Understanding the Process of Economic Change.

• Author: Wilkinson, Will
• Position: Book Review

Understanding the Process of Economic Change Douglass C. North Princeton: Princeton University Press, 2005, 187 pp.

You may know the joke about the chemist, the physicist, and the economist in a lifeboat lost at sea with a single can of food and no way to open it. When the punch line arrives, and the economist suggests, "Assume a can opener!" the joke is on the scientific and practical pretensions of economics. And indeed, some of the "simplifying" assumptions of economic theory--such as perfect information; zero transaction and enforcement costs; and automatic, instantaneous, and veridical updating of beliefs--undercut its ability to explain, for example, why Canada is fabulously wealthy while Zimbabwe is not. In Understanding the Process of Economic Change, Douglass C. North--co-winner of the 1993 Nobel Prize in economics and dean of the New Institutionalist school of economics-sets forth a radical reconceptualization of the task and methods of the social sciences in general and economies in particular, providing a glimpse at an economics that refuses to "assume a can opener." The result is either exhilarating or vexing, depending on one's prior methodological commitments.

Understanding the Process of Economic Change proceeds in two sections. In the first section, North raises a number of methodological issues, including the nature of uncertainty and unpredictability (Chap. 2), the integration of the cognitive sciences into economies (Chaps. 3 and 4), and the way taking the mind seriously changes how we must conceive of economic and political institutions (Chaps. 5 and 6). In the second section, North attempts to illustrate how such an ambitious program might be put to use to aid our understanding of economic change. Here North dons his historian's cap, and discusses the way in which humans have altered their environment throughout history (Chap. 7), provides updated accounts of the rise of the western world (Chap. 10), and the rise and the fall of the Soviet Union (Chap. 11), preceded by reflections on the institutional sources of order and disorder (Chap. 8), what it means to get institutions "right" (Chap. 9), and topped off with an examination of the lessons for promoting economic growth in the present day (Chap. 12).

Others are better equipped to comment on whether North's contribution in the historical chapters marks an advance on previous scholarship in economic history. I will concentrate on the first, more methodological, section...