American Economic Association

Economic Performance Through Time

Author(s): Douglass C. North
Source: The American Economic Review, Vol. 84, No. 3 (Jun., 1994), pp. 359-368
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2118057
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 Economic PerformanceThroughTimet
By DOUGLASSC. NORTH*
I stand how economies develop? The very
Economic history is about the perfor-
mance of economies throughtime. The ob-
jective of researchin the field is not only to
shed new light on the economic past, but
also to contribute to economic theory by
providingan analyticalframeworkthat will
enable us to understandeconomic change.
A theoryof economicdynamicscomparable
in precision to general equilibriumtheory
would be the ideal tool of analysis. In the
absence of such a theory we can describe
the characteristicsof past economies, exam-
ine the performanceof economies at vari-
ous times, and engage in comparativestatic
analysis;but missing is an analyticalunder-
standing of the way economies evolve
throughtime.
A theory of economic dynamics is also
crucial for the field of economic develop-
ment. There is no mysterywhy the field of
development has failed to develop during
the five decades since the end of WorldWar
II. Neoclassicaltheory is simplyan inappro-
priate tool to analyzeand prescribepolicies
that will induce development. It is con-
cerned with the operation of markets, not
with how markets develop. How can one
prescribepolicies when one doesn't under-
tThis articleis the lecture DouglassC. North deliv-
ered in Stockholm,Sweden, December 9, 1993, when
he receivedthe Alfred Nobel MemorialPrize in Eco-
nomic Sciences.The article is copyright? The Nobel
Foundation1993 and is publishedhere with the per-
missionof the Nobel Foundation.
* Departmentof Economics,WashingtonUniversity,
St. Louis, MO 63130-4899.I am indebted to Robert
Bates, Lee and AlexandraBenham,Avner Greif, Mar-
garet Levi, Randy Nielsen, John Nye, Jean-Laurent
Rosenthal,NormanSchofield,and BarryWeingastfor
their commentson an earlier draft and to Elisabeth
Case for editingthis essay.
359
methods employed by neoclassical econo-
mists have dictated the subject matter and
militated against such a development.That
theoryin the pristineformthat gave it math-
ematical precision and elegance modeled a
frictionlessand static world. When applied
to economic historyand developmentit fo-
cused on technological development and
more recentlyhuman-capitalinvestmentbut
ignoredthe incentivestructureembodiedin
institutions that determined the extent of
societal investmentin those factors. In the
analysis of economic performancethrough
time it contained two erroneous assump-
tions: (i) that institutionsdo not matter and
(ii) that time does not matter.
This essay is about institutionsand time.
It does not provide a theory of economic
dynamics comparable to general equilib-
riumtheory.We do not have such a theory.'
Rather it providesthe initial scaffoldingof
an analyticalframeworkcapable of increas-
ing our understandingof the historicalevo-
lution of economies and a necessarilycrude
guide to policy in the ongoing task of im-
proving the economic performance of
economies. The analytical frameworkis a
modificationof neoclassicaltheory. What it
retains is the fundamental assumption of
scarcityand hence competitionand the ana-
lytical tools of microeconomictheory.What
it modifies is the rationality assumption.
What it adds is the dimensionof time.
Institutions form the incentive structure
of a society, and the political and economic
institutions,in consequence, are the under-
lying determinants of economic perfor-
mance. Time as it relates to economic and
IIn fact such a theoryis unlikely.I refer the reader
to Frank Hahn's predictionabout the future of eco-
nomic theory(Hahn, 1991).
360 THE AMERICAN ECONOMIC REVIEW
societal change is the dimension in which
the learningprocessof humanbeings shapes
the way institutionsevolve. That is, the be-
liefs that individuals,groups, and societies
hold which determine choices are a conse-
quence of learning through time-not just
the span of an individual'slife or of a gener-
ation of a society, but the learning embod-
ied in individuals,groups,and societies that
is cumulativethrough time and passed on
intergenerationallyby the culture of a soci-
ety.
The next two sections of this essay sum-
marizethe work I, and others, have done on
the nature of institutionsand the way they
affect economic performance (Section II)
and then characterizethe nature of institu-
tional change (Section 111).2 The remaining
four sections describe a cognitive-science
approach to human learning (Section IV);
provide an institutional/cognitiveapproach
to economic history (Section V); indicate
the implications of this approach for im-
provingour understandingof the past (Sec-
tion VI); and finallysuggestimplicationsfor
currentdevelopmentpolicies (Section VII).
