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