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Structure and Change Douglass North
Structure and Change Douglass North
Management School, Queen’s University Belfast, 25 University Square, Belfast BT7 1NN, UK
Douglass North is a pivotal figure in the development of the ‘new’ economic history
as well as the ‘new’ institutional economics. However, the relationship between these
two aspects of his thinking remains undeveloped in previous critical assessments of
North’s work. The relationship is clarified here. The evidence presented indicates that
three distinct phases can be distinguished in his writings between the 1950s and the
2000s. The paper relates these changing views to the shifting mainstream within
economics and the effects that this shift has in turn had on economic history research.
Economic history has adapted to economic research by abandoning some practices
associated with the earlier cliometric literature. Furthermore, North is unique to the
extent that his recent writings represent something of a convergence with ‘old’
institutionalism.
Keywords: Douglass North; economic history; institutional economics
JEL Codes: N01; A12; B52
1 Introduction
The merits or otherwise of adopting a rule-setting approach to economic methodology was
until recently the focus of most debates within the field (Hands 2001; Dow 2002). Early
methodological assessments of cliometrics for instance tended to debate the practice of
cliometricians relative to the supposed rules of conducting good science (Tuma 1971;
McClelland 1975). Considerations of space preclude an extended discussion of the
appropriateness of following the rule-setting approach, but for the purposes of this paper it
suffices to observe that much of the contemporary literature is concerned with constructing
a methodological account of what economists do rather than ‘interpreting rules for good
science’ (Dow 2002, p. vii). Hence the more recent methodological work often tends to
concentrate on explaining the distinctive intellectual approaches of living (or indeed
recently deceased) economists as well as surveying the methodological foundations of
contemporary economics. For example, articles in recent issues of this journal have
considered the distinctive contribution of Thomas Schelling to economics as well as the
development of economic history since the mid-1950s (Cesarano 2006; Rizvi 2007).
Elsewhere, a number of recent methodological pieces have surveyed shifts in what exactly
constitutes ‘mainstream economics’ (Davis 2006, 2008; Hodgson 2007). Such
publications are undoubtedly methodological in content even if names such as Popper,
Lakatos or Kuhn are absent from the title.
This paper surveys the shifts in Douglass North’s economic thought and accordingly
it should be placed in the same category as these recent contributions. This paper finds
*Email: graham.brownlow@qub.ac.uk
that an eminent and influential economist can treat the same important methodological
issue, in this case the relationship between economics and history, in a variety of
different ways during their career. Douglass North has been a major figure in the
revitalization of institutional analysis within economics as well as being a pioneer of
cliometrics. For these reasons alone, his work deserves greater attention from
methodologists. Accordingly, his receipt, along with Robert Fogel, of the Nobel Prize in
Economics in 1993 should be understood as representing not only a reward for
contributing to the development of the new economic history (NEH), but also clear
recognition of North’s important and overlapping contribution to the creation of the new
institutional economics (NIE). The press release issued when North was awarded the
Nobel Prize was clear in that it both focused on his place as a pioneering ‘new’ economic
historian and mentioned his role in the creation of the NIE (Royal Swedish Academy of
Sciences 1994).
Economists and economic historians, as the material presented below indicates, are
already well served by critical assessments of ideas associated with various stages of
North’s career. In contrast, they have been less well served by a survey of his writings
taken as a whole. In section 2 the historical background to North’s thinking will be
outlined. Discussion of the evolution of this thought and the relationship between his work
in economic history and institutional economics have also not been developed. To these
ends a distinction is presented between ‘new economic history’ and ‘historical economics’
in section 3. The observation is made in section 4 that the overlapping nature of North’s
contribution to NIE and NEH has not been always recognized. In section 5 the changes
that can be discerned within his economic thinking are highlighted. Three phases in
North’s intellectual development are identified and discussed in section 6. The evolution
of these ideas is discussed further via an examination in section 7 of how the three editions
of his textbook reflect changes in his thinking. A specific example of this shift (the
changing treatment of institutional evolution and its relationship to technical progress) is
examined in section 8. The paper’s concluding section considers how the shift in the
economics mainstream in recent decades helps us to interpret North’s changes in North’s
economic thought.
