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Structure and change: Douglass North'seconomicsGraham A. Brownlow aa Management School, Queen's University Belfast , 25 UniversitySquare, Belfast, BT7 1NN, UKPublished online: 21 Sep 2010.

To cite this article: Graham A. Brownlow (2010) Structure and change: Douglass North's economics,Journal of Economic Methodology, 17:3, 301-316, DOI: 10.1080/13501781003792662

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Structure and change: Douglass North’s economics

Graham A. Brownlow*

Management School, Queen’s University Belfast, 25 University Square, Belfast BT7 1NN, UK

Douglass North is a pivotal figure in the development of the ‘new’ economic historyas well as the ‘new’ institutional economics. However, the relationship between thesetwo aspects of his thinking remains undeveloped in previous critical assessments ofNorth’s work. The relationship is clarified here. The evidence presented indicates thatthree distinct phases can be distinguished in his writings between the 1950s and the2000s. The paper relates these changing views to the shifting mainstream withineconomics and the effects that this shift has in turn had on economic history research.Economic history has adapted to economic research by abandoning some practicesassociated with the earlier cliometric literature. Furthermore, North is unique to theextent that his recent writings represent something of a convergence with ‘old’institutionalism.

Keywords: Douglass North; economic history; institutional economics

JEL Codes: N01; A12; B52

1 Introduction

The merits or otherwise of adopting a rule-setting approach to economic methodology was

until recently the focus of most debates within the field (Hands 2001; Dow 2002). Early

methodological assessments of cliometrics for instance tended to debate the practice of

cliometricians relative to the supposed rules of conducting good science (Tuma 1971;

McClelland 1975). Considerations of space preclude an extended discussion of the

appropriateness of following the rule-setting approach, but for the purposes of this paper it

suffices to observe that much of the contemporary literature is concerned with constructing

a methodological account of what economists do rather than ‘interpreting rules for good

science’ (Dow 2002, p. vii). Hence the more recent methodological work often tends to

concentrate on explaining the distinctive intellectual approaches of living (or indeed

recently deceased) economists as well as surveying the methodological foundations of

contemporary economics. For example, articles in recent issues of this journal have

considered the distinctive contribution of Thomas Schelling to economics as well as the

development of economic history since the mid-1950s (Cesarano 2006; Rizvi 2007).

Elsewhere, a number of recent methodological pieces have surveyed shifts in what exactly

constitutes ‘mainstream economics’ (Davis 2006, 2008; Hodgson 2007). Such

publications are undoubtedly methodological in content even if names such as Popper,

Lakatos or Kuhn are absent from the title.

This paper surveys the shifts in Douglass North’s economic thought and accordingly

it should be placed in the same category as these recent contributions. This paper finds

ISSN 1350-178X print/ISSN 1469-9427 online

q 2010 Taylor & Francis

DOI: 10.1080/13501781003792662

http://www.informaworld.com

*Email: graham.brownlow@qub.ac.uk

Journal of Economic Methodology,

Vol. 17, No. 3, September 2010, 301–316

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that an eminent and influential economist can treat the same important methodological

issue, in this case the relationship between economics and history, in a variety of

different ways during their career. Douglass North has been a major figure in the

revitalization of institutional analysis within economics as well as being a pioneer of

cliometrics. For these reasons alone, his work deserves greater attention from

methodologists. Accordingly, his receipt, along with Robert Fogel, of the Nobel Prize in

Economics in 1993 should be understood as representing not only a reward for

contributing to the development of the new economic history (NEH), but also clear

recognition of North’s important and overlapping contribution to the creation of the new

institutional economics (NIE). The press release issued when North was awarded the

Nobel Prize was clear in that it both focused on his place as a pioneering ‘new’ economic

historian and mentioned his role in the creation of the NIE (Royal Swedish Academy of

Sciences 1994).

Economists and economic historians, as the material presented below indicates, are

already well served by critical assessments of ideas associated with various stages of

North’s career. In contrast, they have been less well served by a survey of his writings

taken as a whole. In section 2 the historical background to North’s thinking will be

outlined. Discussion of the evolution of this thought and the relationship between his work

in economic history and institutional economics have also not been developed. To these

ends a distinction is presented between ‘new economic history’ and ‘historical economics’

in section 3. The observation is made in section 4 that the overlapping nature of North’s

contribution to NIE and NEH has not been always recognized. In section 5 the changes

that can be discerned within his economic thinking are highlighted. Three phases in

North’s intellectual development are identified and discussed in section 6. The evolution

of these ideas is discussed further via an examination in section 7 of how the three editions

of his textbook reflect changes in his thinking. A specific example of this shift (the

changing treatment of institutional evolution and its relationship to technical progress) is

examined in section 8. The paper’s concluding section considers how the shift in the

economics mainstream in recent decades helps us to interpret North’s changes in North’s

economic thought.

From an explicitly methodological perspective, perhaps the most interesting

observation that arises from an analysis of North’s work is that this undoubted pioneer

of ‘new’ institutionalism and cliometrics has in his more recent work embraced a form of

economic rhetoric closer to the ‘old’ institutionalism. North’s research has arguably

become more ‘heterodox’ as a result. However, this transformation may only have been

the case because the research frontier of the profession shifted. In consequence, when

considering North’s consistently diachronic form of explanation, the careful investigator

must take particular note of North’s methodological changes and continuities as well as

considering the wider research environment.

