New Institutional Economics
Douglass North and institutional change
North’s first works contributed to the rise of the new economic history, or cliometrics, but his subsequent works rejected neoclassical theory, which could not explain longterm change and only considered perfect markets.
Neoclassical theory considers factors of growth - technical progress and growth of factors of production - to be exogenous, whereas, North argued, they are change. Following Coase and Demsetz, he claimed that institutions promoting growth were those that provided appropriate incentives, that is, structures of property rights that equalized private cost and social cost. The growth of the United States during the nineteenth century was interpreted with this theoretical framework, in which efficient institutions are put into place when their benefit is perceived to be greater than their cost (Davis and North 1971). North and Thomas (1973) extended the analysis to the rise of Western Europe over a longer period and endogenously explained its institutional structures as resulting from rational individual decisions. Facing the poor performances of some economies, North (1981) abandoned individual rationality and the thesis of the efficiency of institutions, and introduced the role of ideology and a theory of the state, close to public choice. His theoretical framework was again enriched when he stressed informal institutions, interactions between organizations and institutions, and the path dependency of institutional change (North 1990).North mainly conceives institutions as constraints on (given) individuals, shaping their choice set and the structure of their incentives: “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North 1990: 3). They are formal or informal and result from the agents’ interaction, often spontaneously (in the Hayekian sense). North’s works have been criticized for being, almost paradoxically, ahistorical: institutions mechanically adjust to exogenous causes, and new institutional concepts such as transaction costs and property rights appear to have been plugged into a partial account of historical reality that lacks detailed knowledge of law.
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