INTRODUCTION

Institutions are rules, procedures, and patterns of collective behavior that persist over time. Formal institutions are embodied in organizations with the authority and power to coerce, that is, the capacity to impede, punish, halt, or reverse actions deemed contrary to acceptable norms. Informal institutions are those that persist without the organized capacity to compel compliance and punish violators. Formal institutions are not necessarily powerful nor informal ones weak. Imprecise or contradictory rules and lax enforcement can undermine formal institutions, just as voluntary adherence to unwritten rules can be powerfully reinforced by the uncoerced but self-interested behavior of individuals in a market place. The ensemble of institutions that most directly affect economic activity make up the economic organization of a society. Agencies, policies, and practices that reduce the private costs of economically productive activity, encourage the use of markets, and protect the human and property rights of economic actors make economic growth easier to achieve. Those that raise costs, impose risks, exclude, or discriminate make productivity advances more difficult to achieve.

This chapter focuses on those aspects of the political economy of the Spanish and Portuguese empires that help to explain both the initial success and subsequent longevity of colonial rule, as well as the long-term stagnation of the colonial economies. It argues that the Iberian empires persisted because of a rough equilibrium that developed between the interests of the two premodern imperial states, the relatively weak settler elites in each of the colonies, and the divided subject populations of indigenous and African descent. This colonial equilibrium was achieved by transferring Iberian institutions to the Americas and then modifying them to fit New World conditions.