2 Historical background

The objectives of the pioneers of NEH or cliometrics were clear from the start.1 The

pioneers aimed at securing this ‘new’ cliometric approach to economic history firmly

within ‘the classical economics family’ rather than ‘the historical economics clan’ (Temin

1973, p. 7). Temin and the methodologists who studied the early cliometric work of the

1960s and 1970s presented the emergence of cliometrics as representing a methodological

shift from an inductive to a deductive approach to economic history (Temin 1973;

McClelland 1975). We will see later that North’s writings in recent decades represent a

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reversal of this methodological practice. The ‘cliometric revolution’ can also be

interpreted as providing yet another arena in which the ‘imperialist’ extension of the

application of neoclassical analysis created a new applied field (Temin 1973, p. 8;

Williamson 1991, p. 23; O’Brien 2008).2 The imperialistic agenda initiated by Becker’s

‘economic approach’ remains an influential and controversial research agenda (Becker

1993; Lazear 2000; Fine 2002; Fine and Milonakis 2003).3 The methodological

implications of imperialism are straightforward. Namely, that it was the role of a member

of the economist ‘family’ to apply universally valid and general economic laws and models

to a subject matter regardless of the topic being studied (Hirshleifer 1985; Becker 1993;

Lazear 2000, p. 103). Even its critics concede that this extension of economics into history

managed to overturn a lot of previously accepted historical findings (Libecap, Lyons, and

Williamson 2008, p. 197).

Approximately three decades separate Heckscher’s pioneering advocacy of applying

economic theory to historical topics and the ‘high renaissance’ of this idea (Heckscher

1929; O’Brien 2008, p. 437). It was only in the late 1950s that Meyer and Conrad urged

economic historians to formulate hypotheses with general rather than specific application

(Conrad and Meyer 1958; Meyer and Conrad 1957; Cesarano 2006, p. 449). In the wake of

this pioneering work, and buoyed up by initial enthusiasm and stimulated by the Purdue

seminars, cliometrics rapidly became part and parcel of the profession. During the 1960s

many economically trained economic historians were hired by economics departments

across the United States (North 1976, p. 461; Williamson 1991, pp. 20–25; Libecap et al.

2008, p. 198).

However, by the 1970s the momentum of the research agenda had declined.

Cliometrics had been associated with substantial progress; by transforming and then

consolidating economic history into an applied branch of economics, it marked the decline

of economists’ interest in the economic past (North 1976, p. 462; Williamson 1991,

pp. 25–26; Cesarano 2006, p. 460). Areas of research such as development, that had been

close to economic history previously, actually drifted apart from economic history as a

consequence of the cliometric revolution (Crafts 2000). North eventually concluded that

the NEH judged by the ‘market test’ had been a failure. He suggested that NEH, by

applying conventional tools to the past, did not add any original dimension to economics

(North 1976; Libecap et al. 2008). His response to this failure was to become involved in a

revival of institutionalism (North 1976, 1977).

The ‘new’ institutionalism for its part took the language (or rhetoric) of mainstream

economics and extended its boundaries with more tools. The development of transaction

cost economics (TCE) is perhaps the clearest and most influential example of this revival

in institutional topics within economics (Williamson 2000, p. 599; Klaes 2008, p. 364).

Similarly to the NEH, institutionalism had a long and distinguished pedigree; as with the

‘cliometric revolution’ the institutional revival was slow in coming (Rutherford 1994,

2001; Hodgson 2007, p. 8).4 The ‘new’ institutionalism was to be a broad enough church

to include North’s historical approach (Vandenberg 2002). Oliver Williamson’s own

assessment is interesting in this regard. He presents North’s contribution to the

development of the NIE as bringing level 1 (informal institutions and culture) and level 2

(formal rules of the game) into the orbit of economic analysis (Williamson 2000).

Williamson stresses especially North’s contribution to the study of level 2 institutions

(2000, p. 598). Williamson distinguishes between these two higher levels, concerned with

institutions that change very slowly, and level 3 (transaction cost economics) and level 4

(neoclassical economics/agency theory) institutions, which are Williamson’s own

research focus (Williamson 2000, pp. 596–600).5

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3 North, Kindleberger and ‘scientific’ economics

It is no coincidence that ‘Theory, Statistics and History’ is the title of the first chapter in all

three editions of North’s textbook on American economic history, Growth and Welfare in

the American Past. The invocation reflects the influence of Schumpeter in North’s

research.6 With its clear mastery of all three of the techniques (history, statistics and

theory) that Schumpeter equated with the ‘scientific’ economist, North’s research agenda

fits this definition of economics. Moreover, his research agenda has matched the

Schumpeterian agenda in terms of ambition:

