Introduction

In the first three chapters we have outlined a theory of institutional change. We have argued that it is the emergence of potential profits outside the existing arrangemental structure that provides the impetus for such change; we have enumerated the sources of those profits; and we have specified a model that, we suggest, is useful in explaining the type and timing of arrangemental innovation. Theory can never be predictive, however, unless the model is conjoined with a set of initial conditions (i.e. a model is a set of logical relations of the form A implies B, and the initial conditions say that A exists). In this case, the process of innovation takes place within an institutional environment, and the environment helps to shape the course of innovation. One would, for example, hardly expect that the same external profits would produce the same innovational response in twentieth century America (where the environment is characterized by a fair degree of political democracy, a high level of sophistication among the private business community, and the rule of law) as in eighteenth century Russia (where the environment was quite different).

Certainly, therefore, the institutional environment must be specified, but in the context of an evolving American nation, the problem is even more urgent. The initial conditions, far from remaining constant over the past 175 years, have been in an almost continuous state of flux.