The Nobel Prize

Douglass C. North (b. 1920)

Douglass North was born in Cambridge, Massachusetts, USA in 1920. His early education was peripatetic, primarily because his father’s job as an insurance company manager necessitated a number of family relocations – including a spell in Ottawa, Canada. As North’s mother ‘believed in education broadly construed’, the family also lived for a time in Europe and North went to school in Switzerland in 1929–30 (Nobel Foundation, 2004). Returning to America, North completed his high-school education in Wallingford, Connecticut, where he became an accomplished amateur photographer, something he was to later consider taking up as a profession.

Although accepted by Harvard University, North elected to attend the University of California at Berkeley following another family move, on this occasion to San Francisco. He judges himself to have been at best a ‘mediocre’ undergraduate; possibly he spent a little too much time engaged in student politics – North says he became a ‘convinced Marxist’ at Berkeley. He was awarded a BA in political science, philosophy and economics in 1942. Plans he had to enrol in law school after graduation were abandoned after the American entry into the Second World War (following the Japanese attack on Pearl Harbour in December 1941), and on leaving university North  joined the Merchant Marine ‘because of the strong feeling that I did not want to kill anybody’ (Nobel Foundation, 2004). He became a navigator and made repeated trips to Australia and into the Pacific war zone.

North recollects that his time at sea, and a period towards the end of the war as a navigation instructor back in California, gave him an opportunity for three years of continuous reading; this reading convinced him that he should become an economist (Nobel Foundation, 2004). It was, however, a close-run thing. As an undergraduate North had worked a summer as a photographer and had encouragement to return to that profession, but he was persuaded to stick with economics and so went back to Berkeley to enrol as a graduate  student. This decision was informed by a conviction ‘that what I wanted to do with my life was to improve societies, and the way to do that was to find out what made economies work the way they did or fail to work’ (Nobel Foundation, 2004). While the formal economics he learned at Berkeley did not inspire him – and he  claims not to have learned much – it was during his postgraduate studies that he began to embrace economic history under his thesis adviser M.M. Knight. North was awarded his PhD in 1952.

After the war, Berkeley also provided North with his first academic appointment as graduate teaching fellow, a post he held  from 1946 to 1949. In 1950 he began a 33-year association with the University of Washington in Seattle where he was first assistant, then associate professor, becoming Professor of Economics in 1960. North also served as director of the university’s Institute for Economic Research between 1961 and 1966 and then chairman of the same body from 1967 to 1969. He has also held posts at Rice University,  Houston, Texas, where he was Peterkin Professor of Political Economy in 1979, and the University of Cambridge, where he was Pitt Professor from 1981 to 1982. Since 1983, North has been Professor of Economics at Washington University in St Louis.

North’s offices and honours include membership of the Board of Directors of the National Bureau of Economic Research (NBER) from 1967 to 1987; in 1972–73 he was president of the American Economic History Association . North was visiting associate director of the Centre de Recherche Historique at the École Pratique des Hautes Études in Paris in 1973 and in 1975–76 he was president of the American Western Economic Association. In 1993 North was awarded the Nobel Memorial Prize in Economics jointly with Robert Fogel ‘for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change’ (Nobel Foundation, 2004).

North’s involvement with what has become known as the ‘new economic history’ or ‘cliometrics’14 – he and Fogel are generally acknowledged as its founders – began at a joint conference of the NBER and the Economic History Association on the growth of the American economy. He credits this meeting – which had a quantitative focus – with actually launching cliometrics; which is the use, inter alia, of quantitative techniques, hypothesis testing, economic theory and counterfactual analysis to explain economic growth and
decline (Nobel Foundation, 2004). North joined the NBER as a research associate in 1956 and, working alongside Simon Kuznets (see entry in this volume), began the empirical analysis that would lead to his important quantitative study of the US balance of payments 1790–1860 (Nobel Foundation, 2004 and see North, 1960). North reflects that this ‘was an enormously important year of my life’; in effect it both prompted and nurtured his ground-floor work in cliometrics (Nobel Foundation, 2004).

