Douglass C. North
Some Fundamental Puzzles in Economic History/Development
Unpublished Manuscript, 1996 (31 pages).

Abstract: North, Nobel Laureate in Economics and Professor at Washington University in St. Louis, addresses the issue of historical and contemporary economic change and development, arguing that sustained economic development is a rare phenomenon that is not explained by conventional economic growth theory and the rational choice paradigm. Instead he proposes it is "the incentive structure imbedded in the institutional/organizational structure of economies that has to be a key to unraveling the puzzle of uneven and erratic growth" (3). Institutions provide "the structure that humans impose on human interactions in order to reduce uncertainty" (5); they are not simply products of economic necessity or rational choice, but arise out of historically contingent belief systems, a sustained "path dependence". While institutions provide "the rules of the game", organizations are the players (6); depending on the pay-offs within the system, organizations will tend to adopt a strategy of redistribution of wealth or increased productivity.  

Employing the successful economies of the Netherlands and England in early modern Europe as examples, North argues a range of historical factors set these polities on a path to growth.


Key institutional/organizational changes were those that permitted the growth of impersonal exchanges--both economic and political. By permitted I mean that, to use game theory terminology, they altered the payoff between defection and cooperation to favor the latter in both political and economic markets. That is, personal exchange provides settings in which it typically pays to cooperate. Impersonal exchange is just the antithesis and necessitates the development of institutions to alter pay-offs in favor of cooperative activity (21).

Such institutions include psychological changes. "The gradual development of informal norms of behavior that have become deeply imbedded in the society provides the stable underpinning to the adaptive efficiency characterizing the Western economies with a long history of growth" (25). For further details on the development on the economies of early modern Europe, see North (1995).



Maintained by Francis F. Steen, Communication Studies, University of California Los Angeles