I set out to understand what makes economies rich or poor because I viewed that objective tobeing the essential prerequisite to improving their performance. The search for the Holy Grailof the ultimate source of economic performance has taken me on a long and certainlyunanticipated journey, from Marxism to cognitive science, but it has been this persistentobjective that has directed and shaped my scholarly career. (North 1997, p. 3 cited inMilonakis and Fine 2007, p. 27)

The topic that North has chosen to analyse throughout his career (‘the ultimate

source of economic performance’) has, therefore, by his own admission, been more

enduring than how he has chosen to study this topic (Libecap et al. 2008).7 North has, in

addition to the cliometric approach outlined in the previous section, pursued another

approach to studying the economic issues. The alternative outlook is antagonistic to the

conceptions of the relationship between statistics, theory and the economic past found

within the cliometric literature of the 1960s and 1970s (O’Brien 2008). It is hence no

coincidence that North’s growing eclecticism during the 1990s was criticized precisely

for rejecting the ‘hard and fast parameters of neoclassical analysis’ (Vandenberg 2002,

p. 232).

Kindleberger provides the most sustained statement of this methodological alternative

(Kindleberger 1989). For Kindleberger the growth of knowledge in economic history

came from a process of ‘leapfrogging’ back and forth between facts and their underlying

theoretical formulation.8 He observed, and more recent methodologists have echoed, that

the long-standing debate within the economic history literature on the advantages of

deduction relative to induction was something of an illusion (Kindleberger 1989, p. 126;

Dow 2002, p. 81).9 His argument was that the eclectic use of a range of tools was essential

in the study of the economic past:

. . . there is no one all-purpose economic theory or model that illuminates economic history,

. . . for economic historians to cling to a single or central theory is misleading, and in generalwrong . . . The economic historian or the economist seeking to test his [or her] analysisagainst historical data should be prepared to put down one economic law or model, and pickup another, when the condition to be explained calls for it, and not to insist on using always thesame tool. (Kindleberger 1989, pp. ix–x)

Kindleberger described himself as a historical economist being concerned with ‘using

history to test the validity and generality of economic laws and models’ rather than

applying models to the economic past regardless of historical or geographical context

(Kindleberger 1989, p. ix). Kindleberger by his rejection of what he termed an ‘all-

encompassing system of interpretation’ was critical of the imperialistic surge

(Kindleberger 1989, p. xi). As will be reiterated throughout this paper, North’s

explanatory strategy has shifted towards a ‘historical economist’ approach, in which

there is an interaction between empirically established relationships and explanatory

models, away from the imperialistic approach associated with the early cliometric work.

Methodologists, while acknowledging that a sharp induction–deduction dichotomy is

potentially misleading, should also recognize that North has progressively moved

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away from the expressly deductive lines of reasoning that typified his earlier cliometric

work.

4 North, the NIE and the NEH

Reflecting the baleful but understandable trend towards ever-increasing academic

specialization, institutional economists surveying North’s career have all too often been

tempted to overlook his contribution to economic history. Economic historians for their

part have likewise often focused on his role as a ‘founding father’ of cliometrics and

neglected his place in the NIE. The summaries that follow are inevitably truncated because

of considerations of space. While Rutherford analysed thoroughly North as an influence on

the new institutionalism, the contribution of North to the development of NEH was

ignored in an otherwise excellent book (Rutherford 1994). When North’s economic

history is studied in more detail it will become clear that Rutherford’s observation that

North ‘has been a consistent advocate of the use of neo-classical theory but has also

admitted limitations’ requires qualification (Rutherford 1994, p. 22).10 North’s later work

is more concerned with qualification than application. McCloskey reversed the imbalance

in a 1994 survey which focused overwhelmingly on North’s contribution to the study of

economic history (McCloskey 1994, p. 164). Goldin’s survey also solely focused on

North’s historical findings despite describing North as a ‘grand theorist’ and pioneer of the

NIE (Goldin 1995, p. 195).

However, the clearest example of the tendency to ignore North’s role in the evolution

of the NIE comes from an economic methodologist rather than an economic historian.

Vromen ignored North’s influence in an otherwise excellent and exhaustive survey

(Vromen 1995).11 In contrast, Sutch’s earlier survey did mention North’s influence on the

development of both the NIE and cliometrics (Sutch 1982). Sutch’s essay was

overwhelmingly skewed towards only considering North’s impact on cliometrics. The

focus of this survey is also noteworthy. North by 1982 had abandoned some of the views

attributed to him by Sutch. In fact, Myrhman and Weingast’s (1994) survey was perhaps

the first discussion of North’s intellectual shifts to consider, albeit briefly, his place within

the NIE and cliometrics and the links between these literatures.

