Working Paper
The Process of Economic Change

A good deal is known about what makes for successful economic development, but very little is known about how to get there - that entails an understanding of the process of economic change. The paper first examines the sources of successful growth and then explores the process of dynamic change of economies. As to sources of growth, three fundamental factors are discussed: basic economic determinants, the institutional framework and the cultural heritage of society. The main force underlying dynamic economic change is the continuous interaction between institutions and organizations. Economic and social organizations of society such as firms, households, schools, and political parties are forced by competition for scarce resources to continually invest in new skills and knowledge to survive. The institutions provide the incentive structure that dictates the kinds of skills and knowledge that organizations as entrepreneurs perceive to have the maximum payoff. The perceptions about economic opportunities are derived from the mental constructs of entrepreneurs and are important in detennining the dynamics of change. However, the economies of scope, complementarities, and network externalities of an institutional matrix make institututional change - and hence economic change - overwhelmingly incremental and path dependent. There are three parts to the process of economic change: the 'reality' of an economy, the perceptions humans in a society possess about that reality, and given the beliefs they possess, the institutional structure that they impose to reduce uncertainty and control the economy. The process of change results from a continuous change in that reality which in turn alters the perceptions humans possess about it, inducing them to modify their institutional structure which leads to further changes in the reality of an economy - an ongoing process.