The Evolution of Institutions: An Agenda for Future Theoretical Research GEOFFREY M. HODGSON 1 g.m.hodgson@herts.ac.uk The Business School, University of Hertfordshire, Mangrove Road, Hertford, Hertfordshire SG13 8QF, UK Abstract. This article reviews some theoretical questions concerning the processes of institutional evolution. The necessity of assuming the prior existence of some other institutions, such as language, is underlined. Arguably, the emergence and stability of some institutions may be enhanced by processes of ‘downward causation’ through which institutional constraints lead to the formation of concordant habits of thought and behaviour. Having pointed to the importance of pre-existing, as well as emerging, institutions, this article reconsiders the possible role of the state in the emergence and maintenance of some institutions, in particular money and property. An agenda for future research is outlined. JEL classification: B4, D0, K0. Keywords: institutions, evolution, downward causation, habits, constraints, the state. 1. Introduction In a book first published in German in 1871, Carl Menger (1981) pioneered a basic analysis of how institutions evolve. His chosen example was the institution of money. Menger saw money as emanating in an undesigned manner from the communications and interactions of individual agents. He started with a barter economy. As is well known, a problem with barter is the lack of a general ‘double coincidence of wants’. To deal with this problem, traders look for a convenient and frequently exchanged commodity to use in their exchanges with others. Once such usages become prominent, a circular process of institutional self-reinforcement takes place. Emerging to overcome the difficulties of barter, a prototype money is chosen because it is a frequently used commodity, and its use becomes all the more frequent because it is chosen. This circular positive feedback leads to the emergence of the institution of money. In this Mengerian approach, individual preference functions are taken as given for the purpose of this analysis. The direction of analysis is from the given individual to the emergent institution. Menger thus inspired a central, unifying future project in both Austrian economics and the ‘new institutional economics’: to explain the existence of political, legal, or social, institutions by reference to a model of given, individual behaviour, tracing out its consequences in terms of human interactions. 2 However, theoretical analyses or simulations of the evolution of money – or other institutions – have proved to be remarkably problematic. For example, in the work of Ramon Marimon et al. (1990) an attempt is made to model the emergence of money with artificially intelligent agents. Their results are highly qualified and partially Constitutional Political Economy, 13, 111– 127, 2002. # 2002 Kluwer Academic Publishers. Printed in The Netherlands.