From an explicitly methodological perspective, perhaps the most interesting
observation that arises from an analysis of North’s work is that this undoubted pioneer
of ‘new’ institutionalism and cliometrics has in his more recent work embraced a form of
economic rhetoric closer to the ‘old’ institutionalism. North’s research has arguably
become more ‘heterodox’ as a result. However, this transformation may only have been
the case because the research frontier of the profession shifted. In consequence, when
considering North’s consistently diachronic form of explanation, the careful investigator
must take particular note of North’s methodological changes and continuities as well as
considering the wider research environment.
2 Historical background
The objectives of the pioneers of NEH or cliometrics were clear from the start.1 The
pioneers aimed at securing this ‘new’ cliometric approach to economic history firmly
within ‘the classical economics family’ rather than ‘the historical economics clan’ (Temin
1973, p. 7). Temin and the methodologists who studied the early cliometric work of the
1960s and 1970s presented the emergence of cliometrics as representing a methodological
shift from an inductive to a deductive approach to economic history (Temin 1973;
McClelland 1975). We will see later that North’s writings in recent decades represent a
Journal of Economic Methodology 303
away from the expressly deductive lines of reasoning that typified his earlier cliometric
work.
Marxist position.12 Their focus conceals as well as reveals. The relationships between
North’s ideas and Schumpeter, Kuznets or the Purdue seminar are not mentioned, by way
of illustration.
Similarly, thought-provoking interpretations from those sympathetic to the older
institutional economics tradition have also appeared since North’s Nobel Prize win.
Dugger, as part of his critique of North, tries to place North relative to both the NIE and the
NEH (Dugger 1995). Dugger’s critique is that North paid too little attention to the OIE and
was simultaneously too influenced by game theory and Hayek’s views on economic
history. While this is interesting as a critique of the arguments contained in North (1990),
Dugger does not acknowledge fully the changes that occurred in North’s thinking between
the 1950s and the 1990s. In contrast to Dugger, Groenewegen, Kerstholt, and
Nagelkerke’s (1995) survey identifies three stages in North’s intellectual development.
This division is similar to that developed later in this paper, but they provide no discussion
of the links between North’s contributions to institutional economics and economic history
(Groenewegen, Kerstholt, and Nagelkerke 1995).
More recent interpretations of North within the ‘old’ institutionalist tradition also
provide useful insights (Fiori 2002; Fiani 2004). These pieces though have tended to focus
on just one aspect of North’s recent work.13 Fiori for instance focuses on the treatment of
the concept of gradualism in North’s more recent work (Fiori 2002). Fiani meanwhile
considers the role of the state and property rights within North’s work (Fiani 2004).
Vandenberg’s paper is more wide-ranging: he acknowledged that as late as 2002 there was
no detailed treatment of North’s work in relation to the two main branches within
institutionalism (Vandenberg 2002, p. 218). Accordingly, though he also recognizes the
place of economic history in North’s thinking, Vandenberg attempts to discuss North’s
thinking in relation to the OIE and NIE. He argues that North is too concerned with broad
canvas to be regarded as being a truly historical economist (Vandenberg 2002,
pp. 229 –230). In the section that follows it will be demonstrated that the historicity of
North’s thinking has altered over time.
book, The Rise of the Western World, co-written with Thomas (Davis and North 1971;
North and Thomas 1973). It was during this phase for example that North began to think in
earnest about the implications of applying TCE and public choice to historical topics
(North 1974a, 1977).
North in the third phase (1981 onwards) has moved even further away from the
cliometric views that he had expressed in the 1960s. North’s writings since the 1980s have
concentrated primarily on theorizing on the relationship between institutions and
economic development rather than on applying models to historical events (North 2005).
By way of further illustration, North’s Nobel lecture discussed the possibilities of creating
a model of adaptive efficiency using theoretical, historical and statistical insights (North
1994, p. 366). North during the 1980s also distanced his analysis from the public choice
position (North 1987). Even more recently, he has focused on the relationship between
rent creation and economic development in what he terms a ‘limited access order’ (LAO)
relative to an ‘open access order’ (OAO) (North, Wallis, Webb, and Weingast 2007). To
return to a theme already discussed in previous sections, North’s more recent work hence
represents a shift away from the earlier more deductive line of reasoning.