There have been a few recent Marxist interpretations of North that are interesting and

(to varying degrees) make an effort to locate North’s thinking in relation to the NEH and

the NIE and also recognize the shifts in his thinking (Ankarloo 1999; Fine and Milonakis

2003; Milonakis and Fine 2007). Ankarloo’s (1999) critique makes the interesting point

that as late as the Nobel lecture there was very little scope for the role of conflict within

North’s writings. The paper is unclear what a Marxist alternative would look like,

however. A much more developed Marxist position is provided in Milonakis and Fine

(2007). Milonakis and Fine are clear in identifying some changes in North’s outlook, but

they also identify what they claim are persistent weaknesses in ‘North’s analytical toolkit’

(2007, p. 54). They for instance describe methodological individualism as being ‘North’s

most sacred analytical principle’ (2007, p. 37). In addition to North’s alleged sins of

methodological individualism and neoclassicism, they are critical of his position on a

range of topics such as collective action, class and ideology and conflict (Milonakis and

Fine 2007, pp. 37–42). They assert that North’s toolkit fails ultimately as a way of

understanding economic history because it does not offer a ‘methodological and

theoretical framework’ consistent with determinism (Milonakis and Fine 2007, p. 54). The

paper is consequently rather less interested in placing North’s intellectual development in

historical context than it is interested in judging (negatively) his output relative to the

Journal of Economic Methodology 305

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Marxist position.12 Their focus conceals as well as reveals. The relationships between

North’s ideas and Schumpeter, Kuznets or the Purdue seminar are not mentioned, by way

of illustration.

Similarly, thought-provoking interpretations from those sympathetic to the older

institutional economics tradition have also appeared since North’s Nobel Prize win.

Dugger, as part of his critique of North, tries to place North relative to both the NIE and the

NEH (Dugger 1995). Dugger’s critique is that North paid too little attention to the OIE and

was simultaneously too influenced by game theory and Hayek’s views on economic

history. While this is interesting as a critique of the arguments contained in North (1990),

Dugger does not acknowledge fully the changes that occurred in North’s thinking between

the 1950s and the 1990s. In contrast to Dugger, Groenewegen, Kerstholt, and

Nagelkerke’s (1995) survey identifies three stages in North’s intellectual development.

This division is similar to that developed later in this paper, but they provide no discussion

of the links between North’s contributions to institutional economics and economic history

(Groenewegen, Kerstholt, and Nagelkerke 1995).

More recent interpretations of North within the ‘old’ institutionalist tradition also

provide useful insights (Fiori 2002; Fiani 2004). These pieces though have tended to focus

on just one aspect of North’s recent work.13 Fiori for instance focuses on the treatment of

the concept of gradualism in North’s more recent work (Fiori 2002). Fiani meanwhile

considers the role of the state and property rights within North’s work (Fiani 2004).

Vandenberg’s paper is more wide-ranging: he acknowledged that as late as 2002 there was

no detailed treatment of North’s work in relation to the two main branches within

institutionalism (Vandenberg 2002, p. 218). Accordingly, though he also recognizes the

place of economic history in North’s thinking, Vandenberg attempts to discuss North’s

thinking in relation to the OIE and NIE. He argues that North is too concerned with broad

canvas to be regarded as being a truly historical economist (Vandenberg 2002,

pp. 229–230). In the section that follows it will be demonstrated that the historicity of

North’s thinking has altered over time.

5 Continuities and changes within North’s economics

Many writers, including many of those included above, have focused on the conceptual

and methodological continuities in North’s economic thought. Such writers have claimed

that North’s entire work is all part of one grand project. Myhrman andWeingast have most

forcefully argued that his contribution was to have formulated what they deem a ‘coherent

whole’ (Myhrman and Weingast 1994, p. 193). While they accept that North has changed

his perspective on a number of topics, they present this change as a gradual, deliberate and

inevitable part of his economic thinking. North’s importance as an economic thinker is

obvious, yet it cannot be argued that the transformations in his thinking have always been

gradual or minor. This paper sides consequently with those writers mentioned above

(Groenewegen et al. 1995; Vandenberg 2002, p. 218) that have instead focused on the

changes rather than the continuities in North’s thinking.

North, until the early 1970s, clearly equated the application of neoclassical tools and

quantitative analysis to historical questions with the creation of a scientific economic

history (North 1963). North was clear that economic history should meet the same set of

scientific standards that were followed in other applied branches of economics (North

1965, p. 86).14 The assumption that such an approach was the only game in town affected

inevitably North’s teaching and supervision as well as research. Students in the University

of Washington graduate seminar were taught to (unfavourably) compare the ‘leading

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interpretative articles in American economic history’ with ‘the most fundamental

propositions in economics’ (North 1965, p. 90).15

His understanding of what constituted the most fundamental propositions in

economics changed considerably in the two decades prior to his receipt of the Nobel Prize.

The conceptual treatment of transaction costs, an essential component of North’s later

work, provides a clear example of methodological changes in North’s research (North

1976, p. 464; Milonakis and Fine 2007, p. 31). Until the late 1960s, transaction costs are

conceptual tools totally absent from his work. The paper on the productivity of ocean

shipping and the co-authored work with Davis represent North’s earliest attempts at

integrating transaction costs within the study of economic history (North 1968; Davis and

North 1970, 1971). Without the consideration of transaction costs, North’s later research

agenda would have followed a very different path. Equally, had he not applied transaction

costs to the study of historical economic institutions, and in the process made several

important discoveries, then NIE itself would have followed a different trajectory. North’s

views on rationality also changed between the 1970s and the 1990s. He acknowledged for

instance that Simon’s research into bounded rationality changed his basic economic

assumptions (North 1990, p. 22). Yet his view of ideology was not simply the application

of Simon’s rationality framework to economic history. North’s integration of ideology

appears instead to be a reaction to criticisms of his earlier arguments. The first extensive

discussion of ideology by North only occurs in Structure and Change in Economic History

(North 1981).