North’s Nobel citation credits him specifically with pioneering studies of long-term development in Europe and the United States and with penetrating analyses of the role of institutions in fostering economic growth. North characterises his own approach to economic history as concerning ‘the performance of economies through time’ (North, 1994, p. 359). McCloskey (1994, p. 165) provides perhaps the most illuminating representation of North’s work in describing it as ‘narrative’, and more compellingly, ‘moving pictures’. North’s dynamic methodology evolved out of the shortcomings he perceived in standard neoclassical theory as applied to such basic questions as why some economies grow and others stagnate. The neoclassical model might be precise and elegant but, for North, it is also ‘frictionless and static’: it can, for example, say much about the operation of markets but little about how they arise and how they develop over time (North, 1994, p. 359). North argues that the neoclassical approach neglects two crucial factors that profoundly influence economic performance: the institutional framework that structures human relations, and the dimension of time through which, and here North borrows a phrase from Friedrich von Hayek, a society’s ‘accumulated stock of knowledge’ is transmitted (and via which institutions evolve). Institutions are the formal constraints that govern a society – rules, laws, constitutions – together with the informal constraints that also condition the behaviour of its members: codes of conduct and conventions, for example (North, 1994). An analytical framework based on an appreciation of the dynamic significance of institutions has enabled North to offer some convincing explanations of economic performance in a variety of historical and contemporary contexts (Myhrman and Weingast, 1994).

North traces the development of his work through a series of books, most of which are referenced in his Nobel citation. The first of these – The Economic Growth of the United States, 1790–1860 – published in 1961, he describes as a ‘straightforward analysis of how markets work in the context of an export staple model of growth’ (Nobel Foundation, 2004). Others are more effusive. Myhrman and Weingast (1994, p. 186) consider it to be ‘one of the founding contributions to cliometrics and the new economic history’, while the Nobel Committee credits it with influencing the research agenda in the United States and elsewhere (see also McCloskey, 1994). Its major (cliometric) innovation was to incorporate significant amounts of quantitative data into the analysis of historical economic performance (see Pressman, 1999; Myhrman
and Weingast, 1994).

In the mid-1960s, North switched the focus of his research from  the United States to Europe. In doing so he came up against a problem: in his own words he ‘quickly became convinced that the tools of neo-classical economic theory were not up to the task of explaining the kind of fundamental societal change that had characterized European economies from medieval times onward’ (Nobel Foundation, 2004). In North’s view, adequate explanations of the markedly different trajectories of European economies could not be produced from ‘frictionless and static’ methods. The neoclassical approach had, for example, little to say about why some countries in Western Europe flourished economically – England and the Netherlands were the beacon cases – and others, such as Spain and Portugal, failed. North’s ‘new institutional economics’ was the means by which he began to address such questions.

This new emphasis on the role of institutions in conditioning economic growth resulted in two further books: with Lance Davis, North produced a reinterpretation of growth in the United States, Institutional Change and American Economic Growth (1971a); and with Robert Thomas he wrote The Rise of the Western World: A New Economic History (1973). Both books demonstrated the importance of the institutional context of growth promotion, as opposed to the traditional neoclassical concern with factor accumulation (North,  1994). For example, in the early United States, canal building played a central role in growth because it both provided for unprecedented savings in transport costs and extended the physical and functional range of markets. What Davis and North (1971a) showed was that this new transport technology did not emerge spontaneously or naturally out of the ether, rather it was predicated on historically contingent institutional change. Similarly, North and Thomas (1973) demonstrated that the economic growth in England that propelled it from a second-class economy in 1600 to the world’s greatest power by 1700 (Hill, 1980) largely rested on a new institutional framework: property rights and the fillip to individualism underwritten by the nascent parliamentary system. Spain, on the other hand, got ‘stuck’ with the wrong institutions and floundered economically (see also North, 1994; Goldin, 1995). Although both books explicitly understood
the significance of institutional forms in the growth process, North later acknowledged that they also had shortcomings: for example, they could not explain ‘why institutions produced results that in the long run did not manage to produce economic growth’ (Nobel Foundation, 2004). Why, in other words, pace the neoclassical rationality assumption, would societies, apparently actively and consistently, choose poor institutional arrangements?

