Structure And Change In Economic History
This book aims to explain the structure and evolution of institutions. The author, Nobel laureate Douglass North, concludes that the tension between gains from specialization and attendant costs is "the basic source of structure and change in economic history." Institutions arise to exploit the gains from division of labor or to reduce transaction costs. This theory appears to offer considerable economy and power of explanation.
North asserts that, in the prehistoric era, human population increase would lead to declining labor productivity as resources were exhausted. New technologies could increase productivity but, if property rights were nonexclusive, as they must have been in a nomadic hunter-gatherer society, new technologies would simply accelerate resource depletion. Only if a tribe or band could exclude rivals from exploiting the resource, as they could in a settled agricultural society, would the productivity gains from new technology be sustained. The advantage that agriculture offered, then, was the opportunity to establish exclusive communal
property rights. This produced what North calls the first economic revolution.
The first economic revolution, occasioned by the rise of agriculture, produced the state, "the most fundamental achievement of the ancient world." The state specialized in providing security, keeping order within societies and protecting them from outside threats, while the complex demands of an agricultural economy (compared to those of a hunter-gatherer economy) required increased specialization throughout the rest of society as well. Over time, new military technologies led to larger states and more representative forms of government as rulers were forced to make concessions to their constituents to compete militarily with other rulers.
The industrial revolution, which North refers to as the second economic revolution, was largely a result of better specified and enforced property rights that raised the private returns to invention and led to an invention "industry." The industrial revolution brought tremendous gains in the standard of living but required new institutions to achieve gains from specialization without losing them to attendant transaction costs.
North notes that transaction costs would be prohibitive without a normative system that encourages compliance with contractual obligations. Accordingly, concurrent with the industrial revolution, we see a concerted effort by elites to inculcate the values of hard work, thrift, and sobriety among the working classes. In fact, North has reflected deeply on the role of ideology in an industrial society. Changes in knowledge and technology affect relative prices and thus affect perceptions of fairness. Differences in occupation or geographic location also give rise to different perceptions of how output should be distributed. "Ideological entrepreneurs" capitalize on these different perceptions. Successful ideologies must provide an explanation of history that plausibly accounts for current conditions. Ideologies must be flexible so that they can attract new adherents and accommodate changed conditions. Most importantly, to effect change, successful ideologies must overcome the free rider problem. Their ability to do so will be inversely related to the legitimacy of existing institutions.
An interesting question asked early on in the book is, why do states persistently fail to establish property rights that would permit high rates of economic growth? He explains that states first maximize returns for the ruler and then, subject to this constraint, try to reduce transaction costs throughout the economy. Where the ruler is an individual or the representative of a small elite group, the interests of rulers will not normally coincide with those of society as a whole.
Structure and Change in Economic History offers considerable insight into fundamental historical forces. It will come as no surprise to those who have read this work that North won the Nobel Prize for Economics in 1993
for his use of economic theory and quantitative methods to explain economic and institutional change.