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OBVIOUS IN RETROSPECT, WHICH MAKES IT EVEN MORE OUTSTANDING In this book, North outlines the precise features of the neo institutional economics school, which includes Coase, Williamson, Olson, Fogel, among others. This book is mainly about the theory itself and its origins and features, not about applications in particular, though the author does address that issue at the end of the book in the section about eocnomic performance. I believe this book is great reading for the literate economist. It is difficult to follow for the non-economist, which I believe North focuses on in his other book, "Structure and Change in Economic History". That work is earlier and I believe not as complete, but it is much more readable. Either way, North's work is among the most important advances in economics in the 20th century (for which he got the Nobel Prize), so knowledge of it should benefit one and all. Most comprehensive book ever Douglass North is an amazing writer. If you are purchasing this book, you probably already know what this book is about and its impact. This book, I would argue is largely responsible for his receiving the Nobel Prize in 1993. His new-institutionalist view links together history, economics, political science, sociology, and every other social science. This book truly inspired me to specialize in institutional economics. Every social issue can be approached from the institutional perspective, namely that institutions determine actions and the market determines institutions. Though my professors are all old institutionalists, they agree this is the best book by far on the subject and most research papers in the subject thus reference this book. For more information on New Institutional Social Science, visit the website at http://cniss.wustl.edu/people.html Institutions, Common Sense, and Economic Performance An intriguing book on the so-called neo-institutionalist approach by one of its long-time proponents, Douglass C. North. Written without accessive jargon, this book is accessible to any intermeidate level student of Economics and Political Science. North argues that institutions (laws, rules, regulations) in their fromal and informal varieties determine economic performance. North has an almost guru-like status in the eyes of the World Bank. Third World countries remain poor, argues new institutionalism, because their institutions foster corruption and distort incentives. But what is the solution? It is hard to imagine that one can graft institutions. How can the rules that function in the U.S. function under all kinds of social and political circumstances? The other troubling point is that it is still hard to integrate this approach with mainstream economics. A serious economist today is trained to shy away from anything that cannot be mathematically modeled. More troubling, however, is the following: neo-institutionalism argues that rules, laws, and regulations structure incentives, which in turn determine economic performance. A thoughtful person probably guessed this a long time ago based on common sense--one does not need a scholarly approach to advocate this position. "Incentives are the underlying determinants of economic performance," says North (p. 135). It is hard to disagree. Incentiv-creating institutions The puzzle of the modern world is not that so many people are poor, but that so many are wealthy. How do democracies, with well-defined property rights and education for all com into place? In this Nobel prize winning work, North investigates some issues overlooked by most economists: the role of a society's institutions, defined as formal and informal constraints, varying from written laws to vague values (but important nevertheless) in a society. Economic theory is not able to explain the great differences in wealth between nations, argues North, and that is certainly a shame, because that would be the most interesting explanation it could possibly make. The solution is to include institutions into economic analysis. Institutions determine transaction costs. In neoclassical economic theory, transaction costs are usually assumed to be zero (for reasons of comfort). North assumes transaction costs to make up half of the economy in a modern well-organized Western society with efficient institutions. A major reason for developing countries to be poor is that transaction costs are prohibitive, obstructing the benefits of trade. North asks some extremely important questions in this book, but I was a bit disappointed that he didn't offer more answers. English not being my natural tongue, I found the book a bit hard to read. However, being very interested in the subject, I found it well worth the effort. Without a major (interest) in economics, you should probably enjoy some of the reviews instead. North's main answer to the main question, by the way, is that countries will prosper if the incentives created by their institutions motivate production, and not redistribution. Important for all social scientists and interesting for all As a Japanese, I am interested in how Northýfs concept ýginstitutionsýh are useful for explaining the gap in performance of the US and Japanese economy during the 1990s. What kinds of policy prescriptions can the Japanese government derive from Northýfs argument on institutions? Institutions are the constraints or mechanisms (such as rules on property rights) to reduce uncertainties inherent in human interaction and thus to reduce transaction costs. As a extreme case, you will find it difficult to make a long-term economic transaction or commitment in Baghdad just after Iraqýfs defeat in the war with the US, since there are no institutions in that particular moment. Broadly, this concept is related to the argument by Christopher Freeman at SPRU on ýgnational system of innovation,ýh especially on norms and rules on intellectual rights, and generation and transfer of technological knowledge enabled by those norms and rules. I think the US system is superior on that. My point is that this already classic book would be valuable for thinking on those topical issues. See also:
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