I am very interested in the work of Douglass North. North places institutions (formal and informal “rules of the game”) as central in understanding economic outcomes. (Neoclassical economics, on the other hand, merely includes prices, preferences, and technology as determinants of just about everything that happens in an economy…a rather impoverished view, even neoclassical economists now recognize.). In doing so, North joins fellow Nobel Laureates Oliver Williamson and Eleanor Ostrom as leaders in what is known as New Institutional Economics (NIE). NIE seeks to maintain the analytical rigor of neoclassical economics (unlike the “old” Institutional Economics) while incorporating nonzero transaction costs (unlike neoclassical economics), which in turn necessitate institutions.
Once you start thinking about it, formal and informal rules are both ubiquitous and critical to an economy’s performance. The institutions that guide rich economies are very, very different than those in, say, Sierra Leone, with tragic economic consequences for the latter. (Sierra Leone and similar African countries remain critically hampered by the institutional legacy left to them by their European colonizers.) Intellectually, NIE both fills a huge gap in neoclassical economics, one that many of my past students sensed, even if they couldn’t but their intellectual fingers on it, and opens the door for a tremendous amount of fruitful and fascinating interdisciplinary work. Economics is usually defined as the study of the allocation of scarce resources; NIE opens a vest range of study toward this end. It’s a whole new playground.
Several directions in which my students and I are taking NIE, or may look into in the future:
- cooperation, trust, and networks: students are very excited about a class I’ll offer on this topic in Spring 2013.
- consciousness and cognition: North persuasively argues that both our institutions and how we seek to alter them are critically influences by our cognition and consciousness. He explores neuroscientific and psychological approaches to cognition and consciousness. It seems clear to me that if we are to shape our economies to be more just, sustainable, and effective, we will have to alter our mental mappings that North believes are critical to shaping institutions.
- sustainability: sustainability (even if we don’t agree on what it means) will require wholesale changes to formal and informal institutions. Key bit: if you know something about ecological economics, you have some sense of just how significantly we’ll have to change our institutions; if you know something about NIE, you know just how nearly impossible that is. Here is a rough draft of the introduction section of a research article I am preparing on this topic:
Douglass C. North received the Nobel Prize in economics in 1993 for his path-breaking work in economic history and the lessons it tells us about economic change and development. North identified institutions and institutional change as key ingredients for the relative success and failure of economies [North 1990, 1991]. His subsequent work continued to develop a comprehensive theory and model of institutional change that recognizes the importance of formal and informal institutions and incorporates ideas regarding cognition, consciousness, culture, beliefs, and a host of other ideas [North 2005]. His writings solidify the nature and importance of path dependency and various forms of lock-in as key factors in shaping economic outcomes. North is one of the key figures in New Institutional Economics (NIE), which maintains a neoclassical analytical flavor while relaxing the usual neoclassical assumptions of perfect rationality, perfect information, and zero transaction costs.
Ecological economics recognizes the importance of institutions and NIE [cite article on institutional ecological econ, and any others that take a broad view]; the work of North and other leading NIE scholars, including Oliver Williamson and Elinor Ostrom, are cited widely. Typical application of NIE in ecological economics, however, seems to be the contexts of a) examining particular institutions in particular settings [lots of citations here], e.g. fishing rights in a given locale, and/or b) in theorizing about cognition and human nature, e.g. in the context of homo economicus and homo sustinens [cite homo sustenins article, the horrible one on cognition and eco-efficiency, perhaps others] North’s theory and model have not, however, been considered comprehensively in the broad context of the institutions necessary for sustainability; the goal of this paper is to begin that process and to establish some initial ideas, implications, directions for future research.
Why focus on the ideas of North, when there is a large body of literature within fields such as Evolutionary Economics and non-economic fields such as sociology, whose ideas can also be used to assess institutional change? Different approaches can provide different insights; while North does incorporate some significant works in evolutionary economics, such as Nelson and Winter (1982), I focus on North primarily because of the straightforwardness, yet depth, of his ideas. Significantly, because North developed a comprehensive, far-ranging theory of institutional change, his ideas serve to bring together in one framework a host of ideas, from non-ergodicity to consciousness to path dependence to political elites, that rarely get considered together. At the same time, fragments of North’s theory have been widely incorporated into economic development theory and other fields, so his more well-known ideas (e.g., that institutions matter) represent a degree of commonality in thinking about institutions. Lastly, within ecological economics North is both influential, yet, I maintain, underappreciated and underutilized. While (for the most part) limiting the utilization of theory to that of North constrains the analysis to some degree, it also sets boundaries to what otherwise could be a dauntingly large topic and haphazard application of theory.
My analysis is guided by a key question: can we change our dominant (rich, capitalistic and consumeristic) institutions sufficiently and in sufficient time, so as to meet the challenges of sustainability, ecological conservation, and related salient issues identified in ecological economics? Defining and examining these challenges more specifically is the subject of much of ecological economics, and is beyond the scope of this paper. (The lack of agreement on so many issues surrounding sustainability is itself a key consideration in the context of institutional change, and is addressed below.) What is central here is that, as North maintains, the set of optimal institutions in one set of economic circumstances will probably not be optimal for a different set of economic circumstances. Unlike North, I extend “different circumstances” to include different goals and different normative criteria. Our contemporary capitalistic economic institutions, so extolled for their ability to produce economic growth over the past several centuries , are highly unlikely to be optimal, or even fairly suitable for a world facing serious limitations to growth and concerned with serious ecological challenges. Possible goals such as a steady-state economy, de-growth, or the vision of a just and sustainable United States in the year 2011, outlined in Farley and Costnanza (2002), are likely to require significant, if not massive changes to formal and informal institutions. Thus, the set of interrelated questions:
- What is the nature of institutional change necessary to achieve sustainability?
- What is the likelihood that these institutional changes can indeed happen?
- What are key entry points to accelerate the necessary institutional changes?
These questions are both immense, and the assessment here is necessarily initial, establishing a framework for further research. The paper proceeds as follows. In the next section, I identify North’s key ideas about institutions, institutional change, and economic change that are important with regard to sustainability. In the third section, I apply these ideas to the context of achieving a sustainably future. In the final section, I offer concluding thoughts and tentative responses to the questions above, along with suggestions for future research.