6 Three phases in the development of North’s economics

Recognizing the distinction outlined earlier in the paper between ‘new economic

historian’ and ‘historical economist’ makes it easier to identify and interpret the path

followed along North’s intellectual journey; it also makes it easier to make some

methodological observations about his work. Exemplars of North writing as an undiluted

‘new economic historian’ before the early 1970s include his early article on the

application of location theory to American economic history as well as the previously

discussed surveys of the economic history literature (North 1955, 1963, 1965). The

presentation in North (2005) provides a clear example of the alternative historical

economics approach. North’s contribution has been shaped by the balance between the

two approaches.

Moreover, the evidence presented in this paper indicates that the second approach

became increasingly crucial. Three phases in his economic thinking can be distinguished

according to the balance between the two approaches. Table 1 below summarizes North’s

intellectual transformation. The table shows that as the balance between these two agendas

(or ‘inputs’) has shifted, so have North’s arguments transformed. In other words, the

‘outputs’ (conclusions of models) have changed as the relationship between history,

statistics and theory has evolved within North’s thinking. This transformation has enabled

North to discuss topics such as ideology, which the cliometric literature downplayed in the

1960s and 1970s.

North in the second phase (1971–1981) was still concerned to identify the

mechanisms by which institutions remained efficient. North’s theoretical view during this

period can be closely aligned with the ‘evolutionary’ or ‘property rights’ perspective

(Alchian 1950). The development of the new institutionalism during the 1970s provided

tools that North could apply to questions of long-run development. This phase was

exemplified by his book on American economic history, co-authored with Davis, and the

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book, The Rise of the Western World, co-written with Thomas (Davis and North 1971;

North and Thomas 1973). It was during this phase for example that North began to think in

earnest about the implications of applying TCE and public choice to historical topics

(North 1974a, 1977).

North in the third phase (1981 onwards) has moved even further away from the

cliometric views that he had expressed in the 1960s. North’s writings since the 1980s have

concentrated primarily on theorizing on the relationship between institutions and

economic development rather than on applying models to historical events (North 2005).

By way of further illustration, North’s Nobel lecture discussed the possibilities of creating

a model of adaptive efficiency using theoretical, historical and statistical insights (North

1994, p. 366). North during the 1980s also distanced his analysis from the public choice

position (North 1987). Even more recently, he has focused on the relationship between

rent creation and economic development in what he terms a ‘limited access order’ (LAO)

relative to an ‘open access order’ (OAO) (North, Wallis, Webb, and Weingast 2007). To

return to a theme already discussed in previous sections, North’s more recent work hence

represents a shift away from the earlier more deductive line of reasoning.

7 The changing contents of North’s Growth and Welfare in the American Past asevidence of shifts in North’s thinking

A comparison and contrast of the contents of the three editions of his textbook, Growth

and Welfare in the American Past, provides a clear example of North’s changing views on

the relationship between economics and history. An analysis of the text provides a good

indicator of the noticeable shifts that have occurred. The different editions were published

in 1966, 1974 and 1983 respectively. Field has criticized the first edition of the textbook on

the grounds that it failed to adequately discuss the institutional development of the USA.

Field suggested this was indicative of North’s inconsistency (Field 1994, p. 135). Field did

not consider the developments that occurred in the next two editions, however. The

contents of all three editions of the book certainly demonstrate a shift from North I to II.

Nevertheless, the basic structure of all three editions was similar. The historical coverage

discussed in the respective editions is concerned with the period from the colonial period

to the (then) contemporary decades of the US economy.

The contrasts among the contents of the three editions become apparent on a closer

inspection. The most recognizable difference of the second two editions of the textbook

compared with the first (1966) edition, is that the 1970s and 1980s editions have a second

chapter on institutional economics and property rights, which is absent from the first

Table 1. Identifying the three phases in North’s economic thinking.

North’s ‘inputs’ North’s ‘outputs’

North I (1950s–1971) Predominantly new economichistorian.

Neoclassical economics appliedto historical topics.

North II (1971–1981) Mix between new economichistorian and historicaleconomist.

Neoclassical model extended bythe tools of NIE.

North III (1981 onwards) Predominantly historicaleconomist.

Neoclassical model refined byincorporating themes ignored bythese models. Some eclectic useof behavioural insights.

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(North 1966, 1974b, pp. 15–26; North, Anderson, and Hill 1983, pp. 12–23). A deeper

reading however reflects the increasingly important influence of public choice theories on

his work during the 1970s. The first edition’s concluding chapter decided that ‘poverty in

the midst of plenty’ was the problem of twentieth-century American development.

However, the influence of public choice and property rights economics became crucial in

the second two editions. Redistribution of income was therefore more favourably treated

in the first edition than in the subsequent editions (North 1966, pp. 189–192).

