Understanding the Process of Economic Change

200 Pages·2005·0.913 MB·English

by  North, Douglass Cecil

Understanding the Process of Economic Change
THEPRINCETONECONOMICHISTORYOFTHEWESTERNWORLD
editedbyJoelMokyr
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TheStricturesofInheritance:TheDutchEconomyintheNineteenthCentury,
byJanLuitenvanZandenandArthurvanRiel
UnderstandingtheProcessofEconomicChange,
byDouglassC.North
Understanding the Process
of Economic Change
Douglass C. North
P R I N C E T O N U N I V E R S I T Y P R E S S
P R I N C E T O N A N D O X F O R D
Copyright©2005byPrincetonUniversityPress
PublishedbyPrincetonUniversityPress,41WilliamStreet,
Princeton,NewJersey08540
IntheUnitedKingdom:PrincetonUniversityPress,
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AllRightsReserved
LibraryofCongressCataloging-in-PublicationData
North,DouglassCecil.
Understandingtheprocessofeconomicchange/DouglassC.North.
p. cm. —(PrincetoneconomichistoryoftheWesternWorld)
Includesbibliographicalreferencesandindex.
ISBN0-691-11805-1(alk.paper)
1.Evolutionaryeconomics.2.Economics—Sociologicalaspects.
3.Institutionaleconomics.I.Title.II.Series.
HB97.3.N67 2005
330.1—dc22 2004049131
BritishLibraryCataloging-in-PublicationDataisavailable
ThisbookhasbeencomposedinMinionText
Printedonacid-freepaper.∞
pup.princeton.edu
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Contents
Preface vii
CHAPTER ONE
An Outline of the Process of Economic Change 1
PART I: THE ISSUES INVOLVED IN UNDERSTANDING
ECONOMIC CHANGE 9
INTRODUCTION 11
CHAPTER TWO
Uncertainty in a Non-ergodic World 13
CHAPTER THREE
Belief Systems, Culture, and Cognitive Science 23
CHAPTER FOUR
Consciousness and Human Intentionality 38
CHAPTER FIVE
The Scaffolds Humans Erect 48
CHAPTER SIX
Taking Stock 65
PART II: THE ROAD AHEAD 81
INTRODUCTION 83
CHAPTER SEVEN
The Evolving Human Environment 87
CHAPTER EIGHT
The Sources of Order and Disorder 103
CHAPTER NINE
Getting It Right and Getting It Wrong 116
v
CONTENTS
CHAPTER TEN
The Rise of the Western World 127
CHAPTER ELEVEN
The Rise and Fall of the Soviet Union 146
CHAPTER TWELVE
Improving Economic Performance 155
CHAPTER THIRTEEN
Where Are We Going? 166
Bibliography 171
Index 183
vi
Preface
UNDERSTANDING the process of economic change would enable us to
account for the diverse performance of economies, past and present.
We would be able to account for the long history of sustained growth
of the United States and western Europe, the spectacular rise and de-
miseoftheSovietUnion,forthecontrastingperformancesoftherapid
economicgrowthofTaiwanandSouthKoreaandthedismalrecordof
sub-Saharan Africa economies, and the contrasting evolution of Latin
America and of North America. And beyond understanding the past,
suchknowledgeisthekeytoimprovingtheperformanceofeconomies
inthepresentandfuture.Arealunderstandingofhoweconomiesgrow
unlocks the door to greater human well-being and to a reduction in
misery and abject poverty.
The economic paradigm—neo-classical theory—was not created to
explain the process of economic change. We live in an uncertain and
everchangingworldthatiscontinuallyevolvinginnewandnovelways.
Standardtheoriesareoflittlehelpinthiscontext.Attemptingtounder-
stand economic, political, and social change (and one cannot grasp
change in only one without the others) requires a fundamental re-
castingofthewaywethink.Canwedevelopadynamictheoryofchange
comparable in elegance to general equilibrium theory? The answer is
probablynot.Butifwecanachieveanunderstandingoftheunderlying
processofchangethenwecandevelopsomewhatmorelimitedhypoth-
esesaboutchangethatcanenormouslyimprovetheusefulnessofsocial
science theory in confronting human problems.
Thisstudyisanextension—averysubstantialextension—ofthenew
institutional economics. A brief review of my earlier work on institu-
tional change will provide the proper setting for that extension. From
myinitialstudieswithLanceDavis(DavisandNorth,1971)andRobert
Thomas (North and Thomas, 1973), I have placed institutions at the
center of understanding economies because they are the incentive
structure of economies. I also have focused on how economies that
were composed of institutions that provided incentives for stagnation
vii
PREFACE
and decline could persist. The underlying source of this persistence
hadtobefeaturesofthehumanenvironmentandofthewayshumans
interpretedthatenvironment.WhatIdidnotconsiderinearlierstudies