7 The changing contents of North’s Growth and Welfare in the American Past as
evidence of shifts in North’s thinking
A comparison and contrast of the contents of the three editions of his textbook, Growth
and Welfare in the American Past, provides a clear example of North’s changing views on
the relationship between economics and history. An analysis of the text provides a good
indicator of the noticeable shifts that have occurred. The different editions were published
in 1966, 1974 and 1983 respectively. Field has criticized the first edition of the textbook on
the grounds that it failed to adequately discuss the institutional development of the USA.
Field suggested this was indicative of North’s inconsistency (Field 1994, p. 135). Field did
not consider the developments that occurred in the next two editions, however. The
contents of all three editions of the book certainly demonstrate a shift from North I to II.
Nevertheless, the basic structure of all three editions was similar. The historical coverage
discussed in the respective editions is concerned with the period from the colonial period
to the (then) contemporary decades of the US economy.
The contrasts among the contents of the three editions become apparent on a closer
inspection. The most recognizable difference of the second two editions of the textbook
compared with the first (1966) edition, is that the 1970s and 1980s editions have a second
chapter on institutional economics and property rights, which is absent from the first
Journal of Economic Methodology 309
(North 1966, 1974b, pp. 15 – 26; North, Anderson, and Hill 1983, pp. 12– 23). A deeper
reading however reflects the increasingly important influence of public choice theories on
his work during the 1970s. The first edition’s concluding chapter decided that ‘poverty in
the midst of plenty’ was the problem of twentieth-century American development.
However, the influence of public choice and property rights economics became crucial in
the second two editions. Redistribution of income was therefore more favourably treated
in the first edition than in the subsequent editions (North 1966, pp. 189 –192).
The final chapter in the first edition focused on the issues of public expenditure growth
and what would now be termed sustainable development (North 1966, pp. 181 –192). The
second and third editions differed in their treatment of the same historical issues, however
(North 1974b, pp. 170 – 178; North et al. 1983, pp. 164 – 174). The second edition treated
government growth and the environment as discrete topics and, while it acknowledged the
existence of lobbying, it presented government intervention on balance as providing a
rational response to market failure (North 1974b, pp. 174– 176). In contrast, the third
edition noted that a government able to protect property rights and supply public goods
could equally encourage rent-seeking. This tension was described as providing a ‘modern
dilemma of political economy’ (North et al. 1983, p. 173). The change in tone between the
second and third editions could be interpreted as reflecting a shift in North’s view on the
balance between government and market failure. However, neither the second or third
edition has any extended discussion of the role of ideology, which is present in North’s
phase III period.16
More generally, as Table 2 indicates, there were changes in content across the three
editions. The changes therefore were not just between the first two editions written in the
1960s and the 1970s, but arguably more profound differences could be found between the
second and third editions.
Table 2. A comparison of the index contents of all three editions of North’s Growth and Welfare in
the American Past.
First edition Second edition Third edition
Incentives 0 0 22
Institutions/Institutional arrangements 0 5 16
Property rights 0 19 45
Transaction costs/information costs/ 0 4 6
enforcement costs/measurement costs
Technology/Technical advance 9 16 27
Innovation 6 8 10
Source: North, Growth and Welfare in the American Past: A New Economic History.
Note: Each separate category is counted in the index of the book; this leads to some double counting. For example
information costs and transaction costs.
310 G.A. Brownlow
underlying legal and economic institutional framework would nevertheless select the most
efficient organizational form (Alchian 1950). Moreover, as Vromen has illustrated,
Alchian as well as other writers such as Friedman and Becker have all interpreted the
ultimate claim to imply that tendencies exist for ‘selection’ regardless of whether firms are
profit maximizers.
The ‘evolutionary’ argument, associated with the ultimate claim, suggests that market
forces increase the opportunities of profitable firms, while the opportunities of less
profitable firms simultaneously decrease (Vromen 1995, p. 39). Vromen observed that the
claim implies that economists need not worry about psychology or decision-making within
organizations (Vromen 1995, pp. 39 –40). Vromen was critical of these implications: he
noted for instance that the perspective did not acknowledge or explain how a non-
maximizing rule of thumb could win out in an evolutionary process (Vromen 1995, p. 40).