The final chapter in the first edition focused on the issues of public expenditure growth

and what would now be termed sustainable development (North 1966, pp. 181–192). The

second and third editions differed in their treatment of the same historical issues, however

(North 1974b, pp. 170–178; North et al. 1983, pp. 164–174). The second edition treated

government growth and the environment as discrete topics and, while it acknowledged the

existence of lobbying, it presented government intervention on balance as providing a

rational response to market failure (North 1974b, pp. 174–176). In contrast, the third

edition noted that a government able to protect property rights and supply public goods

could equally encourage rent-seeking. This tension was described as providing a ‘modern

dilemma of political economy’ (North et al. 1983, p. 173). The change in tone between the

second and third editions could be interpreted as reflecting a shift in North’s view on the

balance between government and market failure. However, neither the second or third

edition has any extended discussion of the role of ideology, which is present in North’s

phase III period.16

More generally, as Table 2 indicates, there were changes in content across the three

editions. The changes therefore were not just between the first two editions written in the

1960s and the 1970s, but arguably more profound differences could be found between the

second and third editions.

8 Technological development and institutional evolution in North

The issues surrounding institutional evolution and its relationship to technological

development are clear and tangible examples of how North has altered his thinking on the

economic process. Vromen’s analysis is useful for identifying how North’s views on

institutional evolution have changed since the 1980s. Vromen observed the role of what he

called the ‘ultimate claim’ within the NIE (Vromen 1995, p. 39). Following the arguments

of Alchian’s pioneering article, the claim implied that even if economic organizations

(such as actors, firms or players) had no preference for efficiency maximization, the

Table 2. A comparison of the index contents of all three editions of North’s Growth and Welfare inthe American Past.

First edition Second edition Third edition

Incentives 0 0 22Institutions/Institutional arrangements 0 5 16Property rights 0 19 45Transaction costs/information costs/enforcement costs/measurement costs

0 4 6

Technology/Technical advance 9 16 27Innovation 6 8 10

Source: North, Growth and Welfare in the American Past: A New Economic History.Note: Each separate category is counted in the index of the book; this leads to some double counting. For exampleinformation costs and transaction costs.

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underlying legal and economic institutional framework would nevertheless select the most

efficient organizational form (Alchian 1950). Moreover, as Vromen has illustrated,

Alchian as well as other writers such as Friedman and Becker have all interpreted the

ultimate claim to imply that tendencies exist for ‘selection’ regardless of whether firms are

profit maximizers.

The ‘evolutionary’ argument, associated with the ultimate claim, suggests that market

forces increase the opportunities of profitable firms, while the opportunities of less

profitable firms simultaneously decrease (Vromen 1995, p. 39). Vromen observed that the

claim implies that economists need not worry about psychology or decision-making within

organizations (Vromen 1995, pp. 39–40). Vromen was critical of these implications: he

noted for instance that the perspective did not acknowledge or explain how a non-

maximizing rule of thumb could win out in an evolutionary process (Vromen 1995, p. 40).

Until the early 1980s, North was sympathetic to the claim; more recently, North has

instead stressed the likelihood of inefficient institutions persisting.17 Following some

well-aimed criticisms, North began to shift his theories away from the view that a selection

mechanism ensured that institutional change was always beneficial (North 1981;

Vandenberg 2002, p. 229).

In the 1990s, he took this line of argument even further by developing an explanation

for the persistence of institutional inefficiency. By 1990, North argued that a process

analogous to technological ‘lock in’ could indeed force a country’s institutional framework

along an inefficient path (North 1990, pp. 93–100). While he accepted that organizations

would become better at exploiting a property rights regime he noted that this did not equate

to economic progress (Vandenberg 2002, p. 229). Furthermore, and especially in the last

decade, North has made much of cognitive aspects of the economic process (North 2003;

Libecap et al. 2008, p. 211). He has gone as far as to claim that cognitive science is a vital

element in understanding economic processes over time (North 2003). Consequently,

‘micromotives’, based on cognition and beliefs, have become an essential aspect of his

explanation of ‘macrobehaviour’. This emphasis provides a further break from the ultimate

claim in his more recent work.

The role of technical change in economic history is another important topic on which

North’s arguments have also changed. Table 2 indicates that North increasingly relied on

institutional relative to technological factors in his textbook account of American

economic history. Field in 1981 argued that The Rise of the Western World downplayed the

role of technical change in pre-1500 Europe; it did not explicitly outline any alternative

theory of institutional change (North and Thomas 1973; Field 1981, p. 192). In the wake of

Field’s article, North was arguably more careful both to elaborate the historical role

of technical change and to integrate this discussion with a model of institutional

transformation. The Industrial Revolution, rather than representing a wave of gadgets, was

in his view an organizational revolution based on the putting out system that paved the way

for technical progress (North 1981, pp. 166–168; Milonakis and Fine 2007, p. 36).

