Many great economists live long lives. James Buchanan, Milton Friedman, F.A. Hayek, Ludwig von Mises, and Gordon Tullock all lived into their nineties. Ronald Coase died a centenarian. Sadly, Douglass North has joined that august club at age 95. Keynes’ prediction about the long run once again proves correct.
North’s ideas and influence will live even longer than he did; consider that his successful rebuttal to Keynes. North won the 1993 economics Nobel for his work as an economic historian, and for showing the importance of institutions in economic development. He also played a large role in inspiring the New Institutional Economics (NIE) movement, which has its own scholarly society.
What are institutions? North and the many economists he influenced use the word in a particular way. For example, the Competitive Enterprise Institute is an institution (it’s even in our name), but not in the Douglass North sense. For North, institutions are more like the rules of the game. In baseball, three strikes and you’re out is a baseball institution—again, in a very different sense than how the Yankees or Cubs are baseball institutions. How would a pitcher’s behavior change if the rule was four strikes per out, or two? How would a hitter behave differently if foul balls were automatic outs? That’s what Doug North’s research approach was about, except on a much larger historical scale.
One of North’s most famous papers is “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” It is set in 12th century France, and coauthored with Paul Milgrom and Barry Weingast, themselves distinguished economists. France had no functional national court system in the 12th century, and a dearth of professional judges and lawyers. Even so, informal markets, called Champagne fairs, opened up and spontaneously evolved their own institutions. Even without help from up on high, people found ways to make things work.
These spontaneous Champagne fair institutions ranged from how stalls were allocated to norms for bargaining and haggling, all the way up to the creation of private courts for resolving disputes. It’s a real-life illustration of Hayek-style spontaneous order. North adds the insight that the institutions that evolved in the Champagne fairs guided peoples’ behavior in certain directions. Different institutions would have guided behavior differently.
Over time, successful institutions displaced unsuccessful institutions, in an ongoing social evolutionary process. This insight continues to influence scholars in many disciplines, not just in economics.
Another famous paper about England’s 17th century Glorious Revolution, also coauthored with Barry Weingast, makes the case that checks on royal power made modern life possible. In the short run, a weaker king made people’s property rights more secure. No longer could the king just take what he wanted. Now he had to deal with a strong Parliament. Successfully removing James II, the last of the Stuarts, and replacing him with the more amiable William and Mary made Parliament a credible counterweight to royal ambition.
This new institution, which we now call separation of powers (note that John Locke’s Treatises came out at precisely this time), made modern commerce and the Industrial Revolution possible. There is obviously much more to the story of modernity, but North told an important part of the tale.
North also laid out his institutional approach in a number of books. To his credit, they are all short. One of them particularly influenced me as a student: Understanding the Process of Economic Change. Here, North goes a level deeper than the Champagne fair or Glorious Revolution articles.
Yes, institutions matter. Societies with secure property rights, the rule of law, and so on tend to be wealthier than societies that don’t. But where do those institutions come from? How do they emerge? How do institutions evolve over time? The general theme is that the institutions that best fit a given society’s circumstances emerge organically, from the bottom up. They can’t be planned and imposed from the top down. They just kind of happen, as unsatisfying as that is to say. They also change over time. What works in one time and place may not work in another, so institutions must be allowed to evolve over time. Legislation and social conventions that worked for railroads or horses might not work for self-driving cars. It is a brilliant performance.
One final point to make: economics is about human cooperation and voluntary exchange. It is quite literally a social science. Douglass North understood that point as well as anyone. Fred Smith and I have recently spent a good deal of time encouraging economists to move beyond the Homo economicus blackboard caricature and study Homo sapiens as well. Douglass North needed no such reminder. Nor do his numerous students who work every day to carry on his impressive intellectual legacy. As long as North’s career was, his influence will last far longer.