Douglass C. North: My Teacher

Attending college at one of the top ten schools in the country affords one the opportunity to study with the best researchers in the field --- even Nobel Prize winners! At Washington University I have been able to take Douglass North's seminar course on property rights. He is a great mind and a serious thinker. I have spent this semester reading nearly everything he has written, and feel confident that I can summarize his main contributions in a blog post. I want to do this because I think other students interested in economics should read his work. His work is very clearly written, and is also very controversial in a powerfully subtle sort of way. Moreover, I think libertarian economists --- Austrians, in particular --- have misunderstood a lot of what North has said and written. Here is what North is about:

Douglass North is an economic historian. But unlike other economic historians, he is very critical of how economists conduct historical investigations. He calls their work "applied neoclassical theory," which, if you are a neoclassical, is a good thing. But North is interested in change and evolution, and he thinks other economic historians should be too. Here is a quote that you can find in all of North's published work:

"I take it as the task of economic history to explain the performance and structure of economies through time."

That is the basic message to all of North's work. The rest of his work can be seen as an explication of this main point. By performance North means growth in output and technology. But "structure" is the essence of North's work. Structure refers to the political and economic institutions that determine the constraints of economies through time. But these constraints should never be taken as given. They are always evolving. This is where North attacks neoclassical theory. According to North, neoclassical theory has assumed as test conditions: "(1) perfectly competitive markets, (2) perfectly specified and costlessly enforced property rights, (3) neutral government, and (4) unchanging tastes." For North, this is all wrong. Not only are markets not perfectly competitive, but a lot of economic activity occurs outside of markets. Also, transaction costs are not zero. And what is interesting about North is that, contra Oliver Williamson and others, he believes that as economies become more wealthy and prosperous, transaction costs should rise! This is most interesting because most "transaction cost" economists believe that these costs are reduced as economies improve over time. North instead places transaction costs and production costs at opposite extremes, and argues that while primitive economies face neglible transaction costs, their production costs are very high; the converse applies to wealthy societies.

On the subject of neutral government, North is very critical of the Public Choice school. This should come as a shock to Austrian economists, because most Austrians consider themselves Public Choice theorists. North has nothing nice to say about this literature. He does this by giving "ideology" a central place in his theoretical framework. For North, transaction costs determine the structure of political and economic institutions. But underlying all this is the role of "ideology." North is very criticial of mainstream economic theory -- economic history included -- for ignoring this important factor. This is also how North connects "changing tastes" to his theory of economic growth. For North, changing tastes and ideology matter. Therefore, government institutions are not determined on the basis of "visible economic interests" (as Public Choice theorists would have it), but instead on the basis of a "straightforward liberal verses conservative attitude." Moreover, "The public good is nothing more nor less than the comprehensive system of cognitive and moral beliefs called ideology. Political and judicial conceptions of "the public good" have obviously changed in the past century."

Thus for North, all of economic change ultimately rests on the evolution of ideology. Public choice theory errs in attributing the decline of the market economy to a takeover of special interests groups in government. For North, "the past century bore witness to a fundamental change in ideological perspective. ... I see no way to account for this transformation without the systematic study of the sociology of knowledge."

Here is North more explicitly: "Public choice theory has extended neoclassical theory to the political process, but the results have been quite modest. There are some basic differences between the operation of markets and the political process, which so far defy effective modelling by the public choice theorist. The breakdown of the Madisonian system and the development of a new set of political controls over property rights, which is the dominant feature of a structural transformation over the past century and a half, requires more fundamental theorizing about the nature of the state than that achievable at the superficial level employed by public choice theory."

One last note that should surprise some Austrians on here. This insight has also led North to speak very favorably of "the Marxist school." For North, this school "cannot be faulted for ignoring the evolving structural aspects of economic systems. Property rights, the state, technology, and ideology have all been a part of Marxist economic history." I raised this point in class the other day and North agreed, much to the surprise of the rest of the class! After 25 years, North still sticks to his early assessment of Marxism.

Douglass North is a great economist. I have been very lucky to study under him (thanks mom and dad).

To conclude: Economic history is the study of change in the performance and structure of economies through time. Thus, theorizing about evolving neoclassical constraints should be the central object of analysis. And the most important "constraint" in determing the performance and structure of ecomomies is ideology. This should lead us, according to North, to Marxism.