II
Institutionsare the humanlydevised con-
straints that structure human interaction.
They are made up of formal constraints
(e.g., rules, laws, constitutions), informal
constraints(e.g., normsof behavior,conven-
tions, self-imposed codes of conduct), and
their enforcementcharacteristics.Together
they define the incentive structureof soci-
eties and specificallyeconomies.
Institutionsand the technologyemployed
determine the transactionand transforma-
tion costs that add up to the costs of pro-
duction. It was Ronald Coase (1960) who
made the crucial connection between insti-
tutions, transactioncosts, and neoclassical
theory. The neoclassical result of efficient
markets only obtains when it is costless to
2These two sectionsbrieflysummarizematerialcon-
tained in North (1990a).
JUNE 1994
transact.Only under the conditionsof cost-
less bargaining will the actors reach the
solution that maximizes aggregate income
regardlessof the institutionalarrangements.
When it is costly to transact, then institu-
tions matter. And it is costly to transact.
John J. Wallis and North (1986) demon-
stratedin an empiricalstudythat 45 percent
of U.S. GNP was devoted to the transaction
sector in 1970.Efficientmarketsare created
in the real worldwhen competitionis strong
enough via arbitrageand efficient informa-
tion feedback to approximate the Coase
zero-transaction-cost conditions and the
parties can realize the gains from trade in-
herent in the neoclassicalargument.
But the informational and institutional
requirementsnecessaryto achieve such ef-
ficient markets are stringent. Players must
not only have objectives,but know the cor-
rect way to achieve them. But how do the
players know the correct way to achieve
their objectives?The instrumentalrational-
ity answer is that, even though the actors
may initially have diverse and erroneous
models, the informationalfeedback process
and arbitragingactors will correct initially
incorrect models, punish deviant behavior,
and lead survivingplayers to correct mod-
els.
An even more stringentimplicit require-
ment of the discipline-of-the-competitive-
market model is that, when there are sig-
nificant transaction costs, the consequent
institutionsof the market will be designed
to induce the actorsto acquirethe essential
informationthat will lead them to correct
their models. The implication is not only
that institutionsare designed to achieve ef-
ficient outcomes, but that they can be ig-
nored in economic analysis because they
play no independent role in economic per-
formance.
These are stringentrequirementsthat are
realized only very exceptionally.Individuals
typicallyact on incompleteinformationand
with subjectivelyderived models that are
frequentlyerroneous;the informationfeed-
back is typicallyinsufficientto correctthese
subjectivemodels. Institutionsare not nec-
essarily or even usually created to be so-
cially efficient; rather they, or at least the
VOL.84 NO. 3 NORTH:ECONOMICPERFORMANCE
THROUGHTIME
formalrules, are created to serve the inter-
ests of those with the bargainingpower to
create new rules. In a worldof zero transac-
tion costs, bargainingstrength does not af-
fect the efficiency of outcomes; but in a
world of positive transactioncosts it does.
It is exceptionalto find economicmarkets
that approximatethe conditions necessary
for efficiency.It is impossibleto find politi-
cal marketsthat do. The reason is straight-
forward.Transactioncosts are the costs of
specifyingwhat is being exchanged and of
enforcing the consequent agreements. In
economic markets what is being specified
(measured) is the valuable attributes-the
physicaland property-rightsdimensions-of
goods and services or the performanceof
agents. While measurementcan frequently
be costly, there are some standardcriteria:
the physicaldimensionshave objectivechar-
acteristics(size, weight, color, etc.), and the
property-rightsdimensions are defined in
legal terms. Competitionalso plays a critical
role in reducingenforcementcosts. The ju-
dicial system provides coercive enforce-
ment. Still, economic markets in the past
and present are typicallyimperfect and be-
set by high transactioncosts.
