daviskedrosky.substack.com/ 20/12/21 (Douglass) North by Northwest (Europe) The History of Economic History, Part II – Davis Kedrosky
…”As we noted last week, North was an apostle of the Cliometric Revolution in economic history. The Economic Growth of the United States, for example, was based on “the proposition that U.S. growth was the evolution of a market economy where the behavior or prices of goods, services, and productive factors was the major element in any explanation of economic change.” Ironically, he explicitly relegated institutions to a subordinate status, writing that “they have modified rather than replaced the underlying forces of a market economy.” As we discussed last week, the book develops a rather conventional (for the time) theory of economic development as a function of geographical specialization—the ‘“triangular trade” between a food-producing Midwest, manufacturing North, and slave-plantation South. And so long as he continued to work on American economic history, his approach remained stereotypically neoclassical, lining up with Fogel, Lance Davis, and Stanley Engerman in foreground technology and production functions…
…“[T]he tools of neo-classical economic theory,” he later wrote, “were not up to the task of explaining the kind of fundamental societal change that had characterized European economies from medieval times onward.” He began to cast about for something new, the first inklings of which appeared in his 1968 paper “Sources of Productivity Change in Ocean Shipping” in the JPE. In it, he found that organizational rather than technical changes were the greatest contributors to efficiency in oceanic transport prior to 1800. This was exactly the opposite conclusion from the one he’d drawn in an analogous paper a decade before, and a tentative step away from the central model of Economic Growth. By 1971, he was calling for something that seems very familiar to us now: “a body of theory which encompasses the traditional models of the economist and both widens its scope and allows us to include an explanation of the formation, mutation and decay of organizational forms within which man cooperates or competes.” In other words, he’d realized that economics was in need of institutionalism.
…The theory of “neoclassical institutions” resulted in two key insights. First, changes in relative prices create incentives for alterations in human organization. But these shifts are sticky, transcending the short-term economic conditions that brought them about. North thought that path dependence and transaction costs were part of the explanation. Once institutions were in place, transaction costs created frictions that led them to persist beyond the context for which they initially evolved. More importantly, North was slowly realizing that neoclassical theory was inadequate for explaining the kind of long-term dynamics that he believed at the center of the wealth and poverty of nations…
North’s “breakthrough” work began to resolve these dilemmas. Structure and Change in Economic History (1981) offered a radical new explanation of persistence that superseded the transaction cost compromise: culture. The “cumulative experience” handed down across generations coalesces over time into beliefs and ideologies, and the accretive nature of this process makes the outputs persist even if economic efficiency arguments dictate change. Bad institutions that clearly retard development can be locked into place by the cultural framework of a society merely because of the path-dependent construction of the underlying norms and assumptions—hardened by thousands of discrete interactions between anonymous actors. Change, therefore, occurred on two levels: the discontinuous and abrupt, as in the Black Death case, and continuous evolutions in the longue duree. Neither type need necessarily persist; Structure and Change offers framework for thinking about why they do and don’t. The assumption that existing arrangements were efficient had been abandoned for good.
In 1989, North (along with Barry Weingast) published the work for which he’s perhaps best known: “Constitutions and Commitment…
What was North’s great intellectual contribution, in the end? To the Nobel Committee, which awarded him the Prize in 1993, North “[s]hed new light on the economic development in Europe and the United States before and in connection with the industrial revolution” and “emphasized the role of property rights and institutions.” As we’ve seen, though, his research program was far more ambitious. To Claudia Goldin, North sought nothing less than to return economic history—led astray by the Cliometric Revolution—to the study of the “humanly devised constraints that shape human interactions,” as he put it in a 1991 paper in the JEP. Neoclassical theory explained capital accumulation and technical change assuming a given set of institutions, but not why or how a particular institutional configuration came to exist in the first place. Accumulation of the conventional factors of production set out the capacity, but not the impetus, for sustained economic growth. To me, North did something even more profound. His efforts to develop a theory of institutions led him, with economic history itself in tow, to study the truly fascinating questions in history: why and how complex societies emerge, change over time, and differ in wealth and power today.”
tandfonline.com/ 6/2020 Frank H. Knight on social values in economic consumption: an archival note by Luca Fiorito , Massimiliano Vatiero
We reproduce an unpublished address on “Social Values in Economic Consumption” which Knight prepared for a SSRC Conference in June 1931. This material sheds new light on Knight in two respects. First, anticipating what is known as the relative income hypothesis, Knight indicated that a general increase in income, not only leaves the individual’s relative position in society unaltered but makes her/his situation worse off due to the peculiar characteristics of the market for “personal services.” Second, this address provides further evidence of how, in spite of some substantial methodological differences, Knight’s research interests converged with those of the institutionalists.
Keywords: Frank H. Knight consumption relative income institutionalism