Until the early 1980s, North was sympathetic to the claim; more recently, North has
instead stressed the likelihood of inefficient institutions persisting.17 Following some
well-aimed criticisms, North began to shift his theories away from the view that a selection
mechanism ensured that institutional change was always beneficial (North 1981;
Vandenberg 2002, p. 229).
In the 1990s, he took this line of argument even further by developing an explanation
for the persistence of institutional inefficiency. By 1990, North argued that a process
analogous to technological ‘lock in’ could indeed force a country’s institutional framework
along an inefficient path (North 1990, pp. 93 –100). While he accepted that organizations
would become better at exploiting a property rights regime he noted that this did not equate
to economic progress (Vandenberg 2002, p. 229). Furthermore, and especially in the last
decade, North has made much of cognitive aspects of the economic process (North 2003;
Libecap et al. 2008, p. 211). He has gone as far as to claim that cognitive science is a vital
element in understanding economic processes over time (North 2003). Consequently,
‘micromotives’, based on cognition and beliefs, have become an essential aspect of his
explanation of ‘macrobehaviour’. This emphasis provides a further break from the ultimate
claim in his more recent work.
The role of technical change in economic history is another important topic on which
North’s arguments have also changed. Table 2 indicates that North increasingly relied on
institutional relative to technological factors in his textbook account of American
economic history. Field in 1981 argued that The Rise of the Western World downplayed the
role of technical change in pre-1500 Europe; it did not explicitly outline any alternative
theory of institutional change (North and Thomas 1973; Field 1981, p. 192). In the wake of
Field’s article, North was arguably more careful both to elaborate the historical role
of technical change and to integrate this discussion with a model of institutional
transformation. The Industrial Revolution, rather than representing a wave of gadgets, was
in his view an organizational revolution based on the putting out system that paved the way
for technical progress (North 1981, pp. 166 –168; Milonakis and Fine 2007, p. 36).
The later articles co-authored with John Wallis have focused on integrating the study of
technical change with institutional change (Wallis and North 1986; North and Wallis
1994). It is noteworthy that North did not resort to using the empirical branch of the TCE
literature, which began in the 1980s, to measure transaction costs (Williamson 2000,
p. 607).18 North responded to this need to synthesize technical and institutional
determinants of transaction costs by developing instead his notion of the ‘transaction
sector’ (Wallis and North 1986; North and Wallis 1994). North in his original article with
Wallis argued that technical change was one of the three sources of transaction cost
reduction (and transaction sector growth), along with the growth of impersonal exchange
Journal of Economic Methodology 311
and governmental growth, in the American economy between 1870 and 1970 (Wallis and
North 1986; Engelbrecht 1997, pp. 279– 282). This was the first attempt at empirically
defining and measuring transaction costs at an economy-wide level (Engelbrecht 1997,
p. 272). In the subsequent article, North argued that institutional and technological factors
combined to determine total output costs in an industry (North and Wallis 1994).
Furthermore, the paper argued that the alterations of these variables in one industry could
spread throughout an economy. According to North and Wallis, such a process explains
much of economic growth (North and Wallis 1994, pp. 618 – 622).
North’s transaction sector papers exemplify Kindleberger’s ‘historical economics’
approach. In the 1986 paper an explanation of transaction sector growth in the United States
was derived from an analysis of the American evidence rather than the empirical and
historical conclusions being derived from the application of a universal model to the
historical evidence (Engelbrecht 1997). The 1986 paper therefore is far from an example of
the deductivist cliometric approach developed by North and others during the 1960s. The
1994 paper developed and presented the transaction sector findings in a simple diagrammatic
and mathematical form, which was easier to integrate with Williamson’s TCE approach.
However, North and Wallis were critical of aspects of the TCE (North and Wallis 1994,
p. 615; Engelbrecht 1997, p. 283). It should also be recognized that North’s practice in the
case of researching the transaction sector is similar to the ‘older’ institutionalism’s approach
to the study of pricing. Hodgson observed that pricing studies within the ‘old’ institutionalist
tradition proceed initially from an investigation of how prices are formed in a specific
context. Only once this investigation is accomplished is it followed by the formulation of a
pricing theory that is specific to the institution under investigation (Hodgson 1998, p. 170).