Measuring and enforcing agreements in
political marketsis far more difficult.What
is being exchanged (between constituents
and legislatorsin a democracy)is promises
for votes. The voter has little incentive to
becomeinformedbecausethe likelihoodthat
one's vote matters is infinitesimal;further,
the complexityof the issues produces gen-
uine uncertainty.Enforcement of political
agreementsis beset by difficulties.Competi-
tion is far less effective than in economic
markets. For a variety of simple, easy-to-
measure, and important-to-constituent-
well-beingpolicies, constituentsmay be well
informed,but beyond such straightforward
policy issues ideological stereotypingtakes
over and (as I shall argue below in Section
IV) shapes the consequent performanceof
economies.3It is the polity that defines and
3See the author's"A TransactionCost Theory of
Politics"for a transaction-costapproachto the relative
inefficiencyof politicalmarkets(North, 1990b).
361
enforces property rights, and in conse-
quence it is not surprisingthat efficienteco-
nomic marketsare so exceptional.
III
It is the interactionbetween institutions
and organizationsthat shapes the institu-
tional evolution of an economy. If institu-
tions are the rules of the game, organiza-
tions and their entrepreneurs are the
players.
Organizationsare made up of groups of
individualsbound together by some com-
mon purpose to achieve certain objectives.
Organizationsinclude political bodies (e.g.,
political parties, the Senate, a city council,
regulatorybodies), economic bodies (e.g.,
firms, trade unions, family farms, coopera-
tives) social bodies (e.g., churches, clubs,
athletic associations),and educationalbod-
ies (e.g., schools, universities, vocational
trainingcenters).
The organizationsthat come into exis-
tence will reflect the opportunitiesprovided
by the institutionalmatrix. That is, if the
institutionalframeworkrewardspiracythen
piratical organizationswill come into exis-
tence; and if the institutional framework
rewardsproductiveactivitiesthen organiza-
tions-firms-will come into existence to
engage in productiveactivities.
Economic change is a ubiquitous,ongo-
ing, incremental process that is a conse-
quence of the choices individualactors and
entrepreneursof organizationsare making
every day. While the vast majorityof these
decisions are routine (Richard Nelson and
SidneyG. Winter,1982),some involvealter-
ing existing"contracts"between individuals
and organizations.Sometimes that recon-
tractingcan be accomplishedwithin the ex-
isting structureof propertyrightsand politi-
cal rules; but sometimes new contracting
forms require an alteration in the rules.
Equally, norms of behavior that guide ex-
changeswill graduallybe modifiedor wither
away.In both instances,institutionsare be-
ing altered.
Modificationsoccur because individuals
perceive that they could do better by re-
structuring exchanges (political or eco-
362 THE AMERICAN ECONOMIC REVIEW
nomic). The source of the changed percep-
tions may be exogenous to the economy-
for instance a change in the price or quality
of a competitive product in another econ-
omy that alters perceptions of en-
trepreneurs in the given economy about
profitableopportunities.But the most fun-
damental long-run source of change is
learningby individualsand entrepreneursof
organizations.
While idle curiositywill result in learning,
the rate of learningwill reflect the intensity
of competition among organizations.Com-
petition, reflecting ubiquitous scarcity, in-
duces organizationsto engage in learningto
survive.The degree of competitioncan and
does vary. The greater the degree of
monopolypower, the lower is the incentive
to learn.
The speed of economic change is a func-
tion of the rate of learning, but the direc-
tion of that change is a function of the
expectedpayoffsto acquiringdifferentkinds
of knowledge.The mental models that the
playersdevelop shape perceptionsabout the
payoffs.
IV
It is necessaryto dismantlethe rationality
assumptionunderlyingeconomic theory in
order to approachconstructivelythe nature
of human learning. History demonstrates
that ideas, ideologies, myths, dogmas, and
prejudicesmatter;and an understandingof
the way they evolve is necessaryfor further
progress in developing a frameworkto un-
derstand societal change. The rational-
choice frameworkassumes that individuals
know what is in their self-interest and act
accordingly.That may be correct for indi-
viduals makingchoices in the highly devel-
oped marketsof modern economies,4but it
is patently false in making choices under
conditions of uncertainty-the conditions
4However,see the anomalieseven here in the stud-
ies by Amos Tverskyand Daniel Kahneman(1986)and
others(RobinM. Hogarthand MelvinW. Reder, 1986).
JUNE 1994
that have characterized the political and
economicchoices that shaped (and continue
to shape) historicalchange.
Herbert Simon (1986 pp. S210-11) has
stated the issues succinctly:
If... we accept the proposition-that
both the knowledgeand the computa-
tional power of the decisionmakerare
severely limited, then we must distin-
guish between the real world and the
actor's perceptionof it and reasoning
about it. That is to say we must con-
structa theory(and test it empirically)
of the process of decision. Our theory
must include not only the reasoning
processes but also the processes that
generatedthe actor'ssubjectiverepre-
sentation of the decision problem,his
or her frame.
The analyticalframeworkwe must build
must originate in an understandingof how
humanlearningtakes place. We have a way
to go before we can constructsuch a theory,
but cognitive science has made immense
strides in recent years-enough strides to
suggest a tentative approachthat can help
us understand decision-makingunder un-
certainty.5
Learningentails developinga structureby
which to interpret the varied signals re-
ceived by the senses. The initialarchitecture
of the structure is genetic, but the subse-
quent scaffoldingis a result of the experi-
ences of the individual.The experiencescan
be classifiedinto two kinds-those from the
physical environment and those from the
socio-cultural linguistic environment. The
structuresconsist of categories-classifica-
tions that gradually evolve from earliest
childhood to organize our perceptions and
keep trackof our memoryof analyticresults
and experiences.Buildingon these classifi-
cations, we form mental models to explain
and interpretthe environment-typically in
5See John H. Hollandet al. (1986) for an excellent
introductionto the cognitive-scienceliterature.
VOL.84 NO. 3 THROUGHTIME
NORTH:ECONOMICPERFORMANCE
ways relevant to some goal. Both the cate-
gories and the mental models will evolve,
reflecting the feedback derived from new
experiences: feedback that sometimes
strengthensour initial categories and mod-
els or may lead-to modifications-in short,
learning. Thus the mental models may be
continuallyredefinedwith new experiences,
includingcontact with others' ideas.
At this juncture the learning process of
human beings diverges from that of other
animals (such as the sea slug-a favorite
researchsubject of cognitive scientists) and
particularly diverges from the computer
analogythat dominatedearlystudies of arti-
ficial intelligence.The mind appears to or-
der and reorder the mental models from
their special-purposeorigins to successively
more abstract forms so that they become
availableto process other information.The
term used by Andy Clark and Annette
Karmiloff-Smith(1993) is "representational
redescription."The capacity to generalize
from the particularto the general and to
use analogy is a part of this redescription
process. It is this capacitythat is the source
not only of creativethinking,but also of the
ideologies and belief systems that underlie
the choices humansmake.6
A common cultural heritage provides a
means of reducing the divergence in the
mental models that people in a society have
and constitutesthe means for the intergen-
erational transfer of unifying perceptions.
In pre-modern societies cultural learning
provided a means of internal communica-
tion; it also provided shared explanations
for phenomenaoutside the immediateexpe-
riences of the members of society in the
form of religions,myths, and dogmas. Such
belief structuresare not, however,confined
to primitive societies, but are an essential
part of modern societies as well.
Belief structuresget transformedinto so-
cietal and economic structures by institu-
tions-both formal rules and informal
6Ideologies are sharedframeworksof mental mod-
els that groupsof individualspossess that provideboth
an interpretationof the environmentand a prescrip-
tion as to how that environmentshouldbe ordered.
363
norms of behavior. The relationship be-
tween mental models and institutionsis an
intimate one. Mental models are the inter-
nal representationsthat individualcognitive
systemscreate to interpretthe environment;
institutions are the external (to the mind)
mechanismsindividualscreate to structure-
and order the environment.
V
There is no guaranteethat the beliefs and
institutions that evolve through time will
produce economic growth. Let me pose
the issue that time presents us by a brief
institutional/cognitive story of long-run
economic/political change.
As tribes evolved in differentphysicalen-
vironments, they developed different lan-
guages and, with differentexperiences,dif-
ferent mental models to explain the world
around them. The languages and mental
models formedthe informalconstraintsthat
defined the institutionalframeworkof the
tribe and were passed down intergenera-
tionally as customs, taboos, and myths that
providedculturalcontinuity.7
With growingspecializationand division
of labor, the tribes evolvedinto polities and
economies; the diversityof experience and
learningproducedincreasinglydifferentso-
cieties and civilizationswith different de-
grees of success in solvingthe fundamental
economic problems of scarcity.The reason
is that as the complexityof the environment
increasedas humanbeings became increas-
ingly interdependent,more complexinstitu-
tional structureswere necessaryto capture
the potential gains from trade. Such evolu-
tion requiresthat the society develop insti-
tutions that will permit anonymous,imper-
sonal exchange across time and space. To
the extent that the culture and local experi-
ences had produceddiverseinstitutionsand
belief systemswith respect to the gainsfrom
7RonaldHeiner (1983), in a path-breakingarticle,
not only made the connection between the mental
capacities of humans and the external environment,
but suggestedthe implicationsfor arrestingeconomic
progress.
364 THE AMERICAN ECONOMIC REVIEW
such cooperation,the likelihoodof creating
the necessary institutions to capture the
gains from trade of more complexcontract-
ing varied. In fact, most societies through-
out history got "stuck" in an institutional
matrix that did not evolve into the imper-
sonal exchange essential to capturing the
productivitygains that came from the spe-
cialization and division of labor that have
producedthe Wealth of Nations.
The key to the foregoingstoryis the kind
of learningthat the individualsin a society
acquiredthroughtime. Time in this context
entails not only current experiences and
learning,but also the cumulativeexperience
of past generationsthat is embodiedin cul-
ture. Collective learning-a term used by
FriedrichA. Hayek-consists of those expe-
riences that have passed the slow test of
time and are embodied in our language,
institutions,technology, and ways of doing
things.It is "the transmissionin time of our
accumulatedstock of knowledge" (Hayek,
1960 p. 27). It is culture that provides the
key to path dependence-a term used to
describe the powerfulinfluence of the past
on the present and future. The current
learningof anygenerationtakesplace within
the context of the perceptionsderivedfrom
collective learning. Learningthen is an in-
crementalprocess filtered by the culture of
a society which determines the perceived
payoffs,but there is no guaranteethat the
cumulativepast experienceof a society will
necessarilyfit them to solve new problems.
Societies that get "stuck" embody belief
systemsand institutionsthat fail to confront
and solve new problemsof societal complex-
ity.
We need to understanda great deal more
about the cumulativelearning of a society.
The learningprocess appearsto be a func-
tion of (i) the way in which a given belief
structure filters the information derived
from experiencesand (ii) the differentexpe-
riences confrontingindividualsand societies
at different times. The perceived rate of
return (private) may be high to military
technology (in medieval Europe), to the
pursuit and refinement of religious dogma
(Rome duringand after Constantine),or to
the researchfor an accuratechronometerto
JUNE 1994
determine longitude at sea (for which a
substantial reward was offered during the
Age of Exploration).
The incentives to acquire pure knowl-
edge, the essential underpinningof modern
economic growth,are affected by monetary
rewardsand punishments;they are also fun-
damentallyinfluenced by a society's toler-
ance of creativedevelopments,as a long list
of creativeindividualsfrom Galileo to Dar-
win could attest.While there is a substantial
literatureon the originsand developmentof
science, very little of it deals with the links
between institutional structure, belief sys-
tems, and the incentives and disincentives
to acquirepure knowledge.A major factor
in the developmentof WesternEurope was
the gradualperception of the utility of re-
search in pure science.
Incentives embodied in belief systems as
expressed in institutions determine eco-
nomic performancethroughtime, and how-
ever we wish to define economic perfor-
mance the historical record is clear.
Throughoutmost of history and for most
societies in the past and present, economic
performancehas been anythingbut satisfac-
tory. Humanbeings have, by trial and error,
learned how to make economies perform
better; but not only has this learningtaken
ten millenia (since the first economic revo-
lution), it has still escaped the grasp of
almosthalf of the world'spopulation.More-
over the radical improvementin economic
performance,even when narrowlydefined
as material well-being, is a modem phe-
nomenon of the last few centuriesand con-
fined until the last few decades to a small
part of the world. Explainingthe pace and
direction of economic change throughout
historypresents a majorpuzzle.
Let us representthe humanexperienceto
date as a 24-hourclock in which the begin-
ning consists of the time (apparently in
Africa between 4 and 5 million years ago)
when humans became separate from other
primates. Then the beginning of so-called
civilizationoccurs with the developmentof
agriculture and permanent settlement in
about 8000 B.C. in the Fertile Crescent-in
the last three or four minutes of the clock.
For the other 23 hours and 56 or 57 min-
VOL.84 NO. 3
NORTH:ECONOMICPERFORMANCE
utes, humansremainedhuntersand gather-
ers, and while populationgrew, it did so at
a very slow pace.
Now if we make a new 24-hourclock for
the time of civilization-the 10,000 years
from developmentof agricultureto the pre-
sent-the pace of change appears to be
very slow for the first 12 hours,althoughour
archeological knowledge is very limited.
Historicaldemographersspeculate that the
rate of population growth may have dou-
bled as compared to the previous era but
still was very slow. The pace of change
acceleratesin the past 5,000 years with the
rise and then decline of economies and civi-
lizations. Populationmay have grown from
about 300 million at the time of Christ to
about 800 million by 1750-a substantial
accelerationas comparedto earlier rates of
growth.The last 250 years-just 35 minutes
on our new 24-hour clock-are the era of
modern economic growth, accompaniedby
a populationexplosionthat now puts world
populationin excess of 5 billion.
If we focus now on the last 250 years, we
see that growth was largely restricted to
Western Europe and the overseas exten-
sions of Britainfor 200 of those 250 years.
Not only has the pace varied over the
ages; the change has not been unidirec-
tional. That is not simply a consequence of
the decline of individualcivilizations;there
have been periods of apparentsecular stag-
nation-the most recent being the long hia-
tus between the end of the Roman Empire
in the West and the revival of Western
Europe approximately500 years later.
VI
What can an institutional/cognitive ap-
proach contributeto improvingour under-
standingof the economicpast? First of all it
should make sense out of the very uneven
patternof economic performancedescribed
in the previous section. There is nothing
automaticabout the evolving of conditions
that will permit low-cost transactingin the
impersonal markets that are essential to
productiveeconomies. Game theorycharac-
terizes the issue. Individualswill usuallyfind
it worthwhilecooperatingwith others in ex-
THROUGHTIME
365
change when the play is repeated, when
they possess completeinformationaboutthe
other players'past performance,and when
there are small numbersof players.Cooper-
ation is difficultto sustainwhen the game is
not repeated(or there is an endgame),when
informationabout the other playersis lack--
ing, and when there are large numbers of
players. Creating the institutions that will
alter the benefit/cost ratios in favor of co-
operationin impersonalexchangeis a com-
plex process, because it not only entails the
creation of economic institutions, but re-
quires that they be undergirdedby appro-
priate political institutions.
We are just beginningto explore the na-
ture of this historicalprocess. The remark-
able developmentof Western Europe from
relativebackwardnessin the 10th centuryto
world economic hegemonyby the 18th cen-
tury is a story of a graduallyevolvingbelief
system in the context of competitionamong
fragmented political/economic units pro-
ducing economic institutions and political
structure that produced modern economic
growth.8And even within Western Europe
there were successes (the Netherlands and
England) and failures (Spain and Portugal)
reflecting diverse external environmental
experiences.'
Second, institutional/cognitive analysis
should explainpath dependence,one of the
remarkableregularitiesof history. Why do
economies once on a path of growth or
stagnationtend to persist? Pioneeringwork
on this subject is beginning to give us in-
sights into the sources of path dependence
(BrianArthur, 1989;Paul David, 1985).But
there is much that we still do not know.The
rationalityassumptionof neoclassicaltheory
would suggest that political entrepreneurs
of stagnatingeconomies could simply alter
the rules and change the directionof failed
economies. It is not that rulers have been
8See North and Robert P. Thomas (1973), E. L.
Jones(1981),and NathanRosenbergand L. E. Birdzell
(1986)for accountsof this growth.
9See part III of North (1990a)for a brief discussion
of the contrastingpaths of the Netherlandsand Eng-
land on the one hand and Spainon the other.
366 THE AMERICAN ECONOMIC REVWIEW
unawareof poor performance.Rather, the
difficultyof turning economies around is a
function of the nature of political markets
and, underlyingthat, the belief systems of
the actors. The long decline of Spain, for
example, from the glories of the Hapsburg
Empireof the 16th centuryto its sorrystate
under FranciscoFranco in the 20th century
was characterizedby endless self appraisals
and frequentlybizarreproposed solutions.'0
Third, this approach will contribute to
our understandingof the complex interplay
between institutions, technology, and de-
mography in the overall process of eco-
nomic change. A complete theory of eco-
nomic performance would entail such an
integrated approach to economic history.
