Major shifts in thinking among economists and other social scientists in recent years have prepared the ground for the launch of the Journal of Institutional Economics. Within economics, for example, after a period of neglect from the earlier to the later decades of the twentieth century, the study of the nature and role of institutions has become a central topic. Explanations of economic growth and development used to focus on inputs, production functions, and outputs, often neglecting the institutional structures that constrain or empower individuals, and frame their incentives and disincentives. Accordingly, for a long time the firm was treated as a ‘black box’, with little regard to the structural determinants of its existence, boundaries, and performance. However, the study of the firm changed dramatically in the 1970s when Oliver Williamson, building on the earlier work of Ronald Coase and others, opened the black box to investigate the firm as an institution. Similarly, in a pioneering series of works, Douglass North has investigated the role of institutions in the historical development of the modern capitalism. There are many other examples of important achievements in this area, too numerous to mention here. The outcome is that institutions have become a central topic of analysis for economists.

When I was an undergraduate in Oxford, we were taught economics almost as though it were a natural science. The subject matter of economics might be different from physics, but only in the way that the subject matter of chemistry or biology is different from physics. The actual results were presented to us as if they were scientific theories. So, when we learned that savings equals investment, it was taught in the same tone of voice as one teaches that force equals mass times acceleration. And we learned that rational entrepreneurs sell where marginal cost equals marginal revenue in the way that we once learned that bodies attract in a way that is directly proportional to the product of their mass and inversely proportional to the square of the distance between them. At no point was it ever suggested that the reality described by economic theory was dependent on human beliefs and other attitudes in a way that was totally unlike the reality described by physics or chemistry.

The paper approaches the ‘market versus state’ issue from the perspective of constitutional political economy, a research program that has been advanced as a principal alternative to traditional welfare economics and its perspective on the relation between market and state. Constitutional political economy looks at market and state as different kinds of social arenas in which people may realize mutual gains from voluntary exchange and cooperation. The working properties of these arenas depend on their respective constitutions, i.e. the rules of the game that define the constraints under which individuals are allowed, in either arena, to pursue their interests. It is argued that ‘improving’ markets means to adopt and to maintain an economic constitution that enhances consumer sovereignty, and that ‘improvement’ in the political arena means to adopt and to maintain constitutional rules that enhance citizen sovereignty.

The analysis of the main features of knowledge, in terms of domain, characteristics and processes makes it possible to trace significant shifts in the economics of knowledge. Changing emphasis about the role of knowledge appropriability, divisibility and tradability has provided different solutions to the knowledge trade-off. Three different and rival concepts of technological knowledge can be identified: (a) knowledge as a public good, (b) knowledge as a proprietary good, (c) knowledge as a localized, collective and complex, path dependent activity. Such a shift has relevant implications in terms of governance mechanisms, strategic attitude of agents and public policy making.

In this paper I identify fractionalization as a consequence rather than solely a cause of poor institutions. I investigate how heterogeneous agents in precolonial Africa relied on social distance-reducing signals to make trade with one another possible. I then show how colonial institutions created noise in these signals, inhibiting widespread cooperation. By stifling trade between diverse agents, colonial institutions contributed to Africa's poor economic growth.

This paper argues that the degree to which a given industry's labor contracts are complete or incomplete is the major factor determining whether its workforce will be unionized. For instance, assembly line industries feature complete labor contracts because of the nature of the production technology: Either a worker keeps up with the line, or he does not. In such a situation, there is no chance for a reciprocal gift exchange under which firms offer high wages in exchange for high effort levels. The result is low wages that make workers prone to unionization. By contrast, jobs that feature incomplete contracts (lawyers, computer programmers, economists) already have reciprocity and gift exchange in place. Such benefits guarantee to workers that their better interests will be looked after by a management that wishes to maintain a positive and productive labor–management interaction.

Alfred Marshall was elected to the Chair of Political Economy at the University of Cambridge in December 1884. He gave his inaugural lecture on ‘The present position of economics’ on 24 February 1885 (Groenewegen, 1995: ch. 10). An abridged version of this lecture is presented below.