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Douglass C. North
President International Society of New Institutional
WUSTL Contact Information: Work: (314) 935-8509 Fax: (314) 935-4156
E-mail: north@wueconc.wustl.edu
Address: Campus Box
I would like to say how pleased I am to be here. I am a fan of CIPE and I think it does wonderful work. I have known CIPE for some time, and I am impressed with what they are doing. I am also happy to see so many familiar faces around the table from work I’ve done before or from my wanderings around
We know a lot about the sources of good economic performance. What we don’t know is how to get them. So the subject of my talk is really about something that economics has slighted throughout its life, still slights fundamentally, and that is the process of economic change. I will spend a lot of my time talking about this process, because I want to weave in all the things that I think are important to this new economic theory. This new economic theory is very impressive, particularly in microeconomic theory, but it is static. It is a theory about how an economy performs in a moment of time. What we need is a dynamic theory, a theory about the process of change. Neither economics nor indeed any of the social sciences provide us with such a framework, and I want to emphasize that without such a framework you are bound to do things wrong. Indeed, the central argument of much of my talk is how we get economic policy wrong — when we use a static framework in dealing with a world of dynamic change. You will see this theme surfacing over and over again.
Now, let me go through the simple mechanics of economic change. We begin with something that nobody knows what it is — we call it reality. Reality is nothing more than what we characterize as the things we are concerned with and what we attempt to build models of and analyze. Economists and social scientists in general have developed enormous amounts of statistical data. They have tried to give us a picture of this moment of time whether you are looking at income accounts, demographic accounts, and so on. We have enormous amounts of data, but the accounts do not put it together. I want to emphasize this, you may have all the statistics in the world about demography and national income and on and on, but what you really want is a framework that puts all of these pieces together. Ideally, that framework would put together three fundamental pieces. First, the framework would build on the theory of demography (fertility, mortality, and migration) and also on the quality of human beings. Second, the framework would build upon our stock of knowledge and the way it is used in society, and that is a complicated thing about which we know very little. Actually, we have a lot of information about technology issues, but we have very little information about the overall stock of knowledge that society uses and develops. Third, is the need for institutions. We need a good theory that would integrate all three of those pieces, because if you don’t integrate all three of them you will get it wrong a lot of the time. When you make a change in any one of these fundamental elements, then you must be conscious about its repercussions on the other elements. You must be self-conscious about the repercussions when you think about the dynamic process of change. That is true. I can think of a simple model that is straight economics or straight demography and it will give you all the answers you need, but for the issues that we are concerned with here — how whole economies perform over time — an integration of the three elements is essential. I am going to make it even tougher. It is one thing to have an integration of these three elements at a moment of time. However, it is a lot more difficult to have it over time. What you are interested in here is something that economics generally does quite badly. You are interested in how, when you alter the way the game is played at one margin, it affects the performance of the economy downstream. If you do not take those effects into account, then obviously you will fall flat on your face. An illustration of this are the economists who went to the transition economies in
If you don’t recognize the interplay between all of the pieces downstream, you are going to get it wrong, and that is really my theme. So we begin with this thing called reality that none of us fully understands even though it is at the heart of what we have to understand all of the time. From reality we have to construct models, theories, and/or ideologies. They are all various versions of what we do and of how we understand this reality. The reason why this is so intriguing is that our beliefs are always a simplified view of a complex world. If we have a belief system that is fairly good it captures the basic elements, at least at a moment of time, and gives us the basic building blocks. When we sometimes develop a model that makes sense out of the world it is because that model captures the fundamentals of the problem, and therefore, the implications with respect to policy bear some resemblance to what we originally had in mind.
The first step is whatever we perceive to be real, and the second step is the way we construct our understanding. This poses an interesting problem, because this automatically implies a world of uncertainty. In economics, we have had a long-standing view that while you can model a world of risk because you can determine some probability of outcomes, you cannot model a world of uncertainty. That holds true because by definition a world of uncertainty is one in which you don’t have a probability distribution outcome. Sometimes you don’t even know what the outcomes may be. Now let me tell you that an enormous amount of what we have to do as economists deals with a world of uncertainty. We do not have any good theories. Not only do we not have good theories about the integration of these three parts at a moment of time; we have almost no theory about how they have evolved through time. Now the reason why this is important to you is because, in spite of that, we all make decisions based on this uncertainty every day. How do we do it? Economists have always asserted that you can’t theorize in the face of uncertainty. Then how come we not only theorize in the face of uncertainty, but act on it? Whether we call them ideologies or belief systems, they are the way in which we act. Now one of the crucial parts about the things we are trying to understand in this world is why belief systems evolved, why they are accepted, and why they may fall apart. If you want the classic example of this, which has dominated our history in the 20th century, it is the rise and fall of the
We have reality and we have belief systems. Then those with belief systems construct a system of institutions based upon those beliefs. These institutions are in fact incentive systems. The institutions are designed to carry on or implement the beliefs of those people who are in a position to influence political, economic, and social policy. So we have the reality, beliefs and institutions, and then, on the margin you keep on evolving. And as different organizations and entrepreneurs seek chances to improve their lot, they modify policies. Policies being modified at the margin in turn have altered the original institutional framework. Then you have altered reality and reality in-turn is going to alter the belief system and on and on in a circular flow that goes on forever.
