Categories:
Institutional Economics
From my latest essay.
In textbook economics, the only external environmental factors that affect the individual are technology and prices. Social norms, habits, and rules play no role. North shows that institutions are fundamental determinants of poverty and prosperity. This essay will explain what North means by institutions and why they are so central.
One point on which I would criticize North is his use of the term “institutions” when what he means are norms and patterns of behavior. “Institutions” has a somewhat different connotation most of the time, and it is too easy to slide back and forth between North’s use of the term and the ordinary connotation.
READER COMMENTS
spencer
Jun 13 2007 at 8:46am
This is one of the best things I have seen you write.
Pretinieks
Jun 13 2007 at 9:07am
That is exactly how Thorstein Veblen used this term.
Tim Lundeen
Jun 13 2007 at 10:22am
Beinhocker in his book, The Origin of Wealth, calls this “Social Technology”, which I like.
James
Jun 13 2007 at 10:50am
Bravo!
I have been reading your essays for the past year and I have to say that this is by far the best one that you have written. You have intrigued me to the point where I am ready to read some of Douglass North’s material. Where do you suggest I start?
Arnold Kling
Jun 13 2007 at 11:08am
I think his Nobel lecture is the best starting place
Eric Falkenstein
Jun 13 2007 at 3:21pm
This was very helpful to someone like myself who is not familiar with his work. I thought it was like Williamson and Coase, static analysis of differing institutions. Clearly he has a good point in that the situation facing a Haitian businessman is not a menu of technologies and prices, or at least the same technology and prices have much different production functions via the predatory activity within the existing institutions.
But this smacks a lot of sociology, with its emphasis on the inertia of institutions, mores, customs, and frankly sociologists have not done well with this framework. Economists have a pernicious model fetish, but that’s better than merely verbal rhetoric that creates rather pointless debates that can be engaged endlessly without effect (sociology, post-modernism, Sokal and Social Text). So I think the key for North’s ideas to get traction in econ is to come up with some non-redundant metrics of institutions and customs that allow one to predict things like intangible GDP cross sectionally.
English Professor
Jun 13 2007 at 5:10pm
Arnold’s difficulty with the term “institutions” is quite relevant, if only because of the dispute last December (2006) over at Cato Unbound, where a group of economists disputed whether “institutions” or “culture” was responsible for the problem of growth in developing economies (“developing,” of course, is a euphemism). For authors like North, I suspect, “culture” is synonymous with “institutions,” but for the people involved in the Cato debate, the two concepts were different. “Culture” there often seemed to represent the way individuals behaved in a society and the kinds of behaviors they found acceptable; institutions were the social structures under which they lived. Thus, traditional Chinese culture may always have favored the types of behavior that give rise to economic prosperity (which is used to explain the prosperity of Hong Kong and of the Chinese throughout South-East Asia), while the institutions of Communist China kept the mainland Chinese miserably poor.
This is an interesting problem brought on, I suspect, by globalization (starting in the 18th or 19th century). For Adam Smith’s England, the institutions were the product of the culture–that is, Anglo-Saxon culture had a bias towards the freedom of the individual, and from this arose such things as the common law, property rights, and various limitations on government, all of which evolved in England over a period of centuries. So the institutions were the social working out of the cultural predispositions. But with globalization, we find countries responding in various ways to the prosperity of the West. Some wish to emulate it and try to import the “institutions,” even though these institutions are often at odds with their traditional cultures. The US imposed new institutions on both Germany and Japan after WWII, and those cultures adapted very successfully to it. (The example of Japan is in fact quite fascinating, for we tend to forget just how culturally different Japan was from the West before the war.) And countries like the Asian Tigers have apparently adapted Western institutions to their own cultures while still maintaining significant differences from the Western model. Historically, then, institutions grow from culture, but in the contemporary world they can be introduced (with varrying amounts of success) in imitation/emulation of other societies.
Arnold Kling
Jun 13 2007 at 6:38pm
I think it’s worth trying to differentiate among:
1. institutions in the ordinary language sense, such as the Federal Reserve Board or George Mason University.
2. informal norms and customs, such as tipping in restaurants
3. formal rules, such as intellectual property law
4. beliefs
North combines (2) and (3) into what he calls institutions, which does not include (1). Someone might combine (2) and (4) into “culture.” North argues that (4) is often the basis for (2) and (3).
Eric Falkenstein
Jun 14 2007 at 8:28pm
I think it should be noted that Smith would not be an economists today. He would be a historian, or political scientist. North is in that vein, which therefore can only motivate economists. So how does a Northian approach influence a model, or an empirical test?
PrestoPundit
Jun 15 2007 at 1:08am
North’s work was well known at the U. of Washington in the 1980s. His work was the first economics that made any impression on me – the explanatory power of economics was a wonder in North’s hands.
But the profession of economics is not driven by explanatory power — it’s driven by the crank-em-out publication imperative, and the easy-to-test math problem format of undergraduate and graduate education. Bottom line is that professional economics is not a science — and North produced science. So why should the economics give a rip about North?
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