Customer Reviews

Structure and Change in Economic History

5 star:		(4)
4 star:		(4)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

This book aims to explain the structure and evolution of institutions. The author, Nobel laureate Douglass North, concludes that the tension between gains from specialization and attendant costs is "the basic source of structure and change in economic history." Institutions arise to exploit the gains from division of labor or to reduce transaction costs. This theory appears to offer considerable economy and power of explanation.

North asserts that, in the prehistoric era, human population increase would lead to declining labor productivity as resources were exhausted. New technologies could increase productivity but, if property rights were nonexclusive, as they must have been in a nomadic hunter-gatherer society, new technologies would simply accelerate resource depletion. Only if a tribe or band could exclude rivals from exploiting the resource, as they could in a settled agricultural society, would the productivity gains from new technology be sustained. The advantage that agriculture offered, then, was the opportunity to establish exclusive communal property rights. This produced what North calls the first economic revolution.

The first economic revolution, occasioned by the rise of agriculture, produced the state, "the most fundamental achievement of the ancient world." The state specialized in providing security, keeping order within societies and protecting them from outside threats, while the complex demands of an agricultural economy (compared to those of a hunter-gatherer economy) required increased specialization throughout the rest of society as well. Over time, new military technologies led to larger states and more representative forms of government as rulers were forced to make concessions to their constituents to compete militarily with other rulers.

The industrial revolution, which North refers to as the second economic revolution, was largely a result of better specified and enforced property rights that raised the private returns to invention and led to an invention "industry." The industrial revolution brought tremendous gains in the standard of living but required new institutions to achieve gains from specialization without losing them to attendant transaction costs.

North notes that transaction costs would be prohibitive without a normative system that encourages compliance with contractual obligations. Accordingly, concurrent with the industrial revolution, we see a concerted effort by elites to inculcate the values of hard work, thrift, and sobriety among the working classes. In fact, North has reflected deeply on the role of ideology in an industrial society. Changes in knowledge and technology affect relative prices and thus affect perceptions of fairness. Differences in occupation or geographic location also give rise to different perceptions of how output should be distributed. "Ideological entrepreneurs" capitalize on these different perceptions. Successful ideologies must provide an explanation of history that plausibly accounts for current conditions. Ideologies must be flexible so that they can attract new adherents and accommodate changed conditions. Most importantly, to effect change, successful ideologies must overcome the free rider problem. Their ability to do so will be inversely related to the legitimacy of existing institutions.

An interesting question asked early on in the book is, why do states persistently fail to establish property rights that would permit high rates of economic growth? He explains that states first maximize returns for the ruler and then, subject to this constraint, try to reduce transaction costs throughout the economy. Where the ruler is an individual or the representative of a small elite group, the interests of rulers will not normally coincide with those of society as a whole.

Structure and Change in Economic History offers considerable insight into fundamental historical forces. It will come as no surprise to those who have read this work that North won the Nobel Prize for Economics in 1993 for his use of economic theory and quantitative methods to explain economic and institutional change.

Professor North's work is divided into two parts. The first briefly outlines a theory of structural change of institutions through time. North argues that the most interesting aspects of economic history involve assumptions that standard, neoclassical economic theory holds contant. In particular, North argues that "The physiography and resources of the regions together with the state of military technology played decisive roles in determining the size and characteristics of the state and in shaping the forms of economic organization" (pg. 64), and that those forms overcome shirking, known as the Free Rider Problem, through the elaboration of a dominant ideology. It is just such considerations that neoclassical theory cannot account for in its model of the utilitarian actor and yet which are so vital in understanding the essential elements of economic history (rather than economics) - structure and change.

The second part applies the ideas of the first to a few thousand years of human history. At least that is the aim. It is actually little more than a brief recounting of major events in world, particularly Western history. North starts with the so-called First Economic Revolution; that is, mankind's switch from a primarily hunter/gatherer existence to one based mostly on agriculture. He then moves through the decline of the ancient world, spending most all of his time on the fall of the Roman Empire. From there he covers the rise of western Europe and then the American economy at the turn of the last century.

