Showing papers by "Douglass C. North published in 1993"

The New Institutional Economics and Development

Abstract: In this essay I intend to briefly summarize the essential characteristics of the new institutional economics, to describe how it differs from neo- classical theory, and then to apply its analytical framework (as I see it) to problems of development.

Institutions and economic performance

Abstract: Institutions provide the incentive structure of an economy and therefore the way they evolve shapes long-run economic performance.Institutions, composed of rules, norms of behaviour, and the way they are enforced, provide the opportunity set in an economy which determines the kinds of purposive activity embodied in organizations (firms, trade unions, political bodies, and so forth) that will come into existence. If the institutions reward productive activity then the resultant organizations will find it worthwhile engaging in activities that induce economic growth. If, on the other hand, the institutional framework rewards redistributive and non-productive activities then organizations will maximize at those margins and the economy will not grow.

Five Propositions about Institutional Change

Abstract: North outlines five propositions about institutional change and explains its meanings. He lays out a specific agenda for the study of institutions that is different from game theoretic or spatial political modeling of institutions. The focus is a transaction cost approach to institutions and a cognitive science approach to "rational" choice. While the former--the transaction cost approach--is at least partly complementary to game theoretic approaches, the latter suggests a distinct departure from much of the current rational choice theory.

What do we mean by rationality

Abstract: The central task of public choice over the next twenty-five years will be a critical exploration of the behavioral assumption it employs. A dissection of the rationality assumption is essential in order to incorporate much more “realistic” assumptions to be derived from the diverse mental models that guide human decision-making. Does such a dissection make a difference to our models? You bet. If individuals have different theories to explain the world around them, they will make different “rational” choices. Ideas matter. As Frank Hahn (1987: 324) succinctly put it, “There is a continuum of theories that agents can hold and act upon without ever encountering events which lead them to change their theories.” In such circumstances there is not one equilibrium but multiple equilibria. In this brief essay I intend to support the above assertions.

The Paradox of the West

Abstract: A central thesis of this chapter is that economic growth and the development of freedom are complementary processes of societal development. Economic growth provides the resources (and leisure) to support more complex societies; and it is unlikely to persist in the long run without the development of political and civil liberties. A world of specialization and division of labor--the roots of economic growth--is going to nurture democratic polities and individual freedoms.

The Paradox of the West

Abstract: A central thesis of this chapter is that economic growth and the development of freedom are complementary processes of societal development. Economic growth provides the resources (and leisure) to support more complex societies; and it is unlikely to persist in the long run without the development of political and civil liberties. A world of specialization and division of labor--the roots of economic growth--is going to nurture democratic polities and individual freedoms.

Institutions, Transaction Costs and Productivity in the Long Run

Abstract: The argument of this essay is that the immense productivity increases resulting from technological developments of the past century and a half could only be realized by fundamental changes in the institutional and organizational structure--a supply side argument; and that the consequent tensions induced by the resulting societal transformation have resulted (and are continuing to result) in politically-induced fundamental changes in the institutional structure to mitigate these tensions--a demand side argument. Both the supply side and demand side institutional changes have been and continue to be fundamental influences on productivity change.

Economic Performance through Time

Abstract: Economic history is about the performance of economies through time. The objective of research in the field is not only to shed new light on the economic past but also to contribute to economic theory by providing an analytical framework that will enable us to understand economic change. A theory of economic dynamics comparable in precision to general equilibrium theory would be the ideal tool of analysis. In the absence of such a theory we can describe the characteristics of past economies, examine the performance of economies at various times, and engage in comparative static analysis; but missing is an analytical understanding of the way economies evolve through time.

Shared Mental Models: Ideologies and Institutions

Abstract: The rational choice framework assumes that individuals know what is in their self interest and make choices accordingly. However, sometimes, especially in situations of uncertainty rather than risk, people act in part upon the basis of myths, dogmas, ideologies and "half-baked" theories. We begin this essay by noting that it is impossible to make sense out of the diverse performance of economies and polities if one confines one's behavioral assumptions to that of substantive rationality in which agents know what is in their self-interest and act accordingly. But once we open up the black box of "rationality," we encounter the complex and still very incomplete world of cognitive science. This essay is a preliminary exploration of some of the implications of the way by which humans attempt to order and structure their environment and communicate with each other. Over time, the approach has fundamental implications for understanding economic change. The performance of economies is a consequence of the incentive structures put into place; that is, the institutional framework of the polity and economy. These are in turn a function of the shared mental models and ideologies of the actors. The presence of learning creates path-dependence in ideas, ideologies and then in institutions. Systems of mental models exhibit path-dependence such that history matters, and in both suboptimal performance can persist for substantial periods of time.