Douglass Cecil North (November 5, 1920 – November 23, 2015) was an American economist known for his work in economic history. Along with Robert Fogel, he received the Nobel Memorial Prize in Economic Sciences in 1993. 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."
North helped popularize cliometrics and was later an influential figure in New Institutional Economics, which emphasizes the impact of institutions on economic behaviors and outcomes. North argued, "Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline." Rational and wealth-maximizing individuals lack complete information and have difficulties monitoring and enforcing agreements. Institutions can provide information and reduce transaction costs, thus encouraging economic activity.
Early life and education 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, Ontario, Canada, in Lausanne, Switzerland, in New York City, and in Wallingford, Connecticut.
North was educated at Ashbury College in Ottawa and the Choate School in Wallingford. He was accepted at Harvard at the same time that his father became the head of MetLife on the West Coast, so North chose instead to attend the University of California, Berkeley. During his time at Berkeley, North was a member of Chi Phi fraternity. In 1942, he graduated with a general B.A. in the 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. That same year, he entered the US Merchant Marine Academy, graduated a year later and went to sea for three years as a deck officer.
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.Breit, William and Barry T. Hirsch. (2004) Lives of the Laureates, 4th ed. Cambridge, Mass: The MIT Press.
North returned to UC Berkeley, where he obtained a Ph.D. degree in economics in 1952 under the guidance of Melvin Moses Knight. He subsequently began his career as an assistant professor at the University of Washington.
Academic career
From 1951 to 1983, North taught economics at the University of Washington, where he was an assistant professor till 1956, an associate professor from 1956 to 1960, and a full professor till 1983; he also chaired the economics department at Washington from 1967 to 1979. In 1960, North became co-editor of the Journal of Economic History, where he helped popularise cliometrics. 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 St. Louis in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics (where he also directed the Center for Political Economy from 1984 to 1990). He also served as the Bartlett Burnap Senior Fellow at the Hoover Institution at Stanford University.North's Profile, Hoover Institution
In 1991, he became the first economic historian to win the John R. Commons Award,John R. Commons Award, Omicron Delta Epsilon which was established by the International Honors Society for Economics in 1965.
A collection of North's papers is housed at the Rubenstein Library at Duke University.
Research agenda Along with Ronald Coase and Oliver Williamson, he helped found the International Society for the New Institutional Economics (ISNIE)Ménard, Claude and Shirley, Mary M. (2014): "The Contribution of Douglass North to New Institutional Economics" in Institutions, Property Rights, and Economic Growth. Sebastian Galiani and Itai Sened (eds.). Cambridge University Press. p. 19. which held its first meeting in St. Louis in 1997. His research included property rights, transaction costs, the institutional basis of markets, and economic organization in history as well as economic development in developing countries.
North served as an expert for the Copenhagen Consensus and as an advisor to governments around the world. He was engaged in research (with John J. Wallis of the University of Maryland 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 Economists for Peace and Security, and a special adviser to the non-profit organization Vipani.
Publications
Institutions In 1991 Douglass North published a paper, titled Institutions, in the Journal of Economic Perspectives. This paper summarized much of his earlier research relating to economic and institutional change. 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.
North defined institutions as the "rules of the game" that structure human interaction, distinguishing between formal institutions such as laws, constitutions, and property rights, and informal institutions such as social norms and cultural practices. These institutions shape the incentives faced by individuals and organizations, influencing economic behavior and long-term outcomes. North argued that effective institutions reduce transaction costs by creating stability and predictability, allowing markets to function more efficiently. He also emphasized that institutions are not always efficient and may persist even when they hinder economic growth due to historical constraints and political incentives. This idea is related to path dependence, in which past institutional choices limit future possibilities and can lead to the persistence of suboptimal systems. North's framework has been widely applied in development economics to explain differences in economic performances across countries. These ideas provide the foundation for North's analysis of how societies evolve economically over time.
Section 2 of North's 1991 paper describes the economic development of societies as occurring in stages:
North 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. However, this confined market reduces the potential of specialization and increases production costs. 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". With increased specialization, production costs are reduced and can justify higher transaction costs.
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 transactional cost problem 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 transactional cost problem is the enforcement of contracts. 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 (and the protection of associated 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."
North enumerates three primitive types of exchange: Tribal Society, which "relies on a dense social network".(Colson 1974, p. 59) Bazaars, which have "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 than large urban societies.
North's paper concludes with a few intriguing questions which his paper 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.