sign of ignorance.
If there is support for some points of view in these matters, it comes from simple
empirical generalisations. When it comes to successful economic performance
“well-defined property rights, limited but strong government, the rule of law, fair-
ly open trade, stabile monetary regimes mobility of labour and capital, and a soci-
ety congenial to invention and innovation are all felt to be part of the equation.”
The state must be efficient and effective and not over-ambitious, as must be its
Democracy to a certain extent can help.
The point with most of these
generalisations is that they are either extremely self-evident or tautological, if not
both at the same time. It is like my father used to say: “if you don(tm)t want to get
drunk you shouldn(tm)t drink too much.” I am still groping for the “too.”
Could economists then at least give some clues as to what causes specific insti-
tutions to arise and to function as they function? In other words, can economics
endogenize institutions? As it cannot do this with culture, and culture is the sub-
stratum of institutions, there again is not much reason for optimism. But even little
85 Van de Klundert, Groei en instituties.
86 Drobak and Nye, Frontiers of new institutional economics, “Introduction,” XX.
87 See World Development Report by the World Bank 1997, referred to in NRC-Han-
delsblad 26-6-1997.
88 See notes 77 and 78.

Page 28
bits might help. To what extent do institutions come into existence and function
according to economic efficiency rules, i.e. how far can they be explained in cost"
benefit terms? Knowledge about their causes and functioning would still leave
many questions with regard to their effects unsettled, but so at least part of what
North considers as the most important determinants of economic life would not be
completely beyond the reach of the economist.
Endogenizing economic institutions and thereby economic order in the sense of
explaining in general economic terms how (ceteris paribus!) they are caused, is
not so complicated. It does not take a superhuman intellect to understand that
perfect competition in practice will be as improbable as it is normal in text-books.
I personally found the work of Schumpeter and Chandler very enlightening in
showing how real competition, in this case in a capitalist context, works. Econo-
mies of scale and scope, high barriers to entry, innovation and the advantages of
being first mover, they all in a fairly obvious way promote forms of imperfect
competition. One must, however, realise that what these authors " and others "
provide, are explanations in principle. That means explanations that show how a
system (in their case industrial capitalism) works, without being able, and without
pretending to be able, to predict how a specific part of it will fare or how it will
develop as a whole. They cannot, for example, predict innovations or their suc-
cess, nor can they indicate who exactly will innovate and innovate successfully.
The concrete effects of imperfect competition therefore are mostly unpredictable
and as such can only be explained ad hoc.
One can very well imagine that the
existence of specific economic institutions like property rights or even political
organisations like the state can be explained in economic-functional terms, in the
sense that one can show their economic functionality and functioning. But that is
something different from explaining their concrete actual emerging, functioning
and effects.
Endogenizing political power is even harder. To put it bluntly: impossible. The
logic of power simply is not identical to the logic of profit, notwithstanding the
fact that they may sometimes overlap. Talking about the state as a provider of
goods, or of politicians operating on a political market offering products to voting
consumers, can be nice as a metaphor. It may even be illuminating in some cases.
But its suggestion that politics might be a subset of the economy, or political sci-
ence a specific kind of economics, simply is wrong. Central government, political
parties, pressure groups or whatever actors there might be in the field, they all
have their reasons for doing what they do and wanting what they want. These,
however, often are not economical or not even rational in any meaning of the
word. Even central governments in democratic states are hardly ever exclusively
or even primarily focused on increasing national wealth at whatever social costs. It
89 Schumpeter, Capitalism, socialism and democracy and A.D. Chandler, jr., Scale and
scope. The dynamics of industrial capitalism (Cambridge Mass 1990).

Page 29
is rule rather than exception that those trying to make or influence politics have
their interests and ideals in mind rather than GNP.
Politics is not economics and
it is not reducible to economics. Even if it were, its market is not a market of
buyers and sellers like the market of “normal” goods with its supply, demand and
a specific, tangible price.