North’s analysis of the transaction sector is merely one example of a more general shift
towards historical economics. As Hodgson argues, such a methodological approach tends
to lend itself to historically and institutionally specific studies rather than general theories
(Hodgson 1998, p. 170). In line with Hodgson’s analysis, it has been noted that: ‘Douglass
North has gradually moved away from a predominantly deductive explanatory strategy to
one that is more clearly characterized by a back and forth between empirically established
relationships and explanatory models carefully designed to do the job of explaining’
(Groenewegen et al. 1995, p. 472). The similarity between the methodological practice of
‘historical economics’ and old institutionalism, as outlined by Kindleberger and Hodgson
respectively, with that of North’s later work leads to the conclusion that North’s earliest
work can be most adequately understood as following the (then) contemporary
neoclassical practice. In contrast, his more recent research represents a convergence with
the older institutionalism.
9 Conclusions
An apparent anomaly can be identified between the greater acceptance of North’s work in
the 1980s and 1990s and the unorthodox content of his research. As North became a more
mainstream figure (as measured in terms of prizes, awards and citations given to his work by
the international economics profession) the contents of North’s publications became more
‘heterodox’ (Vandenberg 2002, p. 232). The tension can most easily be resolved by
acknowledging that the neoclassical economics ‘mainstream’ has shifted since the 1980s
(Davis 2006, 2008; Hodgson 2007). Even the very usefulness of the term ‘neoclassical’ has
been questioned (Colander 2000). Cliometrics emergence in the 1960s occurred prior to the
fracturing of the edifice of general equilibrium analysis and its replacement in the academic
mainstream with a range of approaches including game theory, experimental and
312 G.A. Brownlow
behavioural analysis (Hodgson 2007, pp. 7 –8; O’Brien 2008, p. 441). The trend towards
these newer approaches has arguably increased the acceptance of institutional and
evolutionary perspectives within the economics profession (Hodgson 2007).
The relationship between theoretical innovation in economics and the reaction of
economic historians to these innovations is one long identified by North (North 1965,
1976; Libecap et al. 2008). It is a relationship that other economic historians have
subsequently identified and discussed (Williamson 1991, p. 25; Crafts 2000, pp. 11 – 12;
O’Brien 2008). Overall the shift in the mainstream of economics in recent decades
provides a methodological explanation of the shift in mainstream economic history as well
as contributing to an explanation of North’s intellectual development. Old theoretical
certainties, associated with the general equilibrium framework, which had underpinned
much of cliometrics written in the 1960s and 1970s have been surpassed by a literature that
has been influenced by theoretical insights taken from newer areas of economics including
the new industrial economics, new international economics and new economic geography
(Crafts 2000, p. 12).19
To take just one example identified by North, Greif’s institutionalist economic history,
with its reliance on game theoretic tools, represents the extent to which economic history
has altered as general equilibrium has been eclipsed as a theoretical framework (Greif
2006; Libecap et al. 2008, p. 210). Within economic history moreover, the range of
variables that have become fair game in explaining the economic past have increased
beyond those found previously within the general equilibrium literature. Fogel’s more
recent work on nutrition and economic development and the biological approach of Clark
provide two such examples (Fogel 2004; Clark 2007). Likewise, Mokyr’s work on
technological inertia and development, McCloskey’s work on the role of ‘Bourgeois
virtues’ in the Industrial Revolution and the recent work on the political economy of
nineteenth-century globalization could all be held up as further examples of this trend
(Mokyr 1992; McCloskey 2006; Findlay and O’Rourke 2007). North is thus far from alone
among previously ‘new’ economic historians that have turned towards a more eclectic
choice of explanatory variables.
As the evidence presented in this paper indicates however, where North is unique is
that his recent writings have taken his framework towards approaches close to the older
tradition within institutionalism. Douglass North is an important thinker for
methodologists to examine not least because the intellectual evolution in his treatment
of the relationship between economics and history provides a case study in the construction
of a methodological account of what economists actually do. An even more complete
picture could be provided in future research by comparing and contrasting North’s
methodological development with the analogous practices of other institutional
economists and economic historians.
