Understanding the Process of Economic Change

Douglass C. North is a leader of the transaction cost revolution in economics. His work contains much that is highly abstract and theoretical and he tends to pack a lot into his paragraphs, so his works are not light reading.

That being said, they remain deeply informative reading. Understanding the Process of Economic Change represents further development of his interest in institutions and economic change—Notth very much is about putting the dimension of time back into economic analysis. It also represents his grappling with the discoveries of modern cognitive science and how they might be incorporated into economics.

The last is much more an attempt to point the way rather than a satisfactory analysis. And, though North commends Barzel’s work, I am not sure his approach to institutions fully absorbs the implications of transaction cost analysis in terms of transactions and patterns of transactions being the subject of analysis.

The sections I enjoyed the most are Part II of the book when he discusses specific historical processes. North points out what has to be a key factor in understanding European success—the sheer diversity of states and policy choices. Selection processes had more to work on, so were more likely to achieve striking outcomes.

His discussion of the collapse of the Soviet Union I found particularly enlightening. Even though his language continues to be a bit challenging at times:

Adaptive efficiency entails an institutional structure that in the face of the ubiquitous uncertainties of a non-ergodic world will flexibly try various alternatives to deal with novel problems that continue to emerge over time. In turn this institutional structure entails a belief structure that will encourage and permit experimentation and equally will wipe out failures. The Soviet Union represented the very antithesis of such an approach (p.154).

Compare Milton Friedman making much the same point:

I have always said the essence of a free-market system, which tends to be called a profit-and-loss system, is that the loss component is more important than the profit component. You need the discipline of the loss in order to keep the system going.

North also exemplifies what many other social science and humanities academics find highly irritating about economists. A persistent tendency to see the West in general as a successful civilisation (as he discusses in his chapter on The Rise of the West) and the United States in particular as a successful society (as North does, particularly with his compare-and-contrast with Latin America in his chapter on Sources of Order and Disorder). Which is, of course, just wrong. North, like many economists, gets excited about things as tending to get better (with more knowledge, longer lives, higher income, etc: his chapter on The Evolving Human Environment is full of such data). And economists tend to like markets and private property and think they might have something to do with the aforementioned—even worse.

North concludes with a discussion of the importance on genuinely attempting to grapple with what makes societies work better or worse. A difficult book at times, but also often an enlightening one.