For economic historians, the ability to write well comes almost as second nature. For Douglass C. North, the author and Nobel winning economist behind Structure and Change in Economic History, this is no exception. Published in 1981, Structure and Change in Economic History is cited as one of the reasons for giving North (and his co-recipient, Robert Fogel) the 1993 Nobel Prize in Economics because of its cohesive creation and application of new institutional theory to history, known as ‘New Economic History.’
Why I chose it
It’s written by a universally respected new institutional scholar who won the Nobel. It would be safe to say that this falls into the list of many economists as ‘must read.’
North splits Structure and Change in Economic History into three parts, ‘Theory’, ‘History’, and ‘Theory and History’, an organizational tool that helps you go back and forth for any notes or passages you may need to reread.
In part one, North lays down all of his new theory for explaining change through economic history, which he largely explains using institutions, transaction costs, and ideology. Through this entire section, North also provides his major criticisms of (then) current economic thought, the other social sciences, and Marxist theory. On each criticism in each chapter of part one, North then explains how his new theory can explain the gaps currently in economic history.
Part two becomes an application test of North’s theory, where he explains human history from the neolithic revolution to the United States, circa 1914. Between these two time posts, North breaks human history up into what he designates as the ‘First’ and ‘Second Economic Revolutions,’ time periods that slightly diverge from mainstream historical and economic analysis. In particular, the Second Economic Revolution, according to North, was not the Industrial Revolution, but rather the century following it, where in the mid-19th century science and innovation were tied together at a constant rate.
Part three is rather short, and is simply a reiteration by North on his theory, its application in history, and the implications of his arguments.
The most important work, in my opinion, occurs in part one, where North outlines his criticism of neoclassical economics and then puts forth his addition to economic theory. My review will focus entirely on this section. However, I want to emphasize that the other two sections of North’s book are still very important and valuable, but for the sake of keeping a somewhat short review, I will have to cut out much of his work.
Neoclassical economics, with its emphasis on marginal returns, market equilibriums, and relative prices, can explain why economies remain stable (when they do) and the rational self interest of individuals. In short, neoclassical theory is great at explaining why prices lead to beneficial market coordination (prosperity) and why individuals will tend to act opportunistic, but it cannot provide an explanation for structural change over time (economic decline, stagnation) and the countless instances where individuals act collectively to overcome the free rider problem (political revolution). In face of all of this, North contends that neoclassical theory must be extended to account for these discrepancies in its current theoretical framework, a task that North takes upon himself to solve.
Early on, North introduces his theory of ideology and its role in structures and change through history. Ideology provides explanation for almost all instances of collective action when neoclassical theory fails to do so. Class conflict, race, and religion all fall into this category and can help explain the multiple revolutions and structural changes seen through history, though I should not overemphasize North’s theory of ideology.
In short, where neoclassical economics fails to explain a change in history, North’s theory of ideology can help bridge the gap by explaining why rational individuals, who would typically be cautious to acting against self interest, will act in a collective manner for the collective good. This is a vital addition to the literature in neoclassical economics, because it is with North that the first substantive theory of ideology is created in a neoclassical framework.
The next major addition to neoclassical theory that North makes is his theory of institutions. For the majority of human history, universal suffering defined the condition of our species. Despite this, there were numerous occasions where societies would rise above the rest and enjoy a burst of prosperity, which combined with the gradual increase in population, meaning that something pushed humanity to perform better. This ‘performance,’ according to North, comes from the various economic organizational forms that have existed through time. Some forms of economic organization were more efficient than others, and through time, better and better forms came into existence. Overarching these organizational forms are institutions, both formal and informal, that dictate and constrain the behavior of humans in a society.
Building on his criticism of neoclassical theory, North argues that institutions are created in order to lower transaction costs in society, both for rulers and for the average peasant. Institutional norms, such as the level of ‘trust’ towards strangers, allow economic activities to exist more efficiently. This, in turn, allows for better economic performance and prosperity in a society. Neoclassical theory has severely neglected the analysis of transaction costs in an economy, assuming that transactions occurred ‘frictionless’ in society. North completely overthrows this by insisting all institutional change can be framed in terms of transaction costs, with the rise and fall of political units (governments) occurring with the rise and fall of transaction costs of enforcing rules. This is also how North creates his theory of the state, another institution which he explains as a result of transaction costs.
Honestly, this book was amazing to read because of all of the insight North provided. Couple this with my amateur level of experience with economics, and you can understand why I have no real criticism to provide. If anything, I believe North could have expanded the last part of his book for the sake of providing better analysis, especially by providing, and further answering, counter arguments against his theory.
If you are a student of economics, history, or just like reading about those two subjects, I cannot recommend this book enough. Yet, despite how easy it is to read North’s work, I can say that I will definitely have to reread the book two or three more times to fully comprehend the gravity of North’s arguments. North rightfully considered a phenomenal writer, and despite the density of his theory, he manages to pack it all in under 210 pages, showing that simplicity is truly the ultimate sophistication… at least with academic literature. 5/5