Timothy Taylor — Douglass North and Instititions

In some ways, North's emphasis on institutions has become so embedded in economic thinking that it runs the risk of sounding obvious. By now, everyone is familiar with the big idea that institutional traits like property rights and the rule of law play a central role in economic performance. But every big insight--like "institutions matter"--sounds obvious when it is raised to a high level of abstraction. The more lasting insights come from a double process: first digging down into the specifics of different times and places so that you can be specific about which institutions mattered at which times and for reasons, and then taking the next step of looking for commonalities and patterns across the landscape of these specific studies. North led the way in showing how to do these kinds of studies, and did far more than his fair share of them. But as North wrote at the end of his JEP essay in 1991:

The foregoing comparative sketch probably raises more questions than it answers about institutions and the role that they play in the performance of economies. Under what conditions does a path get reversed, like the revival of Spain in modern times? What is it about informal constraints that gives them such a pervasive influence upon the long-run character of economies? What is the relationship between formal and informal constraints? How does an economy develop the informal constraints that make individuals constrain their behavior so that they make political and judicial systems effective forces for third party enforcement? Clearly we have a long way to go for complete answers, but the modern study of institutions offers the promise of dramatic new understanding of economic performance and economic change.

My favorite line:

North also pointed out how groups in power could use institutions to perpetuate their authority, and that such groups had an incentive to act in this way and hold on to power. even if the overall effects on growth were negative.

Conversable Economist
Douglass North and Instititions

Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Siobhan Austen and Darren O'Connell — Nobel Laureate Douglass North’s work leaves a strong legacy for economics

North focused on economic history in the belief that we need first to develop an understanding of what determined the performance of economies through time before we can an attempt to improve their current performance.

North’s analysis of the economic performance of nations focused on the role of institutions. He asserted loudly that institutions matter. Indeed, he argued that institutions are the underlying determinants of economic performance; more important that other factors commonly ascribed key roles, such as changes in technology or relative prices.

Institutions are “the humanly devised constraints that structure human interaction”. They comprise all those elements of the social environment that regulate how we can interact with each other. Institutions include laws, rules and constitutions, as well as social norms and conventions.

North argued that institutions matter for economic performance because they affect transaction costs. Transaction costs include the costs involved in designing, negotiating and enforcing trade contracts; the formal and informal contracts involved in buying and selling goods and services. When institutions are missing or weak; for example, when laws are poorly specified or not enforced, the costs and risks of engaging in trade will be high and the prospects for economic expansion will be low.…

In later work North applied his notions about the importance of institutions more broadly and ambitiously. For example, in collaboration with John Wallis and Barry Weingast in 2006, North attempted to use institutional theory to reinterpret the last ten thousand years of human history. They described how the formation of small groups of elites and militarised coalitions within tribes limited outsiders’ access to land, labour and capital within territorial zones, and protected valuable activities such as trade, worship and education.

This generated rents for elites, which, in turn, encouraged cooperation, specialisation and trade – rather than warfare - between neighbouring territories. North and his colleagues argued that this equilibrium proved both profitable and persistent, to the extent that “limited access orders” came to dominate the behaviour of these societies; that is, the stable state became the de jour “natural state”.

An important theme in this narrative is that institutional change is likely to come about when powerful economic or political agents perceive that they can capture additional gains. This reflects North’s close ties to the rational choice tradition, which suggests that institutions evolve in response to the needs and interests of individuals. However, North also recognised that people’s perceptions are influenced by their current cultural context and flows of information. He argued that the development of institutions and economies will be “path dependent” - constrained by the existing set of institutions and incentives – and not necessarily, or usually, optimal in terms of economic efficiency. North emphasised that time matters in the determination of economic performance, as well as institutions.

The interesting thing is that North worked within a neoclassical framework to show that neoclassical assumptions about the "invisible hand" of natural market forces leading to spontaneous order is wrong. History, culture, institutions, and organizations are key economic factors.

The Conversation
Nobel Laureate Douglass North’s work leaves a strong legacy for economics

Siobhan Austen, Associate Professor, School of Economics & Finance, Curtin University, and Darren O'Connell, Sessional Lecturer, Curtin University

John Joseph Wallis — Structure and change in economic history: The ideas of Douglass North

Douglass North passed away at age 95.

Douglass C. North was among the most important and influential economic historians and economists of the late 20th century. This column highlights four of his major contributions: his pioneering work in quantitative economic history, or ‘cliometrics’; his similarly fundamental work using neoclassical economics to understand institutions; his critique of theory for explaining long-term economic and institutional change; and the distinction he drew between institutions and organisations.

VOXEU
Structure and change in economic history: The ideas of Douglass North

John Joseph Wallis | Professor of Economics, University of Maryland

Douglass North, economic historian and co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences, passed away this week. This column pays tribute to one of the great social scientific pioneers of the modern era – focusing on one particular example of how North drew on historical, empirical and theoretical evidence to understand the interactions between institutions and economic change.

Douglass North, an economist’s historian

Kevin Bryan
Assistant Professor of Strategic Management, University of Toronto Rotman School of Management