I’ve been looking for the first time in some years at Douglass North’s short book [amazon_link id=”0691145954″ target=”_blank” ]Understanding the Process of Economic Change[/amazon_link]. North won his Nobel for the application of institutional economics to economic history, or in other words at the role played in the shaping of institutions and hence events by transactions costs and property rights.
This book is about how different societies arrive at their set of institutions. In particular, what enabled the historically rare success of the United States in the 20th century in establishing an orderly and thriving society, able to adapt even in the face of conflicts and technological change? And why has this kind of success been so rare in history, given that order seems clearly preferable to disorder?
[amazon_image id=”0691145954″ link=”true” target=”_blank” size=”medium” ]Understanding the Process of Economic Change (The Princeton Economic History of the Western World)[/amazon_image]
His answer lies in the beliefs members of a society hold, especially their beliefs in the legitimacy of their economic and political institutions. The book identifies four conditions for a society to produce order in the face of change. They are:
– citizens have rights that imply limits to the behaviour of officials and politicians;
– there is a constitutional framework that limits the decision-making power of the government;
– property and personal rights are well-defined and legally protected;
– the state credibly commits to upholding these rights, protecting citizens against expropriation by public officials.
This isn’t dissimilar to the conditions set out by Acemoglu and Robinson in [amazon_link id=”1846684307″ target=”_blank” ]Why Nations Fail[/amazon_link] for institutions to be ‘non-extractive’ – and indeed, their book cites North’s work quite extensively.
[amazon_image id=”1846684307″ link=”true” target=”_blank” size=”medium” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_image]
Much of North’s focus here is on how to improve the institutional framework in developing economies, but his criteria are clearly more general. But he ends with a word about the United States: “All societies throughout history have eventually decayed and disappeared. … There is no guarantee that the [US’s] flexible, adaptively efficient institutional structure will persist in the ever more complex novel world we are creating.” I wouldn’t want to forecast anything, but it isn’t obvious at present that order has the upper hand over disorder.
