Contribution
A short programmatic statement, for a general economics readership, of the view North’s 1990 book develops (the acknowledgement says the essay is “based in part on” that forthcoming book). It defines institutions, ties them to transaction costs, and uses three static forms of exchange and one evolving one to ask why some institutional frameworks produce growth and others do not. Its answer is the interplay of organisations with the framework and path dependence.
Key insight
Institutions are the constraints, not the players. Organisations (firms, guilds, states) arise to exploit the opportunities a framework offers, and their investment in knowledge alters the framework only when the framework rewards productive rather than redistributive activity. That is why frameworks can lock in, and why the same constitution exported to Latin America did not reproduce the United States.
Assumptions
- Agents are wealth-maximising, with asymmetric information about the attributes of what is exchanged.
- Cooperation is easy with repeated play, full information and few players, and hard otherwise. This is stated as the game-theoretic setting (p. 97), not modelled.
- The staged story (village to region to long-distance trade to modern economy) is a heuristic from the German historical school. North says explicitly that it need not match real historical sequence (p. 99, n. 1).
- Path dependence is taken from Arthur and David on technology and applied to institutions by analogy (n. 10).
Key results
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Definition (p. 97). “Institutions are the humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).”
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Institutions and costs (p. 98). Institutions and enforcement, with technology, determine the cost of transacting. “Effective institutions raise the benefits of cooperative solutions or the costs of defection.”
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Static exchange (pp. 102–104). Tribal exchange rests on a dense social network in which deviance threatens survival (Colson; Posner). The Suq has high measurement costs, clientization and bargaining at every margin, and no legal underpinning that would make insuring organisations profitable. The caravan trade ran on personal protection (Geertz’s zettata), with no political structure to extend property rights.
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European evolution (pp. 105–108). Innovations at three margins:
- capital mobility: usury evasion, negotiable and discountable bills of exchange, accounting to monitor agents;
- information costs: printed prices and merchant manuals;
- risk: marine insurance and the commenda leading to the joint-stock company.
Causation ran both ways between trade volume and enforcement. Merchant law began in guild codes enforced by ostracism and was gradually absorbed by the state, which had to be bound against confiscation (the Netherlands; England after 1688).
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The transaction sector (p. 101, n. 7). 25 percent of US GNP in 1870 and 45 percent in 1970, cited from Wallis & North (1986).
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Path dependence (pp. 109–111). The institutional matrix has increasing returns through setup costs, learning, coordination and adaptive expectations. England’s and Spain’s colonies diverged and have not converged.
Claims
| id | claim | strength | support |
|---|---|---|---|
| C1 | Institutions are humanly devised constraints, formal and informal | definitional | stipulated, p. 97 |
| C2 | Institutions and technology determine transaction and production costs | assertion | framework statement, p. 98; no measurement here |
| C3 | Impersonal exchange needs third-party enforcement because cooperation fails without repetition, information or small numbers | weak–moderate | one paragraph of informal game theory, p. 97; no model |
| C4 | Tribal, bazaar and caravan exchange do not evolve from within | weak | three illustrations from secondary sources (Colson, Geertz, Posner) |
| C5 | European trade evolved through two-way causation between volume and cheaper enforcement | moderate as narrative | historical examples, pp. 105–108, cited to De Roover, Udovitch, Mitchell, North & Weingast |
| C6 | Institutional change is path dependent through increasing returns | weak–moderate | analogy with Arthur and David, n. 10; asserted to have “equal explanatory power” |
| C7 | North and South America diverged because of their inherited institutional frameworks | weak | comparative sketch, pp. 110–111, cited to Hughes, Veliz, Glade |
Concepts
- Institutions — the constraints (rules of the game), formal and informal, as distinct from organisations, which are the players.
- Transaction costs — the resources spent to define and enforce exchange agreements, including measurement of what is exchanged.
- Institutional matrix — the interdependent web of institutions and the organisations they make possible.
- Uncertainty versus risk — uncertainty cannot be given a probability; risk can, and so can be insured (p. 106).
Connections
- Hindriks & Guala (LIT-481, read in NOTE-395) take North’s 1990 version of this definition as the exemplar of the rules account. Their objection, that rules alone cannot say why some are followed, fits this essay: compliance here is a matter of enforcement cost, and the closing questions (“What is the relationship between formal and informal constraints?”) are left as open.
- Guala’s book (LIT-472) quotes the 1990 definition as the epigraph of chapter 1.
- The SEP entry (LIT-487, §5.3) groups North with Williamson and Ostrom as “new institutional economics” and calls that programme largely game-theoretic. In this essay game theory is a framing device; the analysis is transaction-cost economics and history.
Bearing on the record
- THEORY-043: none. The essay treats institutions as constraints on individual wealth-maximisers. It attributes no agency or mind to any collective, and organisations appear only as players.
- Social choice (LIT-285, LIT-282). Sen’s results are about aggregating preferences into a social ordering. North’s are about the rules within which individuals choose. The essay does not touch aggregation.
- No instruction for machine-learning practice appears, so nothing here points to the Anthology of the SOTA.
Limitations
- The definition is not argued for, and it does not say what makes a constraint an institution rather than, say, a physical obstacle, beyond being “humanly devised”.
- No model is given; “game theoretic” means a verbal description of when cooperation is easy and hard.
- The historical cases are drawn from secondary literature, and the staged sequence is disclaimed as history (n. 1).
- Why informal constraints bind, which the essay calls central, is left as an open question in its last paragraph.
Open questions
- What makes informal constraints so persistent, and how do they relate to formal rules? (North’s own closing questions, p. 111.)
- Under what conditions does a path get reversed, as in Spain’s modern revival?
Corrections
- none to a seeded skim (there was no seed)
- North & Weingast (1989) is mis-cited. The reference list gives “Journal of Economic History, November 1989, 5, 172–200”, which repeats the volume and pages of the De Roover (1945) entry earlier in the list. Crossref gives “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England”, JEH 49(4):803–832, December 1989, DOI 10.1017/S0022050700009451. North’s reference-list title is the published subtitle only.