If the political economy today is preoccupied with institutions, the “rules of the economic game”, including laws and norms, now pivotal in the explanation of the vast differences in the prosperity of countries, then much of the credit goes to Douglass C. North, who died on November 23. Along with Robert Fogel, North won the Nobel prize for economics in 1993 for contributions to economic history — in particular, bringing to the discipline quantitative tools of statistics and conventional economics, now known as cliometrics after Clio, the muse of history. While pondering over how societies have diverged — “after all, we all descended from primitive hunting and gathering bands” — North realised that conventional economic analysis and tools fell short.
As North asserted in a 1968 article, shipping productivity fell between 1750 and 1910, not because of improved technology leading to lower costs, but because of organisational changes, including reduced piracy and, therefore, insurance costs, improved ports and organisation. North came to see, and show the world, that markets are, in fact, embedded in institutions, which can reduce transaction costs, blunt market failure, align individual and social incentives and, as a result, spur progress. A defence, if there ever was one, of public institutions and the move away from the efficiency argument of markets.
North argued that institutions have a glacial pace of change and are related to a society’s cultural underpinnings. But there is an inherent sticking point: Do institutions change over time in response to the need to reduce transaction costs, or to suit powerful insiders? And is North’s explanation of change and progress too path-dependent? There are still many open questions in new institutionalism, but North did the spadework for a fertile ground for research.
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