BackRemembering North
According to Nobel laureate North, who died on 23 November, institutions served the interests of those with higher bargaining power
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During his younger days, he was a navigator in the Merchant Marine. He even taught the art of navigation to Maritime Service Officers. Fishing, hunting and music were his favourite pastimes. He owned two ranches and knew how to fly a plane. His biggest dilemma in life was whether to choose a career in photography or economics.
For an economist, Douglass Cecil North, who died on 23 November, had a rather eventful life.
North was born in Cambridge, Massachusetts, in the US on 5 November, 1920. He completed both his bachelors and doctorate in Berkeley University. His teaching career, which was to last more than 60 years, began at the University of Washington. It was, however, during his tenure at the Washington University, St Louis that he discovered his academic niche and founded the International Society for New Institutional Economics with Ronald Coase.
With his demise, the school of new institutional economics has indubitably suffered a severe blow. North argued that the neo-classical result of efficient markets is a non-entity if its premise is based on zero transactions cost. This was so, since incomplete asymmetric information coupled with limited mental capacity of human beings raised the transactions costs involved in any exchange.
By introducing institutions into the equation North factored in a means to reduce the uncertainty in human exchange, that is, transactions costs. His Measuring the Transaction Sector in the American Economy, 1870-1970 (mintne.ws/1LOAQse) examines in detail how transactions costs have affected the growth of the American economy in the span of a century.
‘Institutions are the humanly devised constraints that structure political, economic and social interaction.’ North’s description of institutions in his paper Institutions, Institutional Change, and Economic Performance(1991) (mintne.ws/1QeYSmu) is one of the most profound and concise definitions available on institutions today. According to him, institutions served the interests of those with higher bargaining power.
The thought was not very different from Karl Marx’s idea of superstructure and the finding that tension between technology and property rights was the source of conflict in societies. But unlike Marx, he did not think capitalism was incompatible with the technological advances that occurred. On the other hand, he found centralized planning to be the culprit.
North was a historian as much as he was an economist. In fact, he received the Nobel Prize in 1993 along with Robert William Fogel for his expedition in the field of cliometrics or new economic history.
In the words of the Nobel Committee, North and Fogel were credited, with “having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
In fact, North’s description of the evolution of institutions by recounting the economic structures of tribal societies, bazaars and caravan is nothing short of parables used to convey larger ideas. His two initial books, Institutional Change and American Economic Growth , and The Rise of the Western World: A New Economic History, co-authored with Lance Davis and Robert Thomas, respectively, are a couple of the finest works in economic history.
In his autobiographic account on the Nobel website (mintne.ws/1IpptfE) , North says that he was dissatisfied with the presumptions of rationality and zero transactions cost—the theories his earlier books maintained. A decade and half of research later, in his Structure and Change in Economic History (1981), he abandoned this basic premise. He said what other economists did not—institutions were inefficient. In the latter half of his life, North shredded the rationality postulate, the myopic assumption that neo-classical economists held by.
His latest book Violence and Social Orders (2009) (mintne.ws/1TvNlPZ ) which he wrote with John Joseph Wallis and Barry R Weingast, is an extension of his work on institutions. It talks about how social orders determine social interactions and how in a natural state the endemic violence is low due to the consensus among the members of the dominant coalition also known as the elites.
It then propounds how transition occurs to open access orders where competition rather than rent creation sustains social order.
North’s works were largely devoid of complex tabulations and calculus. His books The Economics of Public Issues, and Abortion, Baseball and Weed: The Economic Issues of Our Times use simplistic illustrations to explain basic economic concepts.
If we had to classify these works, it would ideally belong to the genre of 21st century books like Stephen J. Dubner’s and Steven Levitt’s Freakonomics, which explains economics with common sense.
Along with his co-authors Roger LeRoy Miller and Daniel K. Benjamin, he examines issues like whether drug use can be stopped or reduced through regulation and conclude that when a substance becomes illegal, its consumption becomes intensive.
Perhaps, the Indian legislators can learn a lesson or two from North and his friends before going ahead and banning liquor in their respective states.
North’s life was a journey pondering on the basic inequalities which exist in societies, his fundamental question being, ‘Why do some countries become rich and others remain poor?’
Though the question will remains a vital one long after his death, the answers and interpretations Douglass C North gave to the subject will remain crucial to economic history, institutional economics and economics itself.
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