[.uk] Institutions, Institutional Change and Economic ... (ISBN 0521394163)

Book Description:
An analytical framework for explaining the ways in which institutions and institutional change affect the performance of economies is developed in this analysis of economic structures.

Realistic and Relevant:
These are strange times in the economics profession. Most economists insist upon representing actual economic systems with mathematical models that bear little resemblance to reality. The results of these models are often quite strange. Government deficits are offset by taxpayers who save more money in anticipation of higher future taxes. Monetary policy is neutral; it has no real predictable effects. We are in equilibrium in every phase of the business cycle. Investors might as well pick stocks by throwing darts. Economic analysis is judged by its formalism, not its realism. This book by Douglass North is a refreshing change from `economics as usual'. Here the factors that matter most are real institutions and actual history. North draws upon the right kind sources for his theoretical underpinnings (Coase, Hayek, Ostrom, Olson, Veblen- yes Veblen too). North also focuses on an issue of primary importance- economic performance through time. How does economic development happen? Why does it happen in some nations and not others? There are some important ideas here. We need to think in terms of adaptive efficency (p80-81). Incremental changes in institutions comes from entrepreneurs (p8). We should understand institutional change in terms of transaction costs, relative prices, and ideology (p86). North has constructed a theory of institutional change using a blend of common sense and subtlety that is rare in modern economics. This book should be required reading for all econ grad students. There are some historical examples sprinkled through this book. Personally, I would have liked to see more history. But it is still the case that there is more history here than one typically finds in contemporary economics. Institutions, Institutional Change, and Economic performance is not easy reading, but it is easier to read and vastly more informative than the math models that most economists try to pass off as proper economic analysis.

The Limits of Hard-Rational Choice:
North's work attempts to show how hard-rational choice theory and neoclassical economic theory are weak in that they argue that cooperation and coordination are not fundamental to transactions. North writes that in the "zero transaction-cost world, bargaining has no place, however, in the real world, institutions, bargaining and cooperation are necessary" (16). The author argues that the rigidity of the human behavior described by hard-rational choice theorists is not practical in a real-world sense. For example, actors do not have perfect "computational power" and as such they don't have a perfect description of the world. Rather, the situations faced by actors are complex and uncertain. As such, transaction outcomes are unpredictable. North writes, "Uncertainties arise from incomplete information with respect to the behavior of other individuals in the process of human interaction" (25). In order to protect oneself or maximize his or her individual utility, an individual must collect information regarding a transaction. The costs of transaction "consist of the costs of measuring the valuable attributes of what is being exchanged and the costs of protecting rights and policing and enforcing agreement" (27). Institutions are created to generate regular patterns in human interaction. Doing so decreases the costs of transaction, or "playing the game." However, the game is never stable and as such institutions are malleable; they are capable of change. Yet the changes occur slowly, by increments. In the later chapters of the book, North takes a historical look at economic development, stability and change. Had all things been equal, transaction costs being zero, North argues that little diversity between economic systems would exist. North writes, "In a world in which there are no increasing returns to institutions and markets are competitive, institutions do not matter. If the actors initially have incorrect models and act upon them, they either will be eliminated or efficient information feedback will induce them to modify their models" (95). However, in real-world situations, institutions do matter and they are in continuous need of minor, or marginal, adjustments. In many ways, it is the behavior of the actors that make adjustments to the institution. North writes, "Incremental change comes from the perceptions of the entrepreneurs in political and economic organizations that they could do better by altering the exiting institutional framework at some margin" (8). In conclusion, new institutionalism has emerged in response to the concentration on behavioral/rational choice theories in the discipline. The new institutionalism attempts to "bring the institutions" back in to political science. However, institutional scholars have evolved from the days of strictly studying the political systems of polities. The new institutionalism attempts to blend aspects of behavioral/rational choice theories with the importance of institutional structure and establish a new paradigm with which to study political phenomena.

The Perfect Introduction to "New Institutional Econonomics":
Douglass North is an excellent writer, and this book is the amazing culmination of a lifetime's work in the area known as New Institutional Economics. This school or tradition is concerned with the role institutions play in the functioning of economies, and in particular, how they influence economic performance. Institutions are defined as rules or constraints, both informal (social conventions, habits, norms, etc.) and formal (legal rules and regulation), on human behavior. Rules, however, only provide the framework for action, and it is here where Douglass North brings in "organizations", which are responsible for determining the ways in which those "rules" become articulated, accepted (internalized) and enforced. A lot is covered in this book, but some general themes and arguments can be gleaned from the very short and immensely accessible number of pages. Perhaps most importantly, North argues in this book that conventional concepts like economic efficiency, cooperation, perfectly defined and costlessly enforced property rights, "frictionless exchange", costless information, and economic rationalism are by no means "given" in the standard economic modeling framework. These all depend on the "stability" of the institutions that exist in society. Stability, in turn, also depends on the ability of the agents responsible for measurement and enforcement to reduce transaction costs so that economic performance can be improved. This itself is by no means "given", because the State (the agent commonly assigned the task of enforcement) typically acts in ways that make property rights less secure, and hence raises transaction costs. If all of this sounds interesting, then Douglass North's book is perhaps the best source to consult on these matters. His prose is eminently readable, and he is a pleasure to follow as he tells his story in fascinating detail. I have explored other books that deal with similar topics, but I still regard this book as the most edifying.

Not enough economics for someone interested in economics; not captivating enough for anyone:
As a fan of the economic focus on institutions, I was excited to read one of Douglass North's books. North is the founder of this school, it would seem, and won a Nobel for it. Unfortunately, North's book hasn't enough mathematics to satisfy those with a quantitative bent, nor enough elegance to captivate anyone. I had to put it down after 80 pages (of 140 or so). I haven't felt like precious moments of my life were being lost so viciously since I last hurled Cryptonomicon across the room. I'm told that I should read North's papers rather than his books; this seems wise. If you want to read books that refocus economics on institutions, I'd strongly suggest starting with Bowles's "Microeconomics: Behavior, Institutions, and Evolution." It's the best synthesis of the subject that I've seen, bringing in threads from evolutionary game theory and probably every major economist from the last 75 years.

Economic excellence:
This is a really good and insightful book for anyone interested in economics, especially as it relates to determining factors in economic growth. In about 150 pages, North presents an interesting and thought provoking theory of economic growth.