------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (February 2005)
Douglass C. North, _Understanding the Process of Economic Change_.
Princeton: Princeton University Press, 2005. xi + 187 pp.
$29.95/=A318.95 (hardcover), ISBN: 0-691-11805-1.
Reviewed for EH.NET by Alexander J. Field, Department of Economics,
Santa Clara University.
Douglass North's latest book addresses fundamental issues in
understanding change and variation in economic performance. Early
North (Davis and North, 1971; North and Thomas, 1973) treated
institutional structures as epiphenomenal -- largely reflective of
resource endowments or available technologies. In later books (North
1981, 1990) his views evolved, acknowledging that some persisting
rule structures might be dysfunctional, and that ideologies and
social norms could play a role in explaining such outcomes. In this,
his most recent book, he delves deeper, exploring the cognitive
processes whereby individuals construct mental models of the world,
and how such processes can, in the aggregate, influence economic
performance.
Those familiar with North's prior work on institutions will find that
this contribution shares many characteristics. Although critical of
economics as it is practiced, he never engages in a jeremiad. North
wants to point the way forward rather than become mired in criticism,
and as befits a Nobel Prize winner in economics, he has recruited and
absorbed the ideas of many prominent scholars, both inside and
outside the discipline. As in the earlier works, there is little
original research reported here. This is a work of synthesis.
The book has two parts. The first addresses "Issues Involved in
Understanding Economic Change," and the second, presumably with no
objections from Bill Gates, "The Road Ahead." On the dustcover Barry
Weingast describes the book as "vintage North." When we refer to a
vintage automobile, or vintage wine, we often refer to something with
a provenance at least two or three decades earlier, and this
characterization is most applicable to the second part of the book.
For example, chapter 10, "The Rise of the Western World," is largely
derivative of arguments first advanced in the early 1970s. But Part I
of the book contains generally newer material, and for those who have
not been following the latest developments in North's thinking, this
is a good place to catch up.
More so than in North's writings from the 1970s, the claims of the
book are modest. In the preface the author asks rhetorically whether
"we can develop a dynamic theory of change" and answers "probably
not" (p. vii), claiming as his objective the old German objective of
_verstehen_, or "understanding," a word which also, of course,
figures prominently in the book's title. But "understanding" is not
enough if we truly aspire to do social science. "Understanding" opens
the door to "just so" stories that may be comforting and enjoyable to
read, but have the appearance of giving us more insight than they do.
One searches in vain in this book for hypotheses that could be tested
against historical or contemporary data, and although North has, I
think, situated the play in the right arena, he has done little to
move the explanatory ball forward. Thus the book is ultimately
disappointing for those seriously interested in these issues.
Let me briefly summarize what I see as our current state of
knowledge. First, there are a number of universal features of human
societies which almost certainly have a genetic substrate, either in
terms of innate behavioral predispositions or differential
preparedness to learn in certain directions. North seems to be on the
same page here, acknowledging, for example that our abilities to
cooperate in small groups, and our receptivity to
religious/supernatural explanations have a biological basis (pp.
viii-ix, 28-29, 45, 72). As is probably appropriate for a book of
this scope, he avoids discussion of the processes or mechanisms of
natural selection that would have been necessary for such
predispositions to take hold.
Secondly, there is substantial variation in human culture, even where
available technologies and resource endowments are similar, and such
variation is consequential for economic performance. Third -- and
this for North is the new ground broken here -- this variation
reflects the consequences of different learning or acculturation,
which results in different groups of people having different "mental
models" of the world, particularly the world of human relationships.
Although I would probably choose somewhat different vocabulary from
North, I'm with him on most of this. But for me, the frustrating
feature of this book is that it does not really advance the
discussion beyond this framing of the problem. Some of this is
reflected in assertions that lack adequate substantiation. For
example, a theme reiterated at several points is that "Problems posed
by the transition of a belief system from one constructed to deal
with the physical environment to one constructed to confront the
complex problems of the human environment are at the core of the
problems of economic development ..." (pp. 44, see also p. 71). Are
they? It's not at all clear that the problems of navigating the human
environment are fundamentally different from what they were two
millennia ago or even earlier, one of the reasons students of
politics and philosophy can still read with profit the writings of
classical Greeks, or fifteenth-century Italians.
Another problematic area is the treatment of the cognitive sciences.