There is an immense difference between voting on the
one hand and buying or producing on the other. The stakes are different, the play-
ers are different, and the game that is being played is different. If only because the
economy has no government that can take certain decisions that apply to everyone
and are binding. If the logic of public choice were the logic of rational choice "
which it is not ", it would still not be economics. And if it were economics, it
would be economics of the non-perfect and non-free competition type, which means
it is complex and under-determined. There is no model that can predict which
pressure group will achieve exactly what goal, no model that can predict what a
politician will do when in power.
10. An effort to integrate culture, institutions and the state in economics:
Douglass North
This may all sound fairly vague and maybe it is. Why then not look at the work of
someone who has really thought this through? This again brings us to North as he
has professed his intent to integrate culture, institutions, and the state in what in
the end should amount to “a theory of institutional change”. According to him in
building such a theory three elements deserve special attention: a theory of ideol-
ogy, that as we saw, and as North himself admits, still is in the wishful thinking
stage; a theory of property rights, and a theory of the state.
His starting point was
firmly neo-classical, which means his explanation how institutions arise, departs
from a rational-choice and cost-benefit analysis and supposes they function effi-
90 See for J. Bradford De Long, “Overstrong against thyself: war, the state, and growth in
Europe on the eve of the industrial revolution” in: Olson and Kähkönen, A not-so-dismal
science, 138-167. Gellner(tm)s Plough sword and book and Jones(tm) Growth recurring con-
stantly refer to the tension between profit-seeking and rent-seeking. The entire oeuvre of
Mancur Olson focuses on the role of interest groups and their harmful effects for GNP in,
especially, democracies. This topic also figures prominently in Weede, Economic develop-
91 People who compare the political and the economic market in any case pass over the
fact that most people in world history have neither had the right to vote nor the right to
produce and consume as they wanted!
92 For a fine and convincing analysis of the difference between the rules of the market as
they function in economics and the functioning of politics see Weede, Economic develop-
ment, chapter 2.
93 North, Structure and change, 7-8.

Page 30
ciently. Together with Thomas he tried to empirically implement this approach in
a book that basically presents a model in which demography, technology and the
size of the market determine relative factor prices, which then are adduced to ex-
plain why and how property rights emerged. I don(tm)t think that worked. To begin
with because their reasoning presupposes the existence of markets for various fac-
tors of production and a strong market-orientation in a world " Western Europe
between 900 and 1700 " where these were anything but omnipresent. That they do
so is quite understandable, since a neo-classical approach of whatever variety,
including an institutional one, by definition is not able to explain the emergence of
a market economy. No economic theory can. There is nothing economically inev-
itable to the market and from the point of view of rent-seeking elites, i.e. all the
elites in the Ancien Regime, it is not even desirable.
Claiming that the emergence of property rights can be explained by the fact that
in a time of labour scarcity, peasants could strengthen their position on the labour
market versus their lords, suggests that this kind of market relations was decisive
in determining the strength of various categories of the population. They were not
without impact, but the fact that peasants East of the Elbe, who objectively were
just as scarce after the Black Death, often were made serfs, and the differences in
property rights between for example France and England, indicate that much more
than a simple economic market-logic was operating. Sheer power and force played
a very important role, and their logic need not be the logic of neo-classical eco-
nomics. To merit the label “theory of institutional change”, moreover, North(tm)s ide-
as are on the one hand too narrow, too exclusively focused on transaction costs and
property rights, and on the other hand too wide, when for example he thinks these
two elements can basically explain the Industrial Revolution.
