Douglass C. North: the restless innovator.

• Author: Nye, John V.C.

By the time Douglass North passed away at the age of ninety-five, he had become one of the most widely read and most highly cited economists in all the social sciences. I stress the social sciences because North's work has influenced research not just in economic history--his specialty--but also in political science, sociology, and anthropology as well as in law and philosophy. Moreover, his ideas are an illustration of how radical notions become received wisdom. His most influential claim-- that institutions are critical to the process of economic growth--went from being ignored or derided to being critiqued for its oversimplifications to becoming so commonplace a notion that modern-day readers are likely to say, "Didn't we always know that?"

Yet, odd as it may sound, there was a time when the mainstream view of economic development was that institutions were of minor importance in modern industrialization. That technological innovation as an independent force, coupled to applied science and industry within a nation that had the right mix of capital and labor and working under the guidance of Keynesian monetary and fiscal policy, was the prime or even the sole determinant of growth and prosperity. As one professor told me more than three decades ago, "Markets account for only static gains in income. Growth is all about technological change, and there, government policy is often more effective than market prices."

I am not going to rehash the stories about the common wisdom of the 1960s that overrated the growth prospects of the Soviet bloc vis-a-vis the West or the way that the International Monetary Fund and the World Bank arranged their funding and support to align with this consensus. I simply note that whenever someone today writes that one sector of the economy is clearly more deserving of support than another, that managed growth always beats spontaneous investment, that increased public spending is the proper route to development, or that sufficient numbers of engineers and scientists can propel the economy of an otherwise moribund nation, that person is in essence channeling the anti-institutional spirit of pre-Northian ideas.

So let us examine more closely what North meant by institutions and just what his contributions were. For North, institutions were the so-called rules of the game--the set of formal and informal laws and norms that constrained and directed people's behavior in both business and politics. Unlike the more informal use of the word institutions, he saw entities such as the World Bank and the university as organizations, not...