North acknowledges lack of competence to choose among the various
models of learning that have been set forth (p. 24), although he does
seem to favor proponents of the neural networks or connectionist
program. This approach attracted a great deal of excitement in the
1980s, but the enthusiasm for it, like that for the earlier AI
(artificial intelligence) program, is now waning in many circles. If
North is right about the importance of the formation of mental models
in understanding economic change, we will have to be more definitive
in making judgments about which seem to be the most promising lines
of inquiry, and how specifically they can help us understand economic
and political change.
North's identification of the key issues that confront us is
valuable, although some of the logic borders on the circular. For
example, the "foundation of the study" (p. 36) seems to be the claim
that societies that have successfully addressed big variations in
their environment are likely to be able to successfully address big
variations in their environment in the future, and therefore are
likely to survive and prosper. Compared to earlier formulations there
is novelty in identifying the mechanism for more flexible response in
a population's diversity of mental models of human interaction; this
relates closely to the subsequent discussion of the benefits and
costs of political conformity (p. 42) which is in turn linked to the
role of political fragmentation in encouraging growth in the West
that was prominently featured in North and Thomas (1973). But of
course this is one of those statements that is true except when it is
not, that is, when a previously diverse society becomes more
ideologically conformist and less flexible. If we are to make
progress, we are going to need to do better than simply offer ex post
"understanding" of why such a change takes place.
Here is my most fundamental area of disagreement. North sees
institutions "as an ongoing response to the ... uncertainties that
humans have confronted" (pp. 14-15). But institutions reflect more
than this. They reflect the behavioral predispositions that make
possible orderly interaction among humans, and some of these have
little to do with uncertainty or strategies to reduce it. North's
framing of the problem comes from placing too much emphasis on the
legacy of Herbert Simon's work, particularly its emphasis on bounded
rationality, as the most significant limitation to the rational
choice approach. The Simon influence is reflected, for example in the
statement that "If individuals have perfect perception, then there
may not be any need for institutions even in the face of uncertainty"
(p. 22)
Some of the most basic human predispositions, particularly those
enabling orderly social interaction, have nothing to do with reducing
uncertainty. Experimental evidence makes quite clear that some of us,
some of the time, are prepared to cooperate in a one-shot prisoners'
dilemma, even though this represents the choice of a strictly
dominated strategy, and even though the logic of choosing otherwise
is completely independent of any uncertainty about what the
counterparty will do. The willingness of substantial numbers of
humans to violate the unambiguous predictions of game theory in both
cooperating and in engaging in third party punishment underlies our
ability to initiate and sustain social order.
It is true that we find throughout the book statements such as
"Informal norms develop that blend the moral inference of genetic
origin with the intentional aims of humans, which together provide
the backbone of what we should mean by the term culture" (p. 42). But
we also read that "If the highest rate of return is to piracy we can
expect that the organizations will invest in skills and knowledge
that make them better pirates" (p. 61). Well, not necessarily. If
"informal norms ... that blend the moral inference of genetic origin
..." are strong enough, this won't happen. The statement about piracy
contributes no more to understanding an outcome than stating, as
something so self evident that it requires no empirical validation,
that if a player has a strictly dominant strategy she will play it.
As the experimental evidence for PD games shows, this game theoretic
conclusion may be quite unambiguous, but also, as an empirical
matter, it is frequently wrong.
Here is another example: "the rash of entrepreneurial malfeasance in
large U.S. corporations in 2001-02 has reflected the evolution of an
institutional framework that has altered relative prices to provide
incentives for such anti-social behavior" (p. 77). If the
institutional framework is defined broadly enough so as to
incorporate social norms and the mental models that undergird them,
this cannot be wrong. But the statement gives us little insight into
whether we should search for the explanation in some identifiable
change in formal rules or whether this behavior reflected a broader
cultural development.
Readers interested in North's latest thinking about what sorts of
issues we need to explore in understanding economic growth and
development will find much in the book that is useful. Those looking
to push out the frontiers of our scientific understanding will be
disappointed. We face great challenges as well as opportunities in
trying to make operational the types of explanations suggested by
North's roughly sketched out framework.
Alexander J. Field is the Michel and Mary Orradre Professor of
Economics at Santa Clara University, and the author of
_Altruistically Inclined? The Behavioral Sciences, Evolutionary
Theory, and the Origins of Reciprocity_ (University of Michigan
Press, 2004, paperback).
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Published by EH.Net (February 2005). All EH.Net reviews are archived
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