The later articles co-authored with JohnWallis have focused on integrating the study of

technical change with institutional change (Wallis and North 1986; North and Wallis

1994). It is noteworthy that North did not resort to using the empirical branch of the TCE

literature, which began in the 1980s, to measure transaction costs (Williamson 2000,

p. 607).18 North responded to this need to synthesize technical and institutional

determinants of transaction costs by developing instead his notion of the ‘transaction

sector’ (Wallis and North 1986; North and Wallis 1994). North in his original article with

Wallis argued that technical change was one of the three sources of transaction cost

reduction (and transaction sector growth), along with the growth of impersonal exchange

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and governmental growth, in the American economy between 1870 and 1970 (Wallis and

North 1986; Engelbrecht 1997, pp. 279–282). This was the first attempt at empirically

defining and measuring transaction costs at an economy-wide level (Engelbrecht 1997,

p. 272). In the subsequent article, North argued that institutional and technological factors

combined to determine total output costs in an industry (North and Wallis 1994).

Furthermore, the paper argued that the alterations of these variables in one industry could

spread throughout an economy. According to North and Wallis, such a process explains

much of economic growth (North and Wallis 1994, pp. 618–622).

North’s transaction sector papers exemplify Kindleberger’s ‘historical economics’

approach. In the 1986 paper an explanation of transaction sector growth in the United States

was derived from an analysis of the American evidence rather than the empirical and

historical conclusions being derived from the application of a universal model to the

historical evidence (Engelbrecht 1997). The 1986 paper therefore is far from an example of

the deductivist cliometric approach developed by North and others during the 1960s. The

1994 paper developed and presented the transaction sector findings in a simple diagrammatic

and mathematical form, which was easier to integrate with Williamson’s TCE approach.

However, North and Wallis were critical of aspects of the TCE (North and Wallis 1994,

p. 615; Engelbrecht 1997, p. 283). It should also be recognized that North’s practice in the

case of researching the transaction sector is similar to the ‘older’ institutionalism’s approach

to the study of pricing. Hodgson observed that pricing studies within the ‘old’ institutionalist

tradition proceed initially from an investigation of how prices are formed in a specific

context. Only once this investigation is accomplished is it followed by the formulation of a

pricing theory that is specific to the institution under investigation (Hodgson 1998, p. 170).

North’s analysis of the transaction sector is merely one example of a more general shift

towards historical economics. As Hodgson argues, such a methodological approach tends

to lend itself to historically and institutionally specific studies rather than general theories

(Hodgson 1998, p. 170). In line with Hodgson’s analysis, it has been noted that: ‘Douglass

North has gradually moved away from a predominantly deductive explanatory strategy to

one that is more clearly characterized by a back and forth between empirically established

relationships and explanatory models carefully designed to do the job of explaining’

(Groenewegen et al. 1995, p. 472). The similarity between the methodological practice of

‘historical economics’ and old institutionalism, as outlined by Kindleberger and Hodgson

respectively, with that of North’s later work leads to the conclusion that North’s earliest

work can be most adequately understood as following the (then) contemporary

neoclassical practice. In contrast, his more recent research represents a convergence with

the older institutionalism.

9 Conclusions

An apparent anomaly can be identified between the greater acceptance of North’s work in

the 1980s and 1990s and the unorthodox content of his research. As North became a more

mainstreamfigure (asmeasured in terms of prizes, awards and citations given to his work by

the international economics profession) the contents of North’s publications became more

‘heterodox’ (Vandenberg 2002, p. 232). The tension can most easily be resolved by

acknowledging that the neoclassical economics ‘mainstream’ has shifted since the 1980s

(Davis 2006, 2008; Hodgson 2007). Even the very usefulness of the term ‘neoclassical’ has

been questioned (Colander 2000). Cliometrics emergence in the 1960s occurred prior to the

fracturing of the edifice of general equilibrium analysis and its replacement in the academic

mainstream with a range of approaches including game theory, experimental and

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behavioural analysis (Hodgson 2007, pp. 7–8; O’Brien 2008, p. 441). The trend towards

these newer approaches has arguably increased the acceptance of institutional and

evolutionary perspectives within the economics profession (Hodgson 2007).

The relationship between theoretical innovation in economics and the reaction of

economic historians to these innovations is one long identified by North (North 1965,

1976; Libecap et al. 2008). It is a relationship that other economic historians have

subsequently identified and discussed (Williamson 1991, p. 25; Crafts 2000, pp. 11–12;

O’Brien 2008). Overall the shift in the mainstream of economics in recent decades

provides a methodological explanation of the shift in mainstream economic history as well

as contributing to an explanation of North’s intellectual development. Old theoretical

certainties, associated with the general equilibrium framework, which had underpinned

much of cliometrics written in the 1960s and 1970s have been surpassed by a literature that

has been influenced by theoretical insights taken from newer areas of economics including

the new industrial economics, new international economics and new economic geography

(Crafts 2000, p. 12).19

To take just one example identified by North, Greif’s institutionalist economic history,

with its reliance on game theoretic tools, represents the extent to which economic history

has altered as general equilibrium has been eclipsed as a theoretical framework (Greif

2006; Libecap et al. 2008, p. 210). Within economic history moreover, the range of

variables that have become fair game in explaining the economic past have increased

beyond those found previously within the general equilibrium literature. Fogel’s more

recent work on nutrition and economic development and the biological approach of Clark

provide two such examples (Fogel 2004; Clark 2007). Likewise, Mokyr’s work on

technological inertia and development, McCloskey’s work on the role of ‘Bourgeois

virtues’ in the Industrial Revolution and the recent work on the political economy of

nineteenth-century globalization could all be held up as further examples of this trend

(Mokyr 1992; McCloskey 2006; Findlay and O’Rourke 2007). North is thus far from alone

among previously ‘new’ economic historians that have turned towards a more eclectic

choice of explanatory variables.

