Skip to Main Content
Have library access? Log in through your library
Understanding the Process of Economic Change

Understanding the Process of Economic Change

Douglass C. North
Copyright Date: 2005
Pages: 200
  • Cite this Item
  • Book Info
    Understanding the Process of Economic Change
    Book Description:

    In this landmark work, a Nobel Prize-winning economist develops a new way of understanding the process by which economies change. Douglass North inspired a revolution in economic history a generation ago by demonstrating that economic performance is determined largely by the kind and quality of institutions that support markets. As he showed in two now classic books that inspired the New Institutional Economics (today a subfield of economics), property rights and transaction costs are fundamental determinants. Here, North explains how different societies arrive at the institutional infrastructure that greatly determines their economic trajectories.

    North argues that economic change depends largely on "adaptive efficiency," a society's effectiveness in creating institutions that are productive, stable, fair, and broadly accepted--and, importantly, flexible enough to be changed or replaced in response to political and economic feedback. While adhering to his earlier definition of institutions as the formal and informal rules that constrain human economic behavior, he extends his analysis to explore the deeper determinants of how these rules evolve and how economies change. Drawing on recent work by psychologists, he identifies intentionality as the crucial variable and proceeds to demonstrate how intentionality emerges as the product of social learning and how it then shapes the economy's institutional foundations and thus its capacity to adapt to changing circumstances.

    Understanding the Process of Economic Changeaccounts not only for past institutional change but also for the diverse performance of present-day economies. This major work is therefore also an essential guide to improving the performance of developing countries.

    eISBN: 978-1-4008-2948-4
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-xii)
  4. CHAPTER ONE An Outline of the Process of Economic Change
    (pp. 1-8)

    Understanding economic change including everything from the rise of the Western world to the demise of the Soviet Union requires that we cast a net much broader than purely economic change because it is a result of changes (1) in the quantity and quality of human beings; (2) in the stock of human knowledge particularly as applied to the human command over nature; and (3) in the institutional framework that defines the deliberate incentive structure of a society. A complete theory of economic change would therefore integrate theories of demographic, stock of knowledge, and institutional change. We are far from...


    • Introduction
      (pp. 11-12)

      What kind of a theoretical framework must we develop to understand the process of economic change? The theory we possess is static; and while a truly dynamic theory may be beyond our reach we can incorporate the dimension of time as an integral part of the analysis. We must develop a body of generalizations about the operation of economies over time. Our objective must be to focus on those elements in the society that undergird and account for that process. Economics is a theory of choice—so far so good. But the discipline neglects to explore the context within which...

    • CHAPTER TWO Uncertainty in a Non-ergodic World
      (pp. 13-22)

      The intellectual journey on which we are embarking requires us to rethink some of the foundations of traditional economic theory, specifically those foundations dealing with the two issues that are the subject of this chapter—uncertainty and ergodicity. Economists, typically, do not ask themselves about the structure that humans impose on themselves to order their environment, and therefore reduce uncertainty; nor are they typically concerned with the dynamic nature of the world in which we live, which continues to produce novel problems to be solved. The last point raises a fundamental issue. If we are continually creating a new and...

    • CHAPTER THREE Belief Systems, Culture, and Cognitive Science
      (pp. 23-37)

      As soon as we realize that we always have an imperfect grasp of “reality” and frequently have contrasting and conflicting views of the human landscape, we can begin to get a handle on the process of human change. The process works as follows: the beliefs that humans hold determine the choices they make that, in turn, structure the changes in the human landscape. How humans perceive the human landscape, how they learn, and what they learn is the subject of this chapter. We begin with exploring the mind of the individual as a necessary condition to understanding societal beliefs.


    • CHAPTER FOUR Consciousness and Human Intentionality
      (pp. 38-47)

      The nature of consciousness has occupied the thoughts of some of the most brilliant minds in philosophy, cognitive science, and psychology; and despite many claims to the contrary, it is still far from explained. John Searle states the issue as follows: “‘The problem of consciousness’ is the problem of explaining exactly how neurobiological processes in the brain cause our subjective states of awareness or sentience; how exactly these states are realized in the brain structures; and how exactly consciousness functions in the overall economy of the brain and therefore how it functions in our life generally” (Searle 1997, 192). Controversy...

    • CHAPTER FIVE The Scaffolds Humans Erect
      (pp. 48-64)

      All organized activity by humans entails a structure to define the “way the game is played,” whether it is a sporting activity or the working of an economy. That structure is made up of institutions—formal rules, informal norms, and their enforcement characteristics. Take professional football. The game is played within a set of formal rules, informal norms (such as not deliberately injuring a key player on the opposing team), and the use of referees and umpires to enforce the rules and norms. How the game is actually played depends not only on the formal rules defining the incentive structure...

