Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
North.1991.Institution

North.1991.Institution

Ratings: (0)|Views: 20 |Likes:
Published by littleconspirator
Douglass C. North's 1991 paper entitled "Institutions".
Douglass C. North's 1991 paper entitled "Institutions".

More info:

Published by: littleconspirator on Apr 05, 2012
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

06/03/2013

pdf

text

original

 
American Economic Association
InstitutionsAuthor(s): Douglass C. NorthReviewed work(s):Source:
The Journal of Economic Perspectives,
Vol. 5, No. 1 (Winter, 1991), pp. 97-112Published by:
Stable URL:
Accessed: 23/03/2012 02:56
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
.
http://www.jstor.org/page/info/about/policies/terms.jspJSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.
 American Economic Association
is collaborating with JSTOR to digitize, preserve and extend access to
The Journal of Economic Perspectives.
http://www.jstor.org
 
Journal ofEconomicPerspectives-Volume,Number1-Winter 1991-Pages 97-112
Institutions
DouglassC. North
Institutions
arethehumanly devised constraints that structurepolitical,
economicandsocialinteraction.Theyconsistofboth informal constraints(sanctions,taboos, customs,traditions,and codes ofconduct),and formalrules(constitutions, laws, property rights). Throughouthistory,institutionshavebeendevised byhumanbeingsto create order and reduceuncertaintyinexchange. Togetherwiththestandardconstraintsofeconomicstheydefine thechoicesetandtherefore determinetransaction andproductioncostsand hencetheprofitabilityandfeasibilityofengagingin economicactivity. Theyevolveincrementally, connectingthepastwith thepresentand thefuture; historyinconsequenceislargelyastoryofinstitutionalevolution in which thehistoricalperformanceofeconomies canonlybeunderstoodasapartofasequentialstory.Institutionsprovidetheincentive structureof aneconomy;as thatstructureevolves,itshapesthe direction ofeconomicchangetowardsgrowth,stagnation,or decline.InthisessayIintendtoelaborate on the role ofinstitutionsin theperformanceofeconomies and illustratemy analysisfromeconomichistory.What makesitnecessarytoconstrain human interaction withinstitutions?The issuecan bemostsuccinctly summarized in a gametheoretic context.Wealth-maximizingindividualswillusuallyfindit worthwhileto cooperate withotherplayerswhen theplayisrepeated,whenthey possesscomplete informa-tion about the otherplayer's past performance, and whenthere are smallnumbersofplayers.Butturn thegame upsidedown.Cooperation is difficult tosustainwhenthegameisnotrepeated (orthereisanendgame), wheninformation on the otherplayers is lacking, and when thereare large numbersofplayers.*DouglassC. North is LuceProfessorofLawandLibertyand Directorofthe Center nPoliticalEconomy, WashingtonUniversity,St.Louis,Missouri.
 
98 Journal of EconomicPerspectivesThese polar extremes reflect contrasting economic settings in reallife.There are many examples of simple exchange institutions that permit lowcosttransacting under the former conditions. But institutions that permit lowcosttransacting and producingina world of specialization and division of laborrequire solving the problems of human cooperation under the latter conditions.It takes resources to define and enforce exchange agreements. Evenifeveryonehadthe same objective function (like maximizing the firm's profits),transacting would take substantial resources; but in the context of individualwealth-maximizing behavior and asymmetric information about the valuableattributes of whatisbeing exchanged (or the performance of agents), transac-tion costsarea critical determinant of economicperformance. Institutionsandthe effectivenessofenforcement (togetherwith thetechnology employed)determinethecostoftransacting.Effective institutions raise the benefitsofcooperativesolutions or the costs ofdefection,tousegametheoreticterms.Intransactioncostterms,institutionsreduce transactionandproduction costs perexchange sothat thepotential gainsfromtrade are realizeable. Bothpoliticaland economic institutions are essentialpartsof aneffective institutional matrix.The major focus of the literature on institutions and transaction costs hasbeen on institutions as efficientsolutionstoproblemsoforganizationinacompetitiveframework(Williamson, 1975; 1985).Thus marketexchange,fran-chising,or verticalintegrationareconceivedinthisliteratureasefficientsolutions to thecomplex problems confronting entrepreneursunder variouscompetitiveconditions. Valuableas this workhasbeen,such anapproachassumes away thecentral concernof thisessay:toexplainthe variedperfor-mance ofeconomiesboth over time andinthe current world.How does aneconomyachievetheefficient, competitivemarketsassumedintheforegoing approach?Theformal economic constraints orpropertyrightsarespecifiedandenforcedby political institutions,and the literaturesimplytakesthoseasagiven.But economichistoryisoverwhelminglyastoryofeconomiesthat failed toproduceasetofeconomicrulesofthegame(withenforcement)thatinduce sustained economicgrowth.Thecentral issueofeconomichistoryand ofeconomicdevelopmentis to account for the evolutionofpoliticaland economic institutions that createaneconomicenvironment thatinducesincreasing productivity.
InstitutionstoCapturethe Gainsfrom Trade
Manyreaderswillbeatleast somewhatfamiliarwiththe ideaof economichistoryover time as a series ofstagedstories.Theearliesteconomies arethoughtofaslocalexchangewithin avillage (orevenwithin asimplehuntingandgathering society). Gradually,tradeexpands beyondthevillage:firsttotheregion, perhapsas a bazaar-likeeconomy;thentolonger distances,throughparticularcaravanorshipping routes;andeventuallytomuchof theworld.At

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->