I could spend the next ten hours telling you about each part of each piece on this because each part is complicated, and indeed, I am writing a book about it. We have very imperfect knowledge about this and when you start to think it is easy to see how throughout economic history we have almost always gotten it wrong. There are times when we got it right, but I am not going to talk about those now, because we get it wrong lots more often than we get it right.
Now we get it wrong for three reasons. First, because we don’t understand this reality or we have an imperfect understanding of it. Sometimes we are close enough so that we see it pretty well, and therefore, we are able to come to terms with it and to make policies that produce the desired results. But the more complicated it is the more uncertain it becomes, and the more likely we are to get it wrong. Now if I had time, I would go into the cognitive science foundations of this environment because a lot of the work I do these days is attempting to understand how these beliefs evolve and why they are adopted. That is really a very exciting frontier that were all involved in these days and in which I am now involved in a big way. In fact, I helped to create a center in cognitive science at
Second, is that the belief system we have may be like Marxism, which incidentally was an impressive belief system that worked well over some areas of activity. Marxism did indeed lead to the
The third way is one that is a big dilemma for all of us in this room, and one that I have been confronted with over and over again. When I get asked to play God around the world, usually with more disastrous results than God, the only real tool that we have is to change the way the game is played. We must change the formal rules of the game and institutions are the formal rules for informal rules of behavior. Enforcement and operating characteristics shape the way in which economies and polities in society work, and we can only change one. It is true we have some control over enforcement mechanisms, although very imperfect control. In most cases, we don’t have much control at all over norms of behavior and values in the short-run.
Let me give you just a couple of simple illustrations to point this out. When Latin American countries became independent in the late 19th century, they generally adopted variations of the U.S. Constitution as formal rules of the game. However, results in
The second illustration is from when I was invited by the Soviet Academy of Science to go to
What we are concerned with is how to shape reform. However, since we can only change the formal rules, we are left with only a very blunt instrument with which to shape reform. I want to emphasize that, because if you don’t understand that, you are going to be continually disappointed. If you do understand it, you will be much more sensible about the way you structure reform or at least about what you can and cannot do in the short-run. Later, I am going to talk about ways by which you can shape the other two aspects of institutional change so that they work in favor of your desired results.
There are three sources of these problems. They relate to a dependent pattern by which unchanged constraints are built into the system. This is important because it gets you into the dynamics of the things I mentioned. We go from reality to beliefs to institutional change, but one thing that I left out is that any institution that you have, you actually inherited from the past. You have inherited not only the formal rules of the game, but you have inherited the informal rules, values, and so on. You have also inherited the way in which the rules of the game are enforced, whether that is through formal means or the reputation of a coercive third party.
So even though you may be the one entrepreneur who is making the political decisions, you are enormously constrained by what you’ve got. You are constrained by the fact that through your inheritance of formal rules and informal norms, you can only affect change at certain margins. Some of the rules you can’t change and some of them you can. It is crucial to understand how this constrains your set of choices. In
Constraints come from at least three sources that I’ll mention. The first source is straightforward and that is the constraints of heritage from which we have evolved. The heritage of
The second constraint that I think makes a crucial difference is the structure of the polity. Economists don’t really do very well when they try to model polities. First, we don’t have a theory about political economy or at least one that is worth a hoot. Second, political scientists, at least until recently, had not done anything interesting on the subject. We are beginning to change. We are beginning to develop models about political economic relationships over time, but so far we really don’t have anything. When I go to advise any country in the world it usually turns out that the fundamental problems come back to polity, the way the polity is organized. But, we don’t have a theory about how to organize polities to produce the kinds of results we like, and that poses a really big dilemma. As a result, we are at a loss on how to get polities to do what we want. How do you get them to put in place efficient property rights, enforcement mechanisms, the rule of law, and judicial systems? These are generally the things we want.
The last constraint that hampers us with respect to change is very straightforward. It is not new. It is just that organizations and interest groups that have evolved as a result of the institutional framework obviously have a stake in perpetuating it. Realize that they are going to try and thwart you in making institutional change and this is the reason why you have to have a crisis. A crisis typically weakens the power of existing interest groups, which would generally prevent you from making changes. That is not always true, but generally you will have interest group pressures that prevent you from making changes. This is always a problem.
Enough of my doomsday talk. Now, let me be positive. Given the constraