Whether in the guise of formal theory (e.g. Persson and Tabellini 2000) or empirical research (e.g. Acemoglu, Robsinson et al. 2001), in the study of political economy, “institutions rule” (Rodrik, Subramanian et al. 2002). If anyone can lay claim to the being the founder of he new institutionalism, it would be Douglass North. In this paper, I attempt to account for the reception accorded North’s work. While doing so, I probe the origins and foundations of the field, which lie in both formal theory and applied economics. I then appraise it. On the one side, I see confusion: a multiplicity of notions as to what is and what is not an institution remain at play. On the other, I see unrealized promise. Those who work in this field, I contend, have yet to extract the full implications of its deepest insight: that power, if properly deployed, can create value. I then engage in remediation by, on the one hand, proposing a way of introducing greater order into the field and, on the other, by outlining a productive form of political analysis. The first response reminds us of the field’s deep preoccupation with time, while the second shifts its focus from the economics of institutions to the politics that shapes their behavior. Three major themes emerge from this discussion. As already intimated, one is the importance of time and a second is that the coercion can be a source of value. The third is that people expend political effort to create institutions not only to privilege particular claims but also to increase the likelihood and magnitude of future outcomes. To create an institution is to invest; to destroy one is to extinguish future possibilities. Institutions, we learn, are a form of capital. 1. The Reception I begin by analyzing the reception accorded North’s work. Doing so offers insight into the intellectual foundations of the new institutionalism and to the practical concerns that drew policy makers as well as academics to its ranks. Within the academy, advances in theory and methods attuned professional audiences to North’s arguments. And within the policy making community, his work served the pragmatic needs of the development agencies: it provided a means for bridging professional differences within them and for reorienting their programs from the promotion of “market fundamentalism” to the promotion of “good governance”. 1.A. The Academy Traditionally, in economics, markets, not institutions, rule. People do not starve, Smith famously argued, because of the benevolence of the butcher, the brewer, or the baker; rather, the latter sustain the former because in so doing, they could reap profits in markets for food (Smith 1976). It was because of the market, Smith argued, that the pursuit of individual self-interest could be aligned with the interests of society. Market Failure The fundamental theorems of welfare economics established the conditions under which Smith’s conjecture was valid. In doing so, they also prepared the ground for the study of non-market institutions, and in two ways. Firstly, the proofs highlighted an embarrassing inconsistency: notable by their absence were the rational, maximizing individuals that stood at the core of neo-classical theory. On the supply side stood firms and on the demand side families. An opening therefore beckoned and ambitious scholars surged into it, with some, like Williamson (1985), asking why profit maximizing individuals would move transactions out of markets and imbed them in firms and others, like Becker (1981), applying economic reasoning to the behavior of households. The theory of the firm and the theory of the family represent two of the earliest contributions to the new institutionalism. Secondly, by establishing the conditions under which markets align self interest with the social welfare, the theorems highlighted as well the conditions under which they would fail to do so. In imperfect markets, individuals, behaving rationally, might choose strategies that yield equilibria; but the equilibrium would be inefficient. And when markets fail, there will therefore be alternatives that some would prefer and no one oppose; incentives will then exist, it was argued, to inspire a search for alternative ways of generating collective outcomes. The very conditions that lead to the failure of markets would thus lead to the creation of new institutions. To be noted is the functionalist nature of this reasoning – something that continues to pervade the institutionalist literature (e.g. Ellickson, 1991). One reason for urging that the new institutionalists take a more political approach is that we need better to understand how institutions are created. From Normative Debate to Positive Theory: The proof of Smith’s conjecture thus led to the recognition that institutions rather than individuals dominate markets and that incentives are often such as to drive people to devise them. James Buchanan and Gordon Tul