s are important, because if economics is a sort of a game, institutions are the referee and even the playing field. Institutions, not just formal institutions but institutions such as the attitude of government officials, decide what you can or can not do. In fact, without institutions, the world would be so confusing that no one would know enough to decide anything. Institutions give shape or structure to the world, and allow us to make decisions. "Information processing by the actors as a result of the costliness of transacting underlies the formation of institutions" (North, 1990, p. 107).
This does not mean that all institutions are helpful. If you want to start a business, do you have to pay a bribe to a government official for a permit? Or, if you do start a business, and it does well, will it be taken by the government for some excuse? These institutions work in a negative way. Still, no one can make decisions without institutions to give shape to the world. If you do have to pay a bribe, it is good to know it.
All of these things are a part of institutional economics. Institutional economics does not see economics as just a pure marketplace. Instead, "the economic system is 'a cultural process or going concern, rather than a mechanism or equilibrium of stable economic relations'" (quoted in Adams, 1980, p. 239). Institutional economics looks past the market to all the institutions that shape people's lives.
A starting point for the problem of institutions and institutional economics is the ideas put forward by Hernando De Soto in his book, The Mystery of Capital. De Soto argues that capitalism has worked very well in the West, but has failed in most other countries. This is not just a problem in the 1990s and 2000s. As De Soto writes in his book,
Yet we continually forget that global capitalism has been tried before. In Latin America, for example, reforms directed at creating capitalist systems h...