Douglass North

Douglass North
Born	(1920-11-05)November 5, 1920 Cambridge, Massachusetts, U.S.
Died	Benzonia, Michigan, U.S.
Nationality	United States
Institution	University of Washington Rice University Cambridge University Washington University in St. Louis Stanford University Hoover Institution
Field	Economic history
School or tradition	New institutional economics
Alma mater	University of California, Berkeley
Influences	Melvin M. Knight
Awards	Nobel Memorial Prize in Economic Sciences (1993)
Information at IDEAS / RePEc

Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. He was the co-recipient (with Robert William Fogel) of the 1993 Nobel Memorial Prize in Economic Sciences. In the words of the Nobel Committee, North and Fogel "renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."

Biography

Douglass North was born in Cambridge, Massachusetts, on November 5, 1920. He moved several times as a child due to his father's work at MetLife. The family lived in Ottawa, Lausanne, New York City, and Wallingford, Connecticut.

A conscientious objector in World War II, North became a navigator in the Merchant Marine, traveling between San Francisco and Australia. During that time, he read economics and picked up his hobby of photography. He taught navigation at the Maritime Service Officers' School in Alameda during the last year of the war, and struggled with the decision of whether to become a photographer or an economist.

North died on November 23, 2015, at his summer home in Benzonia, Michigan from esophageal cancer at the age of 95.

Education

North was educated at Ashbury College in Ottawa, Ontario and The Choate School in Wallingford, Connecticut. He was accepted at Harvard at the same time that his father became the head of MetLife on the west coast, so North opted to go to University of California, Berkeley. In 1942, he graduated with a B.A. in General Curriculum-Humanities. Although his grades amounted to slightly better than a "C" average, he managed to complete a triple major in political science, philosophy and economics.

North returned to UC Berkeley to pursue a PhD in economics. He finished his studies in 1952 and began work as an assistant professor at the University of Washington.

Experience

From 1951-56, North was an assistant professor of economics at the University of Washington, then from 1956-1960, an associate professor. In 1960 North became co-editor of the Journal of Economic History, popularizing Cliometrics (New Economic History), and from 1960–1983 he was Professor of Economics at the University of Washington where he also served as the chair of the economics department from 1967-79. In 1979 he served as the Peterkin Professor of Political Economy at Rice University, and in 1981-82 as the Pitt Professor of American History and Institutions at Cambridge University, before joining the faculty of Washington University in Saint Louis in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics (where he also served as director of the Center for Political Economy from 1984 to 1990). In 1991, he became the first economic historian to win the John R. Commons Award, which was established by the International Honors Society for Economics in 1965.

North served as an expert for the Copenhagen Consensus and as an advisor to governments around the world. He was recently engaged in research (with John J. Wallis of the University of Maryland, College Park and Barry Weingast of Stanford University) on how countries emerge from what they call "the natural state" and into long-run economic growth. He was a trustee of the Economists for Peace and Security and a special adviser to the non-profit organization Vipani.

A collection of North's papers is housed at the Rubenstein Library at Duke University.

North taught at Washington University in St. Louis and was the Bartlett Burnap Senior Fellow at the Hoover Institution at Stanford University.

Research agenda

Along with Ronald Coase and Oliver Williamson, he helped found the International Society for the New Institutional Economics (ISNIE) which held its first meeting in St. Louis in 1997. His research included property rights, transaction costs, and economic organization in history as well as economic development in developing countries.

Publications

Institutions

Douglass North's 1991 paper summarizes much of his earlier work relating to economic and institutional change. In this paper, North defines institutions as "humanly devised constraints that structure political, economic and social interactions". Constraints, as North describes, are devised as formal rules (constitutions, laws, property rights) and informal restraints (sanctions, taboos, customs, traditions, codes of conduct), which usually contribute to the perpetuation of order and safety within a market or society. The degree to which they are effective is subject to varying circumstances, such as a government's limited coercive force, a lack of organized state, or the presence of strong religious precept.

Section 2 describes the economic development of societies as occurring in stages:

He begins with local exchange within the village. In this setting, specialization "is rudimentary and self-sufficiency characterizes most individual households", with small-scale village trade existing within dense social networks of informal constraints that facilitate local exchange, and a relatively low transaction cost. In this close-knit network "people have an intimate understanding of each other, and the threat of violence is a continuous force for preserving order ..."

With growth the market extends beyond the village into larger, interconnected regions. As the participants of a transaction become more socially distant the terms of exchange must be made more explicit. This increase in transaction costs necessitates institutions that reduce the risks of being cheated, either by raising "the benefits of cooperative solutions or the costs of defection".

As long-distance trade becomes more feasible, generally through caravans or lengthy ship voyages, individuals and groups experience occupational and geographic specialization. Society also experiences a rise of formal trading centers (temporary gathering places, towns or cities). From the development of long-distance trade arise two transactional cost problems.

