Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions) [Paperback]

Douglass C. North (Author)

Book Description

Publication Date: October 26, 1990 | ISBN-10: 0521397340 | ISBN-13: 978-0521397346

Continuing his groundbreaking analysis of economic structures, Douglass North develops an analytical framework for explaining the ways in which institutions and institutional change affect the performance of economies, both at a given time and over time. Institutions exist, he argues, due to the uncertainties involved in human interaction; they are the constraints devised to structure that interaction. Yet, institutions vary widely in their consequences for economic performance; some economies develop institutions that produce growth and development, while others develop institutions that produce stagnation. North first explores the nature of institutions and explains the role of transaction and production costs in their development. The second part of the book deals with institutional change. Institutions create the incentive structure in an economy, and organizations will be created to take advantage of the opportunities provided within a given institutional framework. North argues that the kinds of skills and knowledge fostered by the structure of an economy will shape the direction of change and gradually alter the institutional framework. He then explains how institutional development may lead to a path-dependent pattern of development. In the final part of the book, North explains the implications of this analysis for economic theory and economic history. He indicates how institutional analysis must be incorporated into neo-classical theory and explores the potential for the construction of a dynamic theory of long-term economic change. Douglass C. North is Director of the Center of Political Economy and Professor of Economics and History at Washington University in St. Louis. He is a past president of the Economic History Association and Western Economics Association and a Fellow, American Academy of Arts and Sciences. He has written over sixty articles for a variety of journals and is the author of The Rise of the Western World: A New Economic History (CUP, 1973, with R.P. Thomas) and Structure and Change in Economic History (Norton, 1981). Professor North is included in Great Economists Since Keynes edited by M. Blaug (CUP, 1988 paperback ed.)

Editorial Reviews

Review

"At a time when economic and political institutions are being reformed and replaced all over the world, North's book is required reading for all social scientists and policy makers." T.N. Srinivasan, Yale University

"North here draws upon the literature concerning the formation of economic institutions...to ask significant questions about differences among economies across time and space...This is an exciting and stimulating work, and one that will leave its mark upon the work of economic historians. It will also be important for political scientists and other social scientists, to learn the message and relevance of an influential strain of non-mainstream economic thinking." Stanley Engerman, University of Rochester

"In a careful but wide-ranging analysis grounded in rational-choice theory, he stresses the ways in which institutional arrangements, once adopted, may lead quite rational actors to behave in ways that are collectively suboptimal." Paul Pierson, World Politics

Book Description

An analytical framework for explaining the ways in which institutions and institutional change affect the performance of economies is developed in this analysis of economic structures.

Product Details

• Paperback: 159 pages
• Publisher: Cambridge University Press (October 26, 1990)
• Language: English
• ISBN-10: 0521397340
• ISBN-13: 978-0521397346
• Product Dimensions: 6 x 0.6 x 9 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 4.1 out of 5 stars  See all reviews (17 customer reviews)
• Amazon Best Sellers Rank: #116,840 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

22 of 22 people found the following review helpful

4.0 out of 5 stars Realistic and Relevant April 22, 2008

By D. W. MacKenzie

Format:Paperback

These are strange times in the economics profession. Most economists insist upon representing actual economic systems with mathematical models that bear little resemblance to reality. The results of these models are often quite strange. Government deficits are offset by taxpayers who save more money in anticipation of higher future taxes. Monetary policy is neutral; it has no real predictable effects. We are in equilibrium in every phase of the business cycle. Investors might as well pick stocks by throwing darts. Economic analysis is judged by its formalism, not its realism.

This book by Douglass North is a refreshing change from `economics as usual'. Here the factors that matter most are real institutions and actual history. North draws upon the right kind sources for his theoretical underpinnings (Coase, Hayek, Ostrom, Olson, Veblen- yes Veblen too). North also focuses on an issue of primary importance- economic performance through time. How does economic development happen? Why does it happen in some nations and not others?

There are some important ideas here. We need to think in terms of adaptive efficency (p80-81). Incremental changes in institutions comes from entrepreneurs (p8). We should understand institutional change in terms of transaction costs, relative prices, and ideology (p86). North has constructed a theory of institutional change using a blend of common sense and subtlety that is rare in modern economics. This book should be required reading for all econ grad students.

There are some historical examples sprinkled through this book. Personally, I would have liked to see more history. But it is still the case that there is more history here than one typically finds in contemporary economics. Institutions, Institutional Change, and Economic performance is not easy reading, but it is easier to read and vastly more informative than the math models that most economists try to pass off as proper economic analysis.

18 of 20 people found the following review helpful

3.0 out of 5 stars The Limits of Hard-Rational Choice August 1, 2006

By Matthew P. Arsenault

Format:Paperback

North's work attempts to show how hard-rational choice theory and neoclassical economic theory are weak in that they argue that cooperation and coordination are not fundamental to transactions. North writes that in the "zero transaction-cost world, bargaining has no place, however, in the real world, institutions, bargaining and cooperation are necessary" (16).

The author argues that the rigidity of the human behavior described by hard-rational choice theorists is not practical in a real-world sense. For example, actors do not have perfect "computational power" and as such they don't have a perfect description of the world. Rather, the situations faced by actors are complex and uncertain. As such, transaction outcomes are unpredictable. North writes, "Uncertainties arise from incomplete information with respect to the behavior of other individuals in the process of human interaction" (25).

In order to protect oneself or maximize his or her individual utility, an individual must collect information regarding a transaction. The costs of transaction "consist of the costs of measuring the valuable attributes of what is being exchanged and the costs of protecting rights and policing and enforcing agreement" (27). Institutions are created to generate regular patterns in human interaction. Doing so decreases the costs of transaction, or "playing the game."

However, the game is never stable and as such institutions are malleable; they are capable of change. Yet the changes occur slowly, by increments. In the later chapters of the book, North takes a historical look at economic development, stability and change. Had all things been equal, transaction costs being zero, North argues that little diversity between economic systems would exist. North writes, "In a world in which there are no increasing returns to institutions and markets are competitive, institutions do not matter. If the actors initially have incorrect models and act upon them, they either will be eliminated or efficient information feedback will induce them to modify their models" (95). However, in real-world situations, institutions do matter and they are in continuous need of minor, or marginal, adjustments. In many ways, it is the behavior of the actors that make adjustments to the institution. North writes, "Incremental change comes from the perceptions of the entrepreneurs in political and economic organizations that they could do better by altering the exiting institutional framework at some margin" (8).

In conclusion, new institutionalism has emerged in response to the concentration on behavioral/rational choice theories in the discipline. The new institutionalism attempts to "bring the institutions" back in to political science. However, institutional scholars have evolved from the days of strictly studying the political systems of polities. The new institutionalism attempts to blend aspects of behavioral/rational choice theories with the importance of institutional structure and establish a new paradigm with which to study political phenomena.

28 of 33 people found the following review helpful

4.0 out of 5 stars A good... but not great.. book.... August 14, 2000

By J. Michael Showalter VINE™ VOICE

Format:Paperback

I have a hunch that this is one of the kind of books such that only people whom have in a sense already specialized come upon it and decide to buy it. First: if you are one of these kind of people, the articles contained in this volume are well written and though not classics, could further your understanding of 'our' field. Second: if you are not already a specialist, there are other books by Douglass North and Mancur Olson that can better illustrate the general principles on which the economic/political hybrid field is based.... Olson's "The Logic of Collective Action" illustrates the development of institutions while Norths "Structure and Change..." shows how they have functioned throughout time...