Source
Douglass C. North (1991), “Institutions”, Journal of Economic Perspectives 5(1):97–112, LIT-489, read in full in NOTE-392. The essay is “based in part on” his 1990 book, which the record does not hold.
What was actually shown
The 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).” Institutions are the rules; organisations (firms, guilds, states) are the players.
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.” Cooperation is easy with repeated play, full information and few players, and impersonal exchange needs third-party enforcement (p. 97, stated, not modelled).
Static and evolving exchange (pp. 102–108). Tribal exchange rests on a dense network in which deviance threatens survival; the Suq has high measurement costs and no legal underpinning; the caravan trade ran on personal protection. None evolved from within. Early modern European trade did, through innovations at three margins (negotiable bills and accounting; printed prices and merchant manuals; marine insurance and the commenda), with causation running both ways between trade volume and cheaper enforcement, and with merchant law absorbed by a state that had to be bound against confiscation.
Path dependence (pp. 109–111). The institutional matrix has increasing returns through set-up costs, learning, coordination and adaptive expectations, so frameworks lock in. England’s and Spain’s colonies diverged and have not converged; the same constitution exported to Latin America did not reproduce the United States.
What could have come out otherwise. Little in the essay could. Its cases illustrate the account; none is set up so that it might have failed.
What this does not say
- Why some constraints are followed. Compliance is a matter of enforcement cost, and the essay’s closing questions (“What is the relationship between formal and informal constraints?”) are left open. That is the gap Hindriks and Guala name in rules accounts.
- What makes a constraint an institution rather than, say, a physical obstacle, beyond its being humanly devised.
- That the staged history happened. North says the sequence from village to long-distance trade need not match real historical sequence (n. 1).
- That path dependence in institutions is shown. It is asserted to have “equal explanatory power” by analogy with technology (n. 10).
- Anything about group minds or agency. Organisations appear only as players; NOTE-392 finds no bearing on THEORY-043.
- The transaction sector’s growth as a result. The figures (25% of US GNP in 1870, 45% in 1970) are cited from Wallis and North (1986), not derived.
Connections
- Rules in equilibrium (THEORY-414, from LIT-481). Hindriks and
Guala open with North’s definition, from the 1990 book, as the exemplar
of the rules account, and argue that rules alone cannot separate
effective from nominal rules. Their account answers a question this one
leaves open; it does not contradict its claims about performance, so no
rivalsis declared. - Epstein’s survey (LIT-487, §5.3) places North with Williamson and Ostrom in new institutional economics.
- Premodern inequality (THEORY-450, from LIT-087) is a neighbour: there, too, scale sets a ceiling and the institutional framework is offered as what realises it, though that half is weakly supported.
- NOTE-392 corrects the essay’s citation of North and Weingast (1989), which is JEH 49(4):803–832.