The Effect of Informal Institutions on Economic Development

Comprehensive and realistic analysis of economic phenomena requires considering the complexities of human behavior and human society. In this context, a better understanding of economic development requires understanding of social and cultural evolution and its complex and mutual effects on economic developments. In this article, two Neoclassical and New Institutional schools were compared in terms of the relation between culture and economics with a comparative approach. The question is: what is the relationship between culture and economics and how this relationship helps to understand economic and cultural developments. In general, the neoclassical school has removed the normative part of the economy in its agenda. Although DJong(2000) tried to introduce culture as a source for preferences or limitations in the Neoclassical model, and limit institutional model to limitations, these view is rejected here. Some methodological problems, such as the assumption of exogenous preferences and complete rationality are recognized. Also in this paper we extract new institutionalists viewpoint on culture and economics, and first separate studies at the micro and development level, secondly provide a model from Douglas Northchr('39')s views on culture, Third, observe a unified approach among the new institutionalists, despite the differences, and ultimately express the strengths of the new institutional school in solving neoclassical model problems and better understanding economic developments. This paper also compares two views. The most important difference is that culture in neoclassical economics is an endogenous factor, but in institutional economics it comes to analysis as informal institutions and is therefore a strong point in providing better analysis. Finally the policy prescriptions of these two approaches are summarized.