We certainly have not put all the pieces
together yet. For example, Robert Fogel's
path-breakingwork on demographic the-
ory" and its historical implications for
reevaluating past economic performance
have yet to be integratedfully with institu-
tional analysis.The same is true for techno-
logical change. The importantcontributions
of NathanRosenberg(1976)and Joel Mokyr
(1990) exploringthe impetusfor and conse-
quences of technologicalchange have ongo-
ing implicationswhich need to be integrated
with institutional analysis. An essay by
Wallis and North (1994) is a beginning at
integrating technological and institutional
analysis.But a majortask of economic his-
tory is to integratethese separatestrandsof
research.
VII
We cannot account for the rise and de-
cline of the Soviet Union and world com-
munismwith the tools of neoclassicalanaly-
sis, but we should with an institutional/
cognitive approach to contemporaryprob-
lems of development. To do so-and to
provide an analyticalframeworkto under-
stand economic change-we must take into
10DeVries (1976 p. 28) has a description of the
bizarre remedies proposed by a royal commissionto
reverseSpain'sdecline.
"See Fogel's (1994)accompanyingNobel lecture.
JUNE 1994
account the following implications of this
approach:
1. It is the admixtureof formalrules, infor-
mal norms,and enforcementcharacteris-
tics that shapes economic performance.
While the rules may be changed over-
night, the informalnormsusuallychange
only gradually.Since it is the norms that
provide "legitimacy"to a set of rules,
revolutionarychange is never as revolu-
tionaryas its supportersdesire, and per-
formance will be different than antici-
pated. And economies that adopt the
formalrulesof anothereconomywill have
very different performance characteris-
tics than the first economy because of
different informal norms and enforce-
ment. The implicationis that transferring
the formal political and economic rules
of successfulWestern marketeconomies
to third-world and Eastern European
economies is not a sufficient condition
for good economic performance.Privati-
zation is not a panacea for solving poor
economicperformance.
2. Polities significantlyshape economicper-
formance because they define and en-
force the economic rules. Therefore an
essential part of development policy is
the creation of polities that will create
and enforce efficient property rights.
However,we know very little about how
to create such polities because the new
political economy (the new institutional
economics applied to politics) has been
largelyfocused on the United States and
developed polities. A pressing research
need is to model third-worldand Eastern
European polities. However the forego-
ing analysisdoes have some implications:
(a) Politicalinstitutionswill be stable only
if undergirdedby organizationswith a
stake in their perpetuation.(b) Both in-
stitutionsand belief systemsmust change
for successfulreformsince it is the men-
tal models of the actors that will shape
choices. (c) Developing norms of behav-
ior that will support and legitimize new
rules is a lengthy process, and in the
absence of such reinforcingmechanisms
politieswill tend to be unstable.(d) While
VOL.84 NO. 3 NORTH:ECONOMICPERFORMANCE
THROUGHTIME
economic growth can occur in the short
run with autocratic regimes, long-run
economic growth entails the develop-
ment of the rule of law. (e) Informal
constraints (norms, conventions, and
codes of conduct) favorable to growth
can sometimesproduce economicgrowth
even with unstable or adverse political
rules. The key is the degree to which
such adverserules are enforced.
3. It is adaptive rather than allocative effi-
ciency which is the key to long-run
growth. Successful political/economic
systems have evolved flexible institu-
tional structures that can survive the
shocks and changes that are a part of
successful evolution. But these systems
have been a product of long gestation.
We do not know how to create adaptive
efficiencyin the short run.
We have just set out on the long road to
achieving an understanding of economic
performancethroughtime. The ongoing re-
search embodying new hypotheses con-
fronting historical evidence will not only
create an analyticalframeworkenabling us
to understand economic change through
time; in the process it will enrich economic
theory,enablingit to deal effectivelywith a
wide rangeof contemporaryissues currently
beyond its ken. The promise is there. The
recognition of that promise by the Nobel
Committee should be the essential spur to
move us on down that road.
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