was the character of societal change and the way humans understand
and act upon that understanding of societal change.
Economic change is a process, and in this book I shall describe the
nature of that process. In contrast to Darwinian evolutionary theory,
thekeytohumanevolutionarychangeistheintentionalityoftheplay-
ers. The selection mechanisms in Darwinian evolutionary theory are
not informed by beliefs about the eventual consequences. In contrast,
humanevolutionisguidedbytheperceptionsoftheplayers;choices—
decisions—are made in the light of those perceptions with the intent
ofproducingoutcomesdownstreamthatwillreduceuncertaintyofthe
organizations—political, economic, and social—in pursuit of their
goals. Economic change, therefore, is for the most part a deliberate
processshapedbytheperceptionsoftheactorsabouttheconsequences
oftheiractions.Theperceptionscomefromthebeliefsoftheplayers—
thetheoriestheyhaveabouttheconsequencesoftheiractions—beliefs
that are typically blended with their preferences.
But just how do humans come to understand their environment?
Theexplanationsthattheydeveloparementalconstructsderivedfrom
experiences, contemporary and historical. Human learning is more
than the accumulation of the experiences of an individual over a life-
time.Itisalsothecumulativeexperiencesofpastgenerations.Thecu-
mulative learning of a society embodied in language, human memory,
and symbol storage systems includes beliefs, myths, ways of doing
things that make up the culture of a society. Culture not only deter-
minessocietalperformanceatamomentoftimebut,throughtheway
in which its scaffolding constrains the players, contributes to the pro-
cessofchangethroughtime.Thefocusofourattention,therefore,must
beonhumanlearning—onwhatislearnedandhowitissharedamong
themembersofasocietyandontheincrementalprocessbywhichthe
beliefsandpreferenceschange,andonthewayinwhichtheyshapethe
performance of economies through time.
Partofthescaffoldinghumanserectisanevolutionaryconsequence
of successful mutations and is therefore a part of the genetic architec-
ture of humans, such as innate cooperation within small interacting
viii
PREFACE
groups;partisaconsequenceofculturalevolutionsuchasthedevelop-
mentofinstitutionstofavorlargergroupcooperation.Justwhatisthe
mix between the genetic architecture and the cultural heritage is in
dispute. Evolutionary psychologists have stressed the genetic compo-
nentinthescaffoldingprocessattheexpenseoftheroleofthecultural
heritage.Certainuniversalsinhumanmentalconstructssuchassuper-
naturalexplanations—religionsbroadly construed—suggestthatthese
are congenial to the underlying inference structure of all humans.
Equally, the immense variation in the performance characteristics of
societies makes clear that the cultural component of the scaffolding
thathumanserectisalsocentraltotheperformanceofeconomiesand
polities over time.
The wide gap throughout history between intentions and outcomes
reflects the persistent tension between the scaffolds that humans erect
tounderstandthehumanlandscapeandtheeverchanging“reality”of
thatlandscape.Thattensionanditsimplicationsforthehumancondi-
tion both past and present, and indeed future, is the subject of this
book. Part I explores the dimensions of the challenge involved in ac-
quiring an in-depth study of the process of economic change. Part II
takes us some distance along the trail toward a deeper understanding.
Wecannotusefullymodeleconomicchangeuntilweunderstandthe
process. A good model entails a prior comprehension of the complex
factorsmakingupthatprocessandthenadeliberatesimplifyingtothe
crucial elements. Understanding is a necessary prerequisite missing in
theeconomist’srushtomodeleconomicgrowthandchange.Wearea
long way from completely understanding the process. Until we do, we
willhaveverylittlesuccessindeliberatelyimprovingeconomicperfor-
mance. What follows is an attempt to improve our understanding.
Thisstudyhasbeenalongtimeinprocess—morethantenyears—and
could only have developed with the generous help of many organiza-
tions and individuals.
BothWashingtonUniversity,myprincipal location,andtheHoover
InstitutionatStanford,mywinterhome,haveprovidedhospitableset-
tings for research. The Mercatus Center at George Mason University
andtheStanfordInstituteforInternationalStudieshavehostedconfer-
encesfocusedonissuesofthisbook,andIamdeeplyindebtedtoPaul
ix