Examine the relative role of institutions in the rise of Europe - Essay Example

These formal institutions include such diverse tools as constitutions, laws and property rights. Institutions have always been created by human beings throughout history to create order in their various societies and reduce uncertainty in trade. Taken together with the standard constraints imposed by economic logic, institutions define the set of available choices in economic interactions. This has an effect of directly influencing economic behaviour and hence, economic outcomes in any given society (Acemoglu, Johnson, & Robinson, 2005).

Institutions evolve incrementally over time meaning that the economic history of any society has to be comprehended in the context of the evolution of its institutions. The fundamental role played by institutions is that they provide the incentive structure for the given economy. As such, the direction of evolution of this structure in time determines the direction of movement of an economy whether towards growth, stagnation or decline (North 1991). A constantly evolving system of organisation and exchange in medieval Europe’s long-distance trade between the 11th and the 16th centuries eventually led to the rise of Europe as the dominant world power (North, 1991).

The first significant institutional change was the innovation of systems and tools that lowered transaction costs in exchange. The transaction cost of any exchange is defined as the cost, other than the cost of the product or service being exchanged; that is incurred in executing the transaction. This cost consists of various components such as the cost incurred in the search for information about the sellers and their product, the cost of negotiating and closing down on the contract, the cost of enforcing the contract, etc.

(North 1991) The organisational changes, tools and various techniques of exchange that lowered transaction costs for medieval Europe’s long-distance trade included: Among the