This study is an aim to provide an analysis of the diverse formation of economic institutions in Turkey and Iran on the eve of 1980s. It is generally assumed in the paper that institutions are not typically chosen for the general benefit of the society as a whole, but rather imposed by groups with political power for their economic consequences. Therefore, it is argued that understanding institutions requires understanding the dynamics of political power balances. However, political power balances specific to every different country do not develop from scratch: Rather “exogenous variations” such as historical events, seem to play important roles during the process of creation of alternative institutional pathways, whereas the belief structures, in North’s definition ‘mental models’ determine which alternative pathway will be selected or suppressed. In view of that, the origins of the power balances are demonstrated in light of the new approach proposed: The Clash of Paths.