SAN JOSÉ STATE UNIVERSITY
ECONOMICS DEPARTMENT
Thayer Watkins

The Institutional Economics of Douglass North

Source: Douglass C. North, Institutions, Institutional Change and Economic Performance1991

Prefaces of Series Editor and Author

This is a major work of the Neoinstitutionalist School of Economics. It is the culmination of years, even decades, of trying to frame the definition and questions of institutionalist thought at Washington University of St. Louis.

This work is part of the Cambridge University series in the Political Economy of Institutions and Decisions. The series editor says in the preface that this series "attempts to answer two central questions:

North focuses on the specific question of: What combination of institutions best facilitates the capture of the gains from trade? In this work North revises he previous position that institutions evolve toward efficiency and instead maintains the position that institutions evolve toward preserving the status of those in the society that make the rules.

Institutions are important, in part, because over time they constitute the linkage between the future and the past of a society. At any point in time institutions facilitates human cooperation.

Chapter 1: An Introduction to Institutions and Institutional Change

After much mulling over of the problem of defining the nature of institutions North has settled upon defingin institution to be any socially imposed constraint upon human behavior. As he notes, institutions are the "rules of the games" for human interaction. By limiting the actions of humans it is then possible to give humans some expectations about the actions of others. They thus facilitate human interaction.

Chapter 7: Enforcement

A crucial element of the institutional structure of an economy is the method of enforcement of property rights and contracts. There are some cases where contracts are self-enforcing; i.e., when all parties to a contract have an economic incentive to comply with the terms of the contract. An important case of this is when the parties repeatedly engage in contract transactions with each others so the gains from repeated trade outweigh the gains from violate any single contract.

In cases in which contract compliance is not self-enforcing there is a need for a third party to carry out enforcement. This is usually a State. But the problem is ensuring that the enforcers do not act in their own interest rather than impartially enforcing the contract. Such enforcement requires ascertaining the terms of the contract and adjudicating whether the terms have been violated. These are not costless operations so resources must be transferred to the enforcement agency, but there is a difficult problem in determining whether the demands of the enforcement agency are the minimum required or whether they are inflated. To paraphrase North, "You cannot live without a State and you cannot live with a State!"

The traditional view is that a society creates the institutions of enforcement with a constitution, but North questions whether that is the way it actually works. He asks, "Are we free because we have a constitution or do we have a constitution because we are free?"

Chapter 8: Institutions and Transaction and Transformation Costs

Institutions like technology enter into the production functions of an economy and hence its production possibilities.