It is this second part that is the book's weakest link. North should either have spent more time discussing how his theory relates to the event he surveys or let the reader apply the theory on her own and left the historical essays out entirely. As they stand, they are little more than brief reviews in "benchmark" and tired historical events. It would have been interesting, for instance, to see how Roman economic institutions and its ideology of stoicism compared with the Ch'in dynasty and confucianism, or of the role that "physiography" - a word used but never discussed - played in the differing development of each. Here North seems much less willing to speculate.

His theory also leaves a little to be desired. By explaining innovation merely as a result of the development of communal, and then personal property rights, he can make the scientist and historian of science shudder. He argues for the central role of structure in forging economic systems and the dominant order, but seems merely to assume that no structure existed in early hunter/gatherer bands - that they were models of egalitarianism. Such ideas run counter to a lot of accumulating evidence that man, like all social mammals, has a basic social structure "hardwired" in us. It is not clear how such knowledge would effect the formation of early "states" as North describes them.

But all criticisms aside, the book is well-written and the discussions, if they cannot lay all controversy to rest, certainly give the reader an excellent introduction to the economic history of man. Given the spate of less-than-rigorous books on the subject that have been published of late, this one is a welcome breath of fresh air.

Structure and Change in Economic History is an insightful and informative book. Much of what you find here is standard Comparative Institutional analysis, as developed by Mancur Olson, Ronald Coase, and James Buchanan. North aims at understanding institutions as humanly devised structure within which we all interact. Institutions are constraints that enable us to deal with real problem: free riding, high transaction costs, coordination failures... To some extent we must understand institutions in terms of utilitarian calculations. However, we must not limit our analysis to the utilitarian calculus of welfare economics.

Institutions are founded upon ideology. Ideological change drives institutional change. The aim of ideology is to "energize groups to behave contrary to a simple hedonistic individual calculation of costs" (p53). Ideology is definitely important to understanding institutions. But New Institutional and Public Choice Economists tend to ignore ideology, in favor of explaining institutions strictly in terms of utility maximizing choice.

We can see how ideology plays out with institutions that are relatively insulated from pressure groups and voters. Life tenure for judges might enable them to rule on cases based on their worldviews, rather than narrow utilitarian considerations. We must examine the role of `intellectual entrepreneurs' who develop `contrasting worldviews'. North has the right kind of mix between the issues that economists and other academics explore. Economists are right about the need for understanding human behavior in terms of a utilitarian calculus. However, economists have often erred by ignoring factors like ideology. North makes no such mistakes.

Together with his more recent Institutions, Institutional Change and Economic Performance (1990), D.C.North provides here an indispensable framework to reflect on the problems of social transformation that underlie economic growth and development. He proffers no magic wand, but he describes the long processes implied in institution building which no development theoretician or practitioner should ever ignore.

Structure and Change in Economic History is now a classic in the economic literature. The author won a Nobel Prize because of his ability to help people understand complex historical events using economic analysis. This book is perhaps North's most broad-ranging attempt to understand history using economic analysis.

North describes the status of early humans. Because of the absence of property rights to goods and land, humans struggling for survival exploited common property, for example hunting the same game without concern for replenishment of the animals, in much the same way that we currently over-fish our current oceans. When there are not property rights defined to include oceans, for example, each fisherman has little or no incentive to maintain a sustainable number of fish. If a fisherman does not fish today (in hopes of replenishing the supply of fish), this just gives a competitor the opportunity to capture the same fish on the same day, with no net improvement in the number of fish. So the ocean becomes (and has become) depleted.

This "tragedy of the commons" -- because of no ownership of our oceans (or in the case of our ancestors, no ownership of land)-- led to a Malthusean existence for our ancestors, without the opportunity to improve land by investing in it (for example by not over-hunting or over-fishing.)

The invention of government in early agricultural societies, even if exploitative, created a near monopoly on the use of force that subsequently allowed delineation of agricultural property, decreasing the propensity of people to steal from each other's property. The leader (with the monopoly on force) wanted some delineation of property (some establishment of property rights) because it created some individual incentive to improve the land (and incentive to think of ways to improve the land). The leader ended up with more because he could tax the now more productive land. This agricultural revolution -- because of the establishment of property rights to land -- North calls the first economic revolution.

North's insight, as well as that of other property right economists is that historically, those societies that were able to establish systems of property rights that enabled the easiest cooperation between people in terms of exchange of ideas and goods (economists call this "decreasing transaction costs") were those that grew the most rapidly, ultimately because of the growth of knowledge facilitated by exchange.

