This book offers what may with reservations be described as a theory of how the institutional framework of a society emerges and how the exchange processes within this framework take place. We already possess a wealth of theoretical knowledge concerning the emergence and functioning of social institutions, as well as numerous fully developed theories explaining how markets work. The main purpose of this book is to show that both social institutions, defined as the rules of the game, and exchange processes can be analyzed in terms of a common theoretical structure. We propose that a problem-solving model of individual behavior inspired by evolutionary epistemology and cognitive psychology may provide such a unifying theoretical structure. A problem-solving model based on solid experimental findings from the cognitive sciences provides a synthesis of the two basic models currently employed in the social sciences: those of Homo oeconomicus and Homo sociologicus. This model, in turn, is the key to incorporating issues relating to institutions and institutional change and issues relating to the functioning of the markets in a genuine political economy.

Such a political economy can be understood as a transformation of neoclassical economic theory into a discipline that seriously considers the issue of institutions. In fact, the thrust of our argument is that any serious student of economic phenomena must pay attention to the institutions framing these phenomena.