As the evidence presented in this paper indicates however, where North is unique is

that his recent writings have taken his framework towards approaches close to the older

tradition within institutionalism. Douglass North is an important thinker for

methodologists to examine not least because the intellectual evolution in his treatment

of the relationship between economics and history provides a case study in the construction

of a methodological account of what economists actually do. An even more complete

picture could be provided in future research by comparing and contrasting North’s

methodological development with the analogous practices of other institutional

economists and economic historians.

Notes

1. It has been suggested by some authors that the term ‘new economic history’ was first coined byNorth, though others disagree (Murphy 1970, p. 15; Williamson 1991, p. 16; Goldin 1995,p. 193). Stan Reiter, a mathematical economist at Purdue University, devised the nickname‘cliometrics’ (Williamson 1991, pp. 15–16).

2. The definition of neoclassical used in this paper, and as far as possible used in the subsequentdiscussion, is taken from Hodgson (1998, p. 169).

3. For the claim that a newer imperialism has emerged, which emphasizes market (especiallyinformational) imperfections see Fine and Milonakis (2003, p. 547).

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4. Coase’s transaction cost insight dated back to 1937 and Alchian’s ‘evolutionary’ perspectivecould be traced back to 1950. Yet it was only with the emergence of the NIE in the 1970s thatthese papers became influential (Coase 1937; Alchian 1950; Williamson 2000).

5. For an alternative to Williamson’s assessment of North’s contribution to the study of culturesee Khalil (2007).

6. Schumpeter observed:

What distinguishes the ‘scientific’ economist from all the other people who think, talkand write about economic topics is a command of techniques that we class under threeheads: history, statistics, and ‘theory’. The three together make up what we shall call‘Economic Analysis’. (Schumpeter 1954, p. 12)

It should be noted that Schumpeter changed his mind during the writing of History of EconomicAnalysis and later in the same discussion added ‘economic sociology’ as a ‘fourth fundamentalfield’ (Schumpeter 1954, pp. 21, 1190; Swedberg 1991, p. 282 fn 65).

7. However, the parallel should not be stretched too far. North has not had what Schumpeterwould have considered a consistent pre-analytic vision of what the world is like.

8. A similar line of argument can be detected in Hodgson (1995, p. 297). Likewise, see Cesarano(2006, p. 448).

9. For an influential example of a methodological survey of the NEH that focuses on the supposedsuperiority of deduction over induction see Temin (1973).

10. In fairness, Rutherford in a later (2001) survey of the relationship between the so-called oldinstitutional economics (OIE) and the NIE more clearly outlines North’s shift away fromneoclassicism towards OIE (2001, p. 188). However, Rutherford’s later article still does notdiscuss in any significant detail the relationship between economic history and institutionaleconomics that can be found in North’s work.

11. By way of illustration, none of North’s books or articles is even mentioned in Vromen’sbibliography. In contrast, the bibliography provides references to 10 books or articles by OliverWilliamson. Armen Alchian and Ronald Coase get five items mentioned each.

12. In their downplaying of North’s eclecticism and focus on his supposed commitment toneoclassicism and methodological individualism, Milonakis and Fine missed some importantobservations (p. 54). For example, it should be noted that in their critique of North’s analysis oftransaction costs, they ignore the later transaction sector papers and their relationship to TCE(Milonakis and Fine 2007, pp. 48–53).

13. Fiani does however refer (2004, pp. 1014–1016) to the treatment of the state and property rightsin North and Thomas (1973) and North (1981). However, the other five pieces cited in the article,which account for the bulk of Fiani’s analysis, were all written in the period 1989–1999.

14. There is a very intemperate tone to the 1965 paper. Even Conrad and Meyer’s pioneering paperswere deemed as not going far enough in their application of economics (North 1965, p. 91).

15. This pedagogical approach led to the production of North’s paper on ‘Location Theory andRegional Economic Growth’ (North 1955; Hughes 1982, p. 9).

16. The influence of the co-authors in the third edition should also be considered as an additionalexplanation of the difference in tone and perspective from the first two.

17. North’s changing explanation of the economics of American slavery provides clear evidence of ashift in his views on institutional efficiency as well as the widening of his conceptual tools.Compare his earlier brief statements on the profitability of slavery, such as ‘there is no possibilitythat slavery was economically not viable’ (1965, p. 91) with North’s later comments on the sametopic in which ideology plays an important role distinct from profitability (1990, p. 85).

18. Klaes contrasts Wallis and North’s attempt at inferring macroeconomic transaction costs withthose approaches that follow Williamson TCE. Klaes argues there are problems with bothapproaches (Klaes 2008, p. 366).

19. For a critical perspective on these developments see O’Brien (2008, p. 441).

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