Understanding the Process of Economic Change.

• Author: Voigt, Stefan
• Position: Book review

Understanding the Process of Economic Change

By Douglass C. North

Princeton, N.J.: Princeton University Press, 2005.

Pp. xi, 187. $29.95 cloth.

The new institutional economics is the research program whose representatives claim that institutions are crucial for explaining the economic performance of both firms and entire countries. It has been a huge success over the past two decades. Even countries that share almost identical histories, that have similar resource endowments and disease environments, that are subject to identical geographical conditions, and that hence are subject to the same climate may experience very different economic performances. Take the two Germanys between the end of World War II and 1990 as an example: almost nobody questions that the differences in their institutions explain most of the differences in their economic performance.

Until fairly recently, mainstream economics was devoid of discussions of institutions. Douglass C. North can rightly be considered as one of the economists responsible for having changed that situation. His books Structure and Change in Economic History (New York: Norton, 1981) and Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990) proved to be highly significant for the success of the research program. These books synthesized the existing knowledge in an accessible way and with an enthralling style, and they advanced bold hypotheses. Whereas the first book remained largely in line with the neoclassical paradigm, the second may be considered North's break from that paradigm. Focusing solely on these two books, however, is insufficient to explain the decisive role North has played in making the new institutional economics such a success story. Additional factors include the work of the productive group of scholars at Washington University in St. Louis, North's appealing public speaking, and the formation of the International Society for New Institutional Economics.

Hopes that North's new book Understanding the Process of Economic Change will also be an instant success are therefore not unfounded. In the preface, the Nobel laureate makes clear that he is entirely convinced of his new oeuvre, writing that "[t]his study is an extension--a very substantial extension--of the new institutional economics" (p. vii). The question that North deals with here is simple, straightforward, and basic. As the book's title indicates, he aims at...