Fairness requires
to say that North has, also in this context, distanced himself from neo-classical
approaches by, apart from no longer strictly adhering to the rational-choice dog-
ma, admitting that institutions need not be efficient. A die-hard neo-classicist might
defend the thesis that institutions arise because it is the choices of rational actors,
whatever their faults, on which institutions are directly or indirectly based. Those
that are inefficient will be competed out of existence. The real is the rational so to
Rightly North does not believe this: there are inefficient institutions be-
cause of ideology, inefficient political decision procedures, lock-in and path-de-
This of course amounts to saying that people do a lot of things that,
94 See for example R. Brenner, “Economic backwardness in Eastern Europe in the light
of developments in the West” in: D. Chirot, ed., The origins of backwardness in Eastern
Europe. Economics and politics from the Middle Ages until the early twentieth century
(Berkeley 1989) 15-52.
95 See the chapter on the Industrial Revolution in his Structure and change.
96 Vromen, Economic evolution, chapter 3.
97 See North, Institutions, institutional change and economic performance.

Page 31
from the perspective of maximising GNP, they should not be doing. Which boils
down to admitting that institutions cannot be reduced to economic necessities or
even to economic logic, but exist for a whole variety of reasons. Especially polit-
ical or social institutions need not even be efficient, as they do not operate in a
competitive environment of the kind in which economic institutions have to sur-
vive, while on the other hand they can have a huge impact on economic life.
His functional theory of the state in the end boils down to the fact that the state
has as its primary function to protect property and enforce rulings that in the best
of all world would make the market more efficient. But such a functional explana-
tion does not indicate why the state arose in the first place, nor can it tell us much
on why states can behave very differently, and neither is it very informative on the
myriad of other things governments have busied themselves with, apart from pro-
tecting or not protecting property. If institutionalism, or for that matter any other
type of economic approach is not able to endogenize the state in its analysis " and
it is not and will never be " it will simply have to admit that, as an economic theory,
it does not know how to deal with by far the most important institution, an institu-
tion that in OESO countries at the moment has a tax income, to mention but one
obvious element of its importance, of between 30 and 50 percent of GNP. I need
not go further into this. All these criticisms have already been ushered before.
That I make them at all, is because they show, at the highest level so to say, that
institutional economics is not able to really integrate institutions, culture and “nor-
mal” economic analysis into one analytical scheme. North himself indicates that in
his theory of institutional change the motor behind change is largely laying outside
economics. Apart from relative prices, he refers to organisational activity and ide-
ology, these last ones both firmly outside the realm of economic reason.
As Gustavsson in his analysis correctly concludes, North does not so much inte-
grate institutions into economics as economics into institutions. This conclusion is
valid for all efforts that have been made to bring culture, institutions and the state
(back) into economics. They may have widened the range of subjects that are stud-
ied by economists, but they have added only very little to the explanatory power of
their discipline as a discipline.
Wittingly or unwittingly they have made it pat-
ently clear that when it comes to explaining economic reality, economic theory is
extremely impotent and can hardly say anything relevant without the help of de-
tested disciplines like history, sociology, political science or psychology. Institu-
98 See for example Inleiding to the Dutch version of North and Thomas, Rise of the
Western world, published as De opkomst van de westerse wereld. Een nieuwe economische
geschiedenis (Den Haag 1980); Clark, “Economic growth in history and theory”; A.J.
Field, “What is wrong with neoclassical institutional economics: a critique with special
reference to the North-Thomas model of pre-1500 Europe”, Explorations in Economic
History 18 (1981) 174-199 and Gustavsson, Power and economic institutions, 26-33.
99 Gustavsson, Power and economic institutions, 31.

Page 32
tional economics in the end amounts to a camouflaged admittance of failure by
representatives of by far the most arrogant among the social sciences. It would be
hard to give a better illustration of this arrogance than the intriguing finding of
Klamer and Colander that in 1990 only 3.6% of the graduate students in econom-
ics at six top ranking graduate economics programmes in US thought that having a
thorough knowledge of the economy was important if you wanted to have success
as an economist.
Many economists in their dealing with reality remind me of
Hegel. This Prussian virtuoso is supposed to have vociferated “so much the worse
for the facts”, when somebody pointed at some facts that were not in accordance
with his theory.
