This is the final post in the series on Douglass North’s Understanding the Process of Economic Change. I start with the main lessons of the book and continue with comments on its contentious ideas.
The entire review is now available on Dianoetic.
The book explores the roles of knowledge, institutions, demographics, order, and political factors on the evolution of the economy. Being a key figure of the New Institutional Economics school, North provides a first-class example of the school’s method of analysis. He demonstrates the complexities involved in the economic analysis and warns against simplistic or reductionist approaches to economic change. North explicitly rejects the possibility of a general dynamic theory of change to evolve (p. 125-6).
To confront novel situations most effectively, North, following Hayek, proposes the maintenance of institutions that permit trial and error. According to him, the presence of such institutions is the source of US’ material success. Moreover, North suggests that individualistic behavioural beliefs and the lack of large-scale political and economic order promote economic growth, particularly in the West. However, he warns that “the institutions that have emerged in the Western world, such as property rights and judicial systems, do not have to be faithfully copied in developing countries” (p. 159).
Throughout history, according to North, failures, stagnation, and decline have been far more frequent than successes and prosperities. “Economic growth has been the exception”. Nonetheless, he proposes four key requirements to improve economic performance:
- Clear understanding of the institutional and organisational origins of poor performance, for example by tracing transaction costs.
- Clear understating of the institutional framework
- Integrate the dispersed knowledge to improve performance.
- A viable polity to establish and enforce necessary institutions
To sum up, in North’s own words,
“The message of this book is that you have to understand the process of economic growth before you can improve performance and then you must have an intimate understanding of the individual characteristics of that society before you are ready to try to change it. Then you must have an understanding of the intricacies of institutional change to be effective in undertaking that change.” (p. 169)
In the beginning, I think I should clarify two points. First, the book is a great read. It vividly demonstrates the complexities involved in the analytical investigation of economic change, let alone in the provisioning and implementing it. He clearly warns against simplistic and reductionist approaches to economic analysis and practice.
Second, my economic knowledge at this moment is fairly elementary and obviously, I do not consider myself at a point to critique North’s ideas as an expert. However, I found some points that either need more clarification (e.g. by further research on my part) or arise from the differences in viewpoints and basic assumptions.
With these points in mind, I find four issues in North’s book that are either contradictory within other parts of his argument or are not entirely persuasive. I briefly outline these points here and further elaborate on them in the final review manuscript, which will be available on Dianoetic shortly.
1) Polity vs Economy
The most contentious idea, a crucial element of the foundation of North’s analysis, is the distinction between polity and economy. This Weberian idea is seriously contended by various thinkers, e.g. Robinson (2002). Even on the level of everyday life and journalistic material, one can easily observe the overlap and interdependency of these areas.
2) Personal vs impersonal exchange
A sign of internal logical inconsistency arises with the ideas of personal and impersonal exchange. While North argues in favour of impersonal exchange and considers it as a key facilitator of economic growth, he also maintains that smaller groups work more efficiently and productively. He justifies this fact by referring to millions of years of evolution as a hunter/gatherer species.
3) Hunter/gatherer origin
The idea of the hunter/gatherer origin is quite commonly taken as granted. Based on this idea, North argues that the neural networks of our brains are conditioned by millions of years of living as hunter/gatherers. This claim seems to me to be a bit rash. I think some substantial evidence is required to explain a trait because of brain functions or institutions, such as norms and cultures. Even if it is because of brain functions, it is not clear that it is evolved out of living as hunter/gatherer.
To be fair, most of the book’s arguments are not based on the hunter/gatherer origin and whenever this origin is used, it does not play such a significant role in the argument.
The notion of scarcity of resources and thus, agents’ competition to maximise their utility out of those resources is one of the founding elements of the mainstream economics. However, the validity of this tenet has been under discussion (Matthaei 1984, Gowdy 1986, Liodakis 2016).
Gowdy, J. M. (1986). “Neoclassical and Neo-Marxian Views of Scarcity: There Is a Free Lunch.” Review of Radical Political Economics18(4): 102-105.
Liodakis, G. (2016). “An Exploration of Scarcity in Historical Perspective.” Science & Society80(2): 221-247.
Matthaei, J. (1984). “Rethinking Scarcity: Neoclassicism, NeoMalthusianism, and NeoManrsm.” Review of Radical Political Economics16(2-3): 81-94.
North, D. C. (2005). Understanding the process of economic change. New Jersey, Princeton University Press.
Robinson, W. I. (2002). Capitalist globalization and the transnationalization of the state Historical materialism and globalization. M. Rupert and H. Smith. London, Routledge: 210-221.