North: Structure and Change in Economic History

DC North, Structure and change in economic history (Norton).

Preface:

"The objective of this book is to provide a new framework for analyzing the economic past. A new framework is needed because the analytical tools used by economic historians have failed to come to grips with the central issues in economic history: explaining the institutional structure which underlies and accounts for performance of an economic system, and explaining changes in that structure" (xi).

Early theory of the history of markets focused on the gains made from trade through specialization and a clear division of labor. However, the author argues that those who constructed these decisive models did not take into consideration the costs that are related to this specialization. "These transaction costs underlie the institutions determining the structure of political-economic systems" (xi).

Ch 1: The Issues

North begins by highlighting the assumptions and structure of a neoclassical model to exploring economic "performance" (4). The author outlines the assumptions of the model, that individuals make maximizing decisions that involve opportunity costs within a milieu of scarcity, and that this maximizing behavior involves motivation for increasing the capital stock, which is, according to North, "..a function of the stocks of physical capital, human capital, natural resources, technology and knowledge..." (4). "Under these conditions the growth of total output and the growth of output per capita will be determined by the fraction of income saved...and the rate of growth of population. If the fraction of income saved produces a growth of output just equal to the growth of the population then per capita income growth will be zero. On the other hand, a higher rate of saving than of population growth will produce a positive rate of per capital income growth" (5).

This model is just that, a representation of reality. "First of all, the model assumes an incentive structure that will allow individuals to capture the returns to society of investment at these margins, that is, private and social returns are equated. Second, it assumes no diminishing returns to the acquisition and application of new knowledge because of the ability at constant costs to increase the stock of natural resources. Third, it assumes that there is a positive return to savings; fourth, that the private and social costs of having children are equated; and finally, coincidence between people's choices and the desired results" (5). North goes through these assumptions and explains how they are limiting, and at most harmful and at least obfuscating (6).

"Laying bare the assumptions of the neoclassical model points the direction that I shall take in this book. Explaining economic performance in history requires a theory of demographic change, a theory of the growth in the stock of knowledge, and a theory of institutions in order to fill out the gaps in the neoclassical model briefly delineated above...The primary focus of the study is upon a theory of institutions. The building blocks of this theory are: 1. a theory of property rights that describes the individual and group incentives in teh system; 2. a theory of the state, since it is the state that specifies and enforces property rights; 3. a theory of ideology that explains how different perceptions of reality affect the reaction of individuals to the changing 'objective' situation" (7-8).

North claims that there is one more large problem that economic historians have to deal with: that of change in history, or structural change.

In the standard neoclassical model, change is considered within an ideal-type. North gives the example of a society with a fixed amount of land that experiences population growth. This will drive short term food prices up, rents from land up, and the purchasing power of wages down. North contends that this is all well and good, but another story will likely unfold if institutions are taken into account, specifically, he highlights two issues that an institutional account focuses on: the structure of the economic system as well as a more nuanced understanding of individual rationality. The remainder of the chapter compares different approaches to understanding collective action.

Ch 2: An Introduction to the Structure of Economies:

The chapter begins by exploring a brief history of thought vis-a-vis the relationship between resource availability and population growth. "...the argument of this book is straight forward. 1. There have been two major discontinuities in the population/resource rates in history; I shall call them the First and Second Economic Revolutions. 2. Between these two revolutions there have been periods of Malthusian population pressure which have been overcome sometimes by physiological and social responses, and sometimes by alterations in the efficiency of economic institutions which have altered the resource base" (16).