11. Concluding remarks
Culture matters in economic history and economics. It does so on three different
levels: the level of the choices made by consumers and producers, the level of
institutions and the level of the political structure we call the state. If we regard
culture as a set of dispositions it predisposes economic actors to make specific
choices as producers and consumers and functions as the informal basis of institu-
tions and political systems. At all three levels it has a huge impact on economic
Neither economic historians nor economists can afford to neglect culture,
institutions or the state. Deep in their heart economic historians have always known
this. With the cliometric revolution in the 1970ies and 1980ies, however, it seemed
no longer obvious. The New Economic History brought methodological sophisti-
cation, a better understanding and use of theories and methods, and various other
good things. A Marxist might even be seduced into saying that it was a historical
necessity. But to a large extent it meant applying neo-classical theory, which is
unrealistic even when applied to the modern western capitalist present with huge
amounts of information, to a past, where it is even more unrealistic and even less
supported, or held in check, by facts. It is not the kind of economic history that is
likely to throw much light on the questions of large-scale development that I think
should be at the heart of any economic history that wants to be a form of history. I
can only agree with Solow: “Far from offering the economist a widened range of
perceptions, this sort of economic history gives back to the theorist the same rou-
tine gruel that the economic theorist gives to the historian. Why should I believe,
when it is applied to thin eighteenth-century data, something that carries no con-
viction when it is done with more ample twentieth-century data?”
100 Klamer and Colander, Making of an economist, 18.
101 Compare Kunz, “Kulturelle Variablen.”
102 R.E. Solow, “Economics: is something missing”: in: W.N. Parker, ed., Economic
history and the modern economist (Oxford 1986) 21-30.

Page 33
The problem, however, is that even those who are willing to admit that culture,
institutions and the state are inevitable ingredients of any analysis of macro-eco-
nomic change, find it very hard to deal with their role in concrete research. How
exactly can you measure their importance? What theories to use in referring to
their importance? How to pinpoint the exact mechanisms at work? The economic
historian looking for help in these matters will probably look at (new) institutional
economics, a branch of economics that one would expect to have analysed these
problems and that has become extremely fashionable. And, indeed, some work
done by institutionalists is very interesting. People like North, Chandler and Olson
focus on the right questions. There is a lot to be learned from their books that
cannot be learned from mainstream economists. To avoid disillusions, however, it
is better not to have too many illusions in the first place. Institutional economists
may ask the right questions, they have not come up with a set of systematically
interrelated answers that can be integrated in a new paradigm and that allows us to
throw away the neo-classical rational-choice approach. To a very large extent cul-
ture, institutions and the state continue to be external to their economic explana-
tions. Their emergence, functioning and effects still largely have to be explained
by factors outside the economy. Which means they constantly have to be intro-
duced on an ad-hoc basis. To put it in more technical terms, they are not endog-
enized. The ad-hoc element becomes even stronger because of the role of path-
dependency in economic development. This implies that historians will find much
less sensational new insights and methods there than they may have expected.
Even the newest institutional economics in the end boils down to a mainstream
economic analysis combined with the advice and an effort to bring culture, institu-
tions the state and history " under the cloak of the better sounding “path dependen-
cy” " back in. Apart from the concept of transaction costs there is nothing new
from a strictly economical point of view. Do not get me wrong; I am in favour of
institutional economics and hold its practitioners in high esteem and appreciate
their realism. It would be more than welcome when their openness to other disci-
plines would find a wide following. But let them be frank: all this simply means
that history has hit back with a vengeance. Combining the strict logic of traditional
mainstream economics, the insights and research agenda of institutional econom-
ics and the careful attention to concrete mechanisms and context that characterises
history as a discipline, is the task ahead. The results will not be as hard as those
promised by mainstream economics and the new economic history. But I do not
really mind. I have become old enough to prefer being vaguely right over being
precisely wrong.