Imperfect Institutions attempts to analyze why institutions that prompt economic backwardness emerge and persist, to suggest how to reform or recast such institutions, and in the process to educate readers about the ways and accomplishments of the new institutional economics. It only partially achieves its goals, in part because it is written opaquely and in part because how economic institutions are created and what they do are both incompletely understood.

Chapters 1 and 2 integrate new institutional economics with a history of modern growth theory to illustrate the importance of institutions. This section begins with the familiar idea that a country's income can be located in production possibility frontier (ppf) space (it would be helpful also to mention the conceptually distinct consumption possibility frontier), so that any country's income inadequacy can be attributed to being inside (or at the wrong place on) its ppf, or to not shifting its ppf outward rapidly enough because it is not accumulating productive resources or technology rapidly enough. The explanation overlooked by standard growth theory of how such inadequate income growth can occur is inadequate or dysfunctional institutions. The classic approach of governments of both more- and less-developed economies is to distort relative prices, and thus resource allocation, with subsidies, taxes, and quotas. The author tries to be all inclusive and moderately rigorous, but the result is both too detailed and at the same time glaringly incomplete. Thrainn Eggertsson's history of growth theory should have focused clearly on modern growth theories' excessive reliance on an automatically implementing economy and neglect of personal incentives and of institutional constraints and manipulations that influence growth rates and outcomes. The last, the role of institutions in growth, not the author's rehash of modern growth theory, is the novel and important part of his story.

When Imperfect Institutions gets around to discussing institutions and growth, it is pretty sensible. Technical production technologies determine what's possible to produce, and technologies are public goods available to all. But social technologies govern how institutions facilitate or impede adoption of new production technologies. And inappropriate or inadequate social technologies are not easily displaced, for displacement frequently disadvantages influential members of the current society, requires resolution of deep political conflicts, or requires significant changes in behavior or tolerance levels by many. And, one should add, what social technology would be appropriate may not be known and may be in no one person's interest to discover, if the gain to the individual appears small and the new institution's triumph uncertain. Disadvantaged influential members of society blocking adoption of a new social technology should be able to be bought out by those advantaged by it (this ability defines whether the new technology is Pareto-beneficial or not), but may not be able to strike such a deal because the winners from the new technology are uncertain or cannot credibly promise to pay. Power-shifting political changes are notoriously difficult to accomplish peacefully, because after power is shifted the newly empowered are hard to restrain (think of Pinochet ceding political power to the people in Chile, who then sought to punish him). If others must accommodate the new social technology and their compliance is doubtful, then inertia, though lamented by those who favor change, likely will prevail.

This is old stuff, generally lifted from the past 30 years' thinking on public choice. But now Imperfect Institutions adds less-studied fillips, that crises and fashion prompt new social technologies that may not be effective: “Dysfunctional social technologies often gain popularity while the riding [going] appears to be good, whereas random shocks [or changing fashion] can create panic and … do away with relatively effective social arrangements” (p. 32). In the end, Imperfect Institutions concludes that “[s]ocial institutions rise and fall because of changes in the political balance, new material circumstances, or the changing fortunes of social models” (p. 36).

After somewhat unconvincing and sometimes meandering discussions of the alleged cycling of social technologies and of long waves in economic activity, Imperfect Institutions argues that there are regularities in the social technologies of traditional societies, namely, they “attempt to lower the cost of dangerous risks from nature and other sources” (p. 47), but then linger on (sustained by fashion or a winning political coalition) to block or make tenuous the adoption of new social technologies that might better facilitate prosperity. To illustrate, the author presents an interesting case study of Iceland's archaic labor rules, which impoverished farming and retarded development of coastal fisheries because a benefited minority coalition saw no way it could be compensated for permitting Iceland's farmers to fish (pp. 99–124). This long-lived episode and others recounted in the book underscore the necessity of finding propitious moments and strong levers to move economies from impoverishing to prosperity-enabling social institutions.

With the author, I am convinced that inappropriate institutions and strong private incentives that overwhelm dispersed public benefits explain most impoverishing institutions and practices in both more- and less-developed countries. I share the author's beliefs that shocks and changed fashions often prompt changes in social institutions (think of the impact that the Great Depression had on commercial law in the United States, or that the Progressive belief—deprivation prompts depravity—had on criminal law), and wish that he had devoted more attention to thinking about how to take advantage of such times of change. In the end, the author summarizes much sensible thinking about how social institutions hinder or help economies, but he presents it in such a confusing manner that I gleaned few insights toward a remedy for bad institutions.