Section Summary of Douglass North’s Nobel Lecture – Economic Performance through Time Section I: Introduction [1] We need an efective analytical ramework through which to study the perormance o economies over time so that we can better understand economic change. [2] Neo-classical economic theory , in its efort to prescribe policies that induce development ! ailed to recogni"e that institutions and institutions and time matter in analysis. Incentives determine Incentives determine the character or make#up o institutions. [$] %his essay helps scafold an analytical ramework that is capable o increasing our understanding o the historical evolution o economies! and will help guide us in the ongoing task o improving the perormance o economies!. [&] %he relationship between incentives and institutions determines economic perormance. perormance. 'elies are in(uenced in(uenced by learning over over time, determine determine our choices, and are passed on rom generation to generation by culture.
Section II: A summary of work done on the nature of institutions and their impact on economic performance [1] )nstitutions are made up o formal and formal and informal constraints and constraints and their enforcement characteristics. characteristics . %hese three three elements orm orm incentive incentive structures structures o societies and, speci*cally, speci*cally, their economies. %he interactions o institutions and technology determine transaction costs that costs that add up to production costs. [2] %he inormational and institutional re+uirements re+uirements necessary to achieve ecient markets markets are stringent.! stringent.! -ational! -ational! economic analysis assumes assumes that surviving! players behavior will lead to correct models! / i.e. survival o the *ttest0 those that have the best inormation. [$] %he discipline o the competitive market model! implies that institutions are designed to achieve ecient outcomes!, and thus can be ignored in economic analysis!. [&] et, et, we know that institutions are not necessarily created to be socially ecient!0 ratherthe ormal rules are created to serve the interests o those with the bargaining bargaining power to create new new rules.! )t is this bargaining
power that afects the eciency o outcomes in a world with transaction costs, not necessarily the rules per se. [3] %ransaction costs involve measuring the value and enorcing the agreements related to the physical dimensions and property rights o goods and services or the perormance o agents. )n economic markets, the level o competition determines the transaction costs and 4udicial systems provide coercive enorcement!. [5] 6easuring and enorcing agreements in political markets is ar more dicult compared to economic markets, as even a well#inormed constituent is uncertain as to whether or not an elected ocial will make good on his promises. 7omple8ity o political, sociological and economic issues inevitably leads to ideological stereotyping! and shapes the conse+uent perormance o economies!.
Section III: he nature of institutional change [1] )nstitutions 9the rules o the game: interact with organi"ations and entrepreneurs 9the players: to shape the evolution o an economy. ;rgani"ations are made up o groups o individuals bound together by some common purpose to achieve certain ob4ectives and can include political bodies, economic bodies, social bodies and educational bodies.! [2] ;rgani"ations re(ect the opportunities provided by the institutional matri8!, i.e. the interplay o ormal rules and inormal norms. [$] ow ast change occurs depends upon the rate o learning, but the direction o that change depends upon how people perceive the pay#ofs to
ac+uiring diferent knowledge!, i.e. are there positive incentives to learn and change?
Section I!: A cogniti"e science approach to human learning [1] >istory shows us that ideas, ideologies, myths, dogmas and pre4udices! impact how we human beings learn. = +uestion we must ask ourselves is@ do individuals always know what is in their sel#interest and thus act accordingly? [2] Aurthermore, is there a diference between the real world and the decision#makers perception o and reasoning about it? >ow do we come to make decisions? [$] %he analytical ramework we must build should originate in an understanding o how human learning takes place!. %his way, we can come to better know how people make decisions when aced with uncertainty. [&] <8periences and language help us orm mental models! to e8plain and interpret our environment, which are subse+uently categori"ed within our minds. %hese mental models, categories and our interpretation o our environment evolve as we get eedback rom our e8periences and come into contact with others ideas / in short, learning!. [3] ;ur capacity to order and reorder the mental models helps us make space available to process other inormation!. Aurthermore, our capacity to use analogies re(ect creative thinking and the ideologies and belie systems that underlie the choices humans make.! [5] = common cultural heritage helps prevent divergence rom mental models that people in a society have and provides a means o internal communication and shared e8planations or phenomena outside the immediate e8periences o the members o that society.! )t is rom this circumstance that belie structures are created. [B] 'elie structures get transormed into societal and economic structures by institutions / both ormal and inormal norms o behavior.! )nstitutions are the e8ternal 9to the mind: mechanisms individuals create to structure and order their environment.!
Section !: An institutional#cogniti"e approach to economic history [1] %here is no guarantee that the belies and institutions that evolve through time will produce economic growth.!
[2] %ribes diferent circumstances determined diferent institutional rameworks, which were passed down rom generation to generation and ormed cultural continuity. [$] =s societies became more comple8 and human beings become more interdependent, their levels o economic growth were determined by the evolution o their institutions. ) the institutions acilitated impersonal exchange! they grew economically / i not, they remained stuck!. [&] Collective learning! orms culture, which determines path dependence! / or, how much the past in(uences the present and the uture. Cocieties that get Dstuck embody belie systems and institutions that ail to conront and solve new problems o societal comple8ity.! [3] = societys collective learning may be determined by 1: how the belie system *lters! or interprets inormation gained rom e8perience andEor 2: diferent e8periences that conronted people at diferent times. [5] )nstitutions afect the ac+uisition o pure! knowledge, or e8istential truth, through scienti*c research. [B] We as human beings have learned how to progress economically over time, but e8plaining 1: why material well#being! is the e8ception rather than the rule and 2: the pace and direction o economic change throughout history! has proved to be +uite dicult. [F] ) we represent the human e8perience as a 2&#hour clock, civili"ation! occurs around 2$@35. [G] ) the last 1H,HHH years are represented as a 2&#hour clock, modern economic growth and its accompanying population e8plosion begin at about 2$@23. Aurthermore, most o this growth took place in Western
Section !I: Implications of the institutional#cogniti"e approach for impro"ing our understanding of the past [1] %he institutionalEcognitive approach to understanding economic history helps us understand that the conditions or economic growth dont automatically evolve. Irowth depends on cooperation between political and
economic institutions that acilitate low#cost transactions in impersonal markets. [2] When thinking about changes that took place in
Section !II: Implications for current de"elopment policies [1] We should take an institutionalEcognitive approach to development problems, which will help provide us with a new analytical ramework. [2] Aormal rules, inormal norms and enorcement characteristics shape economic perormance. %he rules may change +uickly, but the rules are only legitimi"ed by the inormal norms # which may only change gradually. [$] We know that groups o people, or polities, determine economic perormance based on their creation and enorcement o rules, but we dont yet know how to create or transer efective policy or economic growth to the developing! world. et, we do know that behavior 9i.e. inormal norms: must change to support and legitimi"e new rules and that long#run growth depends on the development o, amongst other things, the rule o law. [&] We know that long#run growth depends on (e8ible institutions that oster adaptability to change, but we dont know how to create adaptive eciency! in the short#run. [3] We will be better able to understand economic change through time and help economic theory deal efectively with new issues through an analytical ramework that employs historical evidence and institutionalEcognitive analysis.