    • CHAPTER SIX Taking Stock
      (pp. 65-80)

      Let us see if we can put together where we are so far in our understanding of the process of economic change. What do we know and what do we need to know to make further progress? We have accumulated a great deal of evidence on the performance of economies over time and we know a good deal about the underlying sources of productivity increase which is the source of improved economic performance. What is still missing is a body of theory that will integrate the analysis of institutional change developed in the previous chapter into the larger context of...


    • Introduction
      (pp. 83-86)

      The key to building a foundation to understand the process of economic change is beliefs—both those held by individuals and shared beliefs that form belief systems. The explanation is straightforward; the world we have constructed and are trying to understand is a construction of the human mind. It has no independent existence outside the human mind; thus our understanding is unlike that in the physical sciences, which can employ reductionism to understand, and expand comprehension of, the physical world. Physical scientists, when they seek a greater understanding of some puzzle in the physical world, can build from the fundamental...

    • CHAPTER SEVEN The Evolving Human Environment
      (pp. 87-102)

      A necessary precondition to understanding the evolving human environment is understanding the revolutionary changes resulting in the “conquest” of the physical environment: those changes provide the context for the evolving human environment. The conquest of the physical environment has been a result of the growth of knowledge about the physical world and its application to solving problems of economic scarcity and human well-being. I have described, in an earlier study (North 1981), the first and second economic revolutions. The first economic revolution was the development of agriculture beginning in the eighth millennium B.C. The second was the application of scientific...

    • CHAPTER EIGHT The Sources of Order and Disorder
      (pp. 103-115)

      Economists seldom put the problem of order and disorder at the center of inquiry.¹ Historical—and contemporary—experience suggests that they should. Establishing and maintaining social order in the context of dynamic change has been an age-old dilemma of societies and continues to be a central problem in the modern world. Economic change produces changes in the absolute and relative income, economic status, and security of individuals and groups in a society and therefore is a breeding ground for disorder. Disorder (via revolution, for example) is endemic to all societies at some time; but while some societies quickly reestablish stable...

    • CHAPTER NINE Getting It Right and Getting It Wrong
      (pp. 116-126)

      When humans understand their environment as reflected in their beliefs and construct an institutional framework that enables them to implement their desired objectives, then there is consistency between the objectives of those players in a position to shape their destiny and the desired outcomes. We could conceive of the enormous increase in life expectancy and material well-being of the past several centuries as reflecting such consistency. But this improvement has been a trial and error process of change with lots of errors, endless losers, and no guarantee that we will continue to get it right in spite of the enormous...

    • CHAPTER TEN The Rise of the Western World
      (pp. 127-145)

      The rise of the Western world was the ascendancy of a relatively backward part of the world to world hegemony between the tenth and the eighteenth centuries.¹ It involved economic, political, and military changes as well as a shift in the focus of institutional change—from dealing with the uncertainties associated with the physical environment to dealing with those of the increasingly complex human environment. The rise of science and its systematic application to solving problems not only of economic scarcity but also of human well-being was still in its infancy by the eighteenth century but the foundation had been...

    • CHAPTER ELEVEN The Rise and Fall of the Soviet Union
      (pp. 146-154)

      The rise of the Western world was, in effect, a success story in which the sequential evolution of beliefs modified by experiences gradually resulted in the changes producing modern economic growth. It was a trial and error process interlaced with good luck. But if we seek to understand the process of change as an exercise in the intentionality of the players, there is no better case in all of history than the rise and fall of the Soviet Union.¹ It exemplifies

      1. the ongoing relationship between beliefs, the way they are formed, and how experience modifies a given belief structure;...

    • CHAPTER TWELVE Improving Economic Performance
      (pp. 155-165)

      The problems of achieving sustained economic growth should be apparent from the preceding chapters. The economic history of the past half century is littered with the debris of economies that failed to develop, from sub-Saharan African economies to the former republics of the Soviet Union. Yes, the economies of the world have generally achieved significant economic growth. A survey of the world economies at the beginning of the twenty-first century reveals unprecedented prosperity as compared to economic conditions in the past. Yet more than a billion people around the earth still exist on less than one dollar a day and...

    • CHAPTER THIRTEEN Where Are We Going?
      (pp. 166-170)

      The unprecedented economic development of the past several centuries with its consequences for material progress and life expectancy has, not surprisingly, provided a context and perspective to humans of continuous progress; and with good reason. The growth in the stock of knowledge has produced material improvements beyond the wildest dreams of our ancestors. The current definition of poverty in the United States (approximately $18,000 a year for a family of four) would have exceeded (given appropriate deflators) the living standard of all but a miniscule fraction of humans several centuries ago. As already mentioned, the criterion of progress is sometimes...

  7. Bibliography
    (pp. 171-182)
  8. Index
    (pp. 183-187)