------------ 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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