North approached an answer to this question in two further books: Structure and Change in Economic History (1981) and Institutions, Institutional Change and Economic Performance (1990). In the first of these he modelled the state in history – the arbiter of institutional rules – as a maximising agency that provides state services, such as security and justice, in exchange for revenue, and which also operates under the risk of replacement by rivals (Myhrman and Weingast, 1994). This approach enabled North to demonstrate that, in his phrase, ‘inefficient’ rules – in the sense that they were preferred by the state but were not greatly conducive to the promotion of economic growth – could emerge and persist (Nobel Foundation, 2004). However, this reading still left him with a rather unsatisfactory understanding of the political process and it is politics, in the final analysis, which decisively conditions the rules by which societies operate.

The second book moves on to consider the relationship between the political process, institutional forms and the economic performance of nations. North argues here that what he calls ‘political markets’ tend to be inefficient because of the difficulty in measuring and enforcing agreements between participants (the electors and electoral candidates in democracies). Given that electors tend to be generally underinformed and the issues complex, ‘ideological stereotyping takes over and [in many cases adversely] shapes the consequent
performance of economies’ (North, 1994, p. 361). However, North also stresses that economic progress is not just a matter of selecting ‘appropriate’ institutions: this can be done relatively quickly but the ‘informal norms’ that condition people to behave in particular ways (customs, beliefs, dogmas, prejudices and so on), and which also shape economic performance, change much more slowly. North’s Nobel citation recognises that his work in this area has important implications for policy making in developed and transition economies.

In addition to his books (see also North, 1966; North and Miller 1971b), North has written some highly influential journal articles. For example, his 1968 Journal of Political Economy paper on productivity in ocean shipping is ‘one of the most quoted studies in economic history’ (Nobel Foundation, 2004).

Main Published Works
(1961), The Economic Growth of the United States, 1790–1860, Englewood Cliffs, NJ: Prentice- Hall. (1960), ‘The United States Balance of Payments 1790–1860’, Trends in the American Economy in the Nineteenth Century, 24th Conference on Income and Wealth, National Bureau of Economic Research, Princeton, NJ: Princeton University Press.
(1966), Growth and Welfare in the American Past: A New Economic History, Englewood Cliffs, NJ: Prentice-Hall.
(1968), ‘Sources of Productivity Change in Ocean Shipping, 1600–1850’, Journal of Political Economy, 76, September, pp. 953–70.
(1971a), Institutional Change and American Economic Growth 1607–1860 (with L.E. Davis), Cambridge: Cambridge University Press.
(1971b), The Economics of Public Issues (with R.L. Miller), New York: Harper & Row. (1973), The Rise of the Western World: A New Economic History (with R.P. Thomas), Cambridge: Cambridge University Press.
(1981), Structure and Change in Economic History, New York: W.W. Norton. (1990), Institutions, Institutional Change and Economic Performance, New York: Cambridge University Press.
(1991), ‘Institutions’, Journal of Economic Perspectives, 5, February, pp. 97–112.
(1994), ‘Economic Performance Through Time’, American Economic Review, 84, June, pp. 359–68.

Secondary Literature
Goldin, C. (1995), ‘Cliometrics and the Nobel’, Journal of Economic Perspectives, 9, Spring, pp. 191–208.
Hill, C. (1980), The Century of Revolution 1603–1714, 2nd edn, Wokingham, UK: Van Nostrand Reinhold.
McCloskey, D.N. (1994), ‘Fogel and North: Statics and Dynamics in Historical Economics’,
Scandinavian Journal of Economics, 96 (2), pp. 161–6.
Myhrman, J. and B.R. Weingast (1994), ‘Douglass C. North’s Contributions to Economics and Economic History’, Scandinavian Journal of Economics, 96 (2), pp. 185–93
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