There are often formal and informal institutions that serve the same function, but experience in transitional economies tells us that many formal institutions depend on the operation of supporting informal institutions (such as the formation of habits, etc.). One issue is the definition of institutions that you assume - Geoff Hodgson's definitions (see his books in the 1990s and his paper in 2006 Journal of Economic Issues) differ a lot from Oliver Williamson's (for instance his 2000 definition and 'levels' diagram in Journal of Economic Literature on New Institutional Economics). Hodgson looks a lot at the way institutions depend on behaviours that in turn behave on embedded attitudes (or even habits). In transition countries in the 1990s formal institutions were often introduced and found to be ineffective because all of the vauge and informal relationships took much longer to develop around them. In terms of growth, one issue for formal institutions, such as the case of legal system enforcement of rights rather than informal enforcement mechanisms, is that the state has to pay for them - and that may have a cost in terms of growth. There is the counter-argument, though, that the informal mechanisms are also economic value produced by the economy, just not measured, so that the freeing up of informal resources (when formal institutions are introduced that substitute for them) is potentially as welfare enhancing as the formal sector growth that is sacrificed to pay for it.

Dear Vincent,

Thanks for your effort to address this question. However, your explanation is not supported by North (1990) on not evolving society.

Upananda, Sri Lanka

Upananda, North changes position a few times over the years, and some of his later writings allow for a recognition of gradual evolution of supporting 'informal' institutions. I think this is in his 1994 American Economic Review article Economic Performance Through Time - also the same idea is recognised in Williamson's article as he stated very different timescales for the development and change of the different types of institutions - formal, informal, etc. North (1994) does mention that economies can get stuck in bad positions - and no longer evolve or progress, which is the ultimate worry for institutional change.

Upanda

There is some discussion on my blog on the question of whether culture and economic freedom are substitutes in economic development, which may be relevant to your question. See: 

http://wintonbates.blogspot.com.au/2014/04/are-culture-and-economic-freedom.html

http://wintonbates.blogspot.com.au/2014/04/are-culture-and-economic-freedom.html

Thanks Winton for drawing our discussion to different perspective which also may not necessarily relevant to economic growth.   However four factors you mentioned and their effects on economic growth is acceptable.  However, empirical evidence support to the theory is rare in modern economies.

 However, such evidence could be shown from histories of great nations in the past. For example, Asokan empires in India flourished under factors that you cited.

Could you cite an example of a country which attain economic growth through  four factors of cultural index? 

Upanda

The research I referred to suggests that exclusive reliance on either culture or formal institutions (economic freedom) is unlikely to produce sufficient economic growth for a country to attain high average income levels. But there are examples of high-income countries that rely to a greater extent on culture (e.g Sweden) and high-income countries that rely to a greater extent on economic freedom (e.g. Singapore).

Thanks Winton for example.

  I argue that  those examples are not outcomes of  economic freedom but governing mechanisms which are free and fair..  As a result, people tend to produce and compete fairly.  When the friction of transaction cost and asymmetry of information is lowered ( through a governing mechanism), economic growth is inevitable.

Upananda

Upananda

There is a lot of overlap between governing mechanisms that are free and fair and what is measured by economic freedom indexes. I wrote something about one aspect of that here: 

http://wintonbates.blogspot.com.au/2009/11/does-world-banks-rule-of-law-index.html

Thanks Winton,

I agree with your comment  bout the World Bank.  I believe that World Bank has to obliged to  to the objectives of its administration, which is more tilted towards economic freedom perceived by capitalistic society.   In practice, capitalism has been proved superior to socialism helping societies attain better economic freedom. Its essential for individuals who believe that  accumulated wealth or the value of goods and services consumed are proxy to happiness.  Most wealthiest men (i.e., Bill Gates) takes some time to understand satisfaction you derive through giving up and satisfaction gain from wealth and consumption.  He (Bill Gates) now be more happier than earlier since he derive happiness by giving up.  Such happiness will not fade away until one's death.

I argue that economic growth achieved through economic freedom does not help individuals to achieve happiness which could be the ultimate goal of an individual.  When you are leaving the world (death) you cannot take any physical goods but feeling of happiness could may be taken with you according to Buddhist Philosophy.

Wealthier societies are happier with few exceptions, particularly because they are healthier.

Formal institutions don't replace informal ones. They interact with each other. I suggest reading for North and Willamson. Also, I invite you to read my PhD thesis concerning your question.

North, D.C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge University Press, New York, NY.

North, D.C. (2005), Understanding the Process of Institutional Change, Princeton University Press, Princeton, NJ.

Williamson, O.E. (2000), The new institutional economics: taking stock, looking ahead, Journal of Economic Literature, 38(3), 595-613.

Ghura, H. (2019). The interaction effect of formal and informal institutions on the development of entrepreneurial activity. A panel data analysis for emerging economies (Doctoral dissertation, Brunel University London).