Overview of Douglass North’s works
This article was published at the time of North’s death. It provides a broad overview of North’s work.
North introduced new concepts in the fields of economic history and institutional economics. He expanded his theories and thinking over the span of his working life, but throughout he believed that people act intentionally and with a view of the world that has been shaped by their culture and experiences.
Neoclassical theory and institutions
North believed that institutions exist to ‘provide stability and predictability to human behaviour’ and that they are ‘an outcome of the natural limits of human capacities for cognition and culture’ (Walis, 2015). He tried to apply neoclassical theory to his observations about institutions because he noted they are shaped by rationality and constraints.
Institutions and change
Institutions change based on ‘the rational interests of individuals attempting to structure the world around them in ways that maximise net benefits’ (Wallis, 2015). Sometimes the change is a response to a change in costs, but this does not explain all institutional change.
North wanted to know ‘why, in the presence of transactional costs, political systems do not inevitably evolve institutions that promote economic growth’ (Wallis, 2015). Some institutional changes actually prohibit economic growth instead of promote it. There is a weighing of the transactional cost of change: ‘institutions change when there are gains from doing so, but then persist because of the high transaction costs of changing them’ (Wallis, 2015).
Change in formal and informal institutions
We also have the problem of being able to change formal institutions (like laws) more quickly than informal ones (like beliefs). This is a problem because beliefs are shaped by culture and ingrained in memory and habits. By definition that means that beliefs look to the past, while changes look to the future.
The sports analogy
North delineated organizations and institutions by using a sports analogy: Institutions are the rules of the game, and organizations are the players. That analogy gives organizations three basic options: ‘one is to maximise under the rules; the second is to devote resources to changing the rules; and the third is to cheat’ (Wallis, 2015).
Interplay between institutions and organizations
The interplay between these two is called ‘adaptive efficiency’.