North points out that selfishness certainly interferes with this, as leaders with a monopoly on the use of force can use that force, not to create the most efficient property rights systems, but rather to force their subjects to give them as much as is possible from taxation, while they still maintain power.

But this power is not infinite, because leaders who use their monopoly on the use of force to inhibit too much the growth of their economies (by too high a tax rate) can fall victim to outside societies that become stronger for not exploiting as much. Or subjects in more exploitative economies can find some way of leaving the protection of one ruler to seek protection from another ruler, whose society has a somewhat more efficient (from the point of view of the person laboring) property right system.

So property right systems at least have the capacity to evolve to be more efficient; that is, to enable greater cooperation between people in sharing political and economic and (much later) scientific ideas; thus increasing the knowledge of society and therefore its productivity.

Indeed the second economic revolution (the industrial revolution) occurred (according to North) because of Enlightenment ideas that encouraged free economic and political exchange which led to even greater refinement in property right definitions and enforcement. These more efficient property rights created more productive exchange and large increases in the growth of societies.

I conceptualize that a world in which evolving property rights become more efficient over time is a world in which knowledge of how to create economic knowledge is being created, though North does not explicitly say that.

The idea implicit in this brilliant book is that the proper role of government is to create an arena in which cooperation between people ("exchange") is as efficient as possible, so that individual creativity can increase productivity and therefore improve the health and safety and happiness of citizens.

We have come a long way since pre-agricultural society, but obviously have a long way to go.

In this book North modifies the rationality assumption of neoclassical theory and puts individuals into a more complex framework of decision-making. According to my reading, this new model is characterized by an emphasis on incentive constrains (structures/institutions) and a dynamic process of learning (both individual and collective).

But here North runs into a problem with the infamous structure/agency dichotomy. That is, he means to rise above methodological individualism by incorporating a broad, deterministic social "structure" into his analysis -- "by structure I mean those characteristics of a society which we believe to be the basic determinants of performance" (3). However, he also seems to chalk a great deal of explanatory power up to individual leadership, calculation and rationality: the state specifying rules of the game to maximize rents (24) and also: "throughout history, individuals given a choice between a state-however exploitative it might be-and anarchy, have decided for the former" (24). But if there's such a powerful structure, then can individuals really "choose" their fate? How much leeway is there for strategic calculation? On page 32 he seems to say that the masses have no power to choose: "institutional innovation will always come from rulers rather than constituents since the latter would always face the free rider problem". Is North's structure (and institutions) merely an aggregation of the choices of masses of agents, or is it the strategic choices of a few ruling principals and their agents, or is it the evolution of an impersonal body of culture, ideas, law, etc., or is it all three? And if it's all three, then is he trying to incorporate too much into the concept of "institutions", until they become tautological? What CANNOT be an institution under his definition, and if everything is an institution, then how can we formulate testable, falsifiable hypotheses about social change?

North defines institutions as "the humanly devised constrains that construct human interaction" (p. 344); or, the rules of the game in a society. Thus, it is clear that North is trying to provide an explanation of the dynamic interaction among many factors, which is always a difficult task. But he is to be commended for modifying neoclassical thought in this provocative new way, potentially opening a path for a whole new research agenda in the social sciences.

Do you want to know why the USA are rich and powerful and why Russia, for example, can't copy its way ? Why is export of formal institutions impossible in this world without considering ideology, mental structures and so on..
And don't even try to force others to be like you, to eat hamburgers and drive fords. We are different! and it lies beneath - in history.
It's the only positive and constructive idea that appears in ones mind when reading North. Let his theory be week and not scientific enough, let him mix neoclassics with institutional economics and history - this eclectics will do good for you as a killer of brain limits.
peace!

A must read for anyone interested in economics and economic history. This book gives a sophisticated and neccessary background that will give an understanding as to why the world is the way it is today.

Although this is an important book from the 1993 Nobel Prizewinner in Economics, and a text that capably and fully illustrates what it sets out to do at its outset, I hesitate to recommend it universally for reasons that aren't fully clear to me.....

Certainly, this is a book that should be read by students of economic histroy and political economy. It illustrates how social changes (i.e. changes in property rights) lead to seemingly unrelated changes across the whole of society. It is well-written. Perhaps you should buy this book....