The first is agency: the transfer of one's goods or services outside the control of local rule leaves the rules of exchange undefined, the risk of unfair trade high, and the contracts within society unenforced. For this reason, sedentary merchants often would send their kin with the product to ensure its safe arrival and the fulfillment of agreed terms of exchange by the receiving party.

The second is contract. Historically this problem was met with either armed forces protecting ships or caravans, or use of tolls by local coercive groups. However, in modern societies, institutions acting cooperatively in the interest of free market trade provide protection for goods and enforcement of contracts. Negotiation and enforcement in alien parts of the world require the development of a standardized system of weights and measures.

As development continues, the rise of capital markets (protection of property rights), creates social capital and enables citizens to gain wealth. Technology plays an instrumental role in the continued development of manufacturing sectors, and acts to lower transaction costs in several ways. The most substantial benefits are generally the result of transportation improvements.

Eventually, society becomes overwhelmingly urban. This final stage of development specialization requires increasing percentages of the resources of the society to be active in the market so that the transaction sector becomes a large share of gross national product. Highly specialized forms of transaction organizations emerge at this stage. Globalized specialization and division of labor demand institutions to ensure property rights even when trading in neighboring countries enabling capital markets to develop "with credible commitment on the part of the players."

Three primitive types of exchange:

• Tribal Society "relies on a dense social network".(Colson 1974, p. 59)
• Bazaars "high measurement costs; continuous effort at clientization; intensive bargaining at every margin"
• Long-distance caravan trade illustrates the informal constraints that made trade possible in a world where protection was essential and no organized state existed.

All three methods above are found to be much less likely to evolve.

North's paper concludes with a few intriguing questions which his paper has aimed to address:

• What is it about informal constraints that give them such a pervasive influence upon the long-run character of economies?
• What is the relationship between formal and informal constraints?
• How does an economy develop the informal constraints that make individuals constrain their behavior so that they make political and judicial systems effective forces for third party enforcement?

Transaction Costs, Institutions, and Economic Performance

In a 1992 paper, North argues that neoclassical economic theory overlooks the institutions required to create efficient markets with low monitoring and transaction costs. He develops a framework for explaining how institutions change and become more efficient over time.

North emphasizes that economic scarcity drives organizations to compete with each other by investing in new knowledge and skills. This competition, however, also causes individuals to act selfishly in the market. Therefore Institutions (formal rules and informal norms) dictate what knowledge players perceive to have the maximum payoff. The ideologies of the players – especially in complex systems with limited information – also influence their choices. Players will attempt institutional revision, argues North, when they believe that they consistently lose under the existing system. North holds that institutional change is usually slow and incremental, because many factors (economies of scope, complementarities, and network externalities) favor the preservation of existing institutions. The ideologies and cultural norms that support particular institutions are also difficult to change quickly.

Other work

North's other major publications include:

• Location Theory and Regional Economic Growth, Journal of Political Economy 63(3):243–258, 1955.
• The Economic Growth of the United States, 1790–1860, Prentice Hall, 1961.
• "The State of Economic History," American Economic Review, 55(1/2), p p. 86–91, 1965.
• Institutional Change and American Economic Growth, Cambridge University Press, 1971 (with Lance Davis).
• The Rise of the Western World: A New Economic History, 1973 (with Robert Thomas).
• Growth and Welfare in the American Past, Prentice-Hall, 1974.
• Structure and Change in Economic History, Norton, 1981.
• Institutions and economic growth: An historical introduction, Elsevier, 1989
• Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England, Cambridge University Press, 1989
• Institutions, Institutional Change and Economic Performance, Cambridge University Press, 1990.
• "Economic Performance through Time," American Economic Review, 1994, 84(3), p p. 359–368. Also published as Nobel Prize Lecture.
• Empirical Studies in Institutional Change, Cambridge University Press, 1996 (edited with Lee Alston & Thrainn Eggertsson).
• Understanding the Process of Economic Change, Princeton University Press, 2005.
• Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, Cambridge University Press, 2009 (with John Joseph Wallis and Barry R. Weingast).

Further reading

• Colson, Elizabeth. Tradition and Contract: The Problem of Order. Chicago: Adeline Publishing, 1974.
• S. Galiani and I. Sened (eds.), 2014. Institutions, property rights and economic growth: The legacy of Douglass North, Cambridge University Press. http://econweb.umd.edu/~galiani/b-north.html

External links

• 1993 Nobel Memorial Prize in Economics
• Hoover Institution homepage
• Douglass C. North – Autobiography
• Appearances on C-SPAN
• Douglas C. North at Goodreads
• Douglass North: The NIE and Development. Essay (~ 1995), 8 p.

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