Notes
1. It has been suggested by some authors that the term ‘new economic history’ was first coined by
North, though others disagree (Murphy 1970, p. 15; Williamson 1991, p. 16; Goldin 1995,
p. 193). Stan Reiter, a mathematical economist at Purdue University, devised the nickname
‘cliometrics’ (Williamson 1991, pp. 15 – 16).
2. The definition of neoclassical used in this paper, and as far as possible used in the subsequent
discussion, is taken from Hodgson (1998, p. 169).
3. For the claim that a newer imperialism has emerged, which emphasizes market (especially
informational) imperfections see Fine and Milonakis (2003, p. 547).
Journal of Economic Methodology 313
4. Coase’s transaction cost insight dated back to 1937 and Alchian’s ‘evolutionary’ perspective
could be traced back to 1950. Yet it was only with the emergence of the NIE in the 1970s that
these papers became influential (Coase 1937; Alchian 1950; Williamson 2000).
5. For an alternative to Williamson’s assessment of North’s contribution to the study of culture
see Khalil (2007).
6. Schumpeter observed:
What distinguishes the ‘scientific’ economist from all the other people who think, talk
and write about economic topics is a command of techniques that we class under three
heads: history, statistics, and ‘theory’. The three together make up what we shall call
‘Economic Analysis’. (Schumpeter 1954, p. 12)
It should be noted that Schumpeter changed his mind during the writing of History of Economic
Analysis and later in the same discussion added ‘economic sociology’ as a ‘fourth fundamental
field’ (Schumpeter 1954, pp. 21, 1190; Swedberg 1991, p. 282 fn 65).
7. However, the parallel should not be stretched too far. North has not had what Schumpeter
would have considered a consistent pre-analytic vision of what the world is like.
8. A similar line of argument can be detected in Hodgson (1995, p. 297). Likewise, see Cesarano
(2006, p. 448).
9. For an influential example of a methodological survey of the NEH that focuses on the supposed
superiority of deduction over induction see Temin (1973).
10. In fairness, Rutherford in a later (2001) survey of the relationship between the so-called old
institutional economics (OIE) and the NIE more clearly outlines North’s shift away from
neoclassicism towards OIE (2001, p. 188). However, Rutherford’s later article still does not
discuss in any significant detail the relationship between economic history and institutional
economics that can be found in North’s work.
11. By way of illustration, none of North’s books or articles is even mentioned in Vromen’s
bibliography. In contrast, the bibliography provides references to 10 books or articles by Oliver
Williamson. Armen Alchian and Ronald Coase get five items mentioned each.
12. In their downplaying of North’s eclecticism and focus on his supposed commitment to
neoclassicism and methodological individualism, Milonakis and Fine missed some important
observations (p. 54). For example, it should be noted that in their critique of North’s analysis of
transaction costs, they ignore the later transaction sector papers and their relationship to TCE
(Milonakis and Fine 2007, pp. 48 – 53).
13. Fiani does however refer (2004, pp. 1014–1016) to the treatment of the state and property rights
in North and Thomas (1973) and North (1981). However, the other five pieces cited in the article,
which account for the bulk of Fiani’s analysis, were all written in the period 1989–1999.
14. There is a very intemperate tone to the 1965 paper. Even Conrad and Meyer’s pioneering papers
were deemed as not going far enough in their application of economics (North 1965, p. 91).
15. This pedagogical approach led to the production of North’s paper on ‘Location Theory and
Regional Economic Growth’ (North 1955; Hughes 1982, p. 9).
16. The influence of the co-authors in the third edition should also be considered as an additional
explanation of the difference in tone and perspective from the first two.
17. North’s changing explanation of the economics of American slavery provides clear evidence of a
shift in his views on institutional efficiency as well as the widening of his conceptual tools.
Compare his earlier brief statements on the profitability of slavery, such as ‘there is no possibility
that slavery was economically not viable’ (1965, p. 91) with North’s later comments on the same
topic in which ideology plays an important role distinct from profitability (1990, p. 85).
18. Klaes contrasts Wallis and North’s attempt at inferring macroeconomic transaction costs with
those approaches that follow Williamson TCE. Klaes argues there are problems with both
approaches (Klaes 2008, p. 366).
19. For a critical perspective on these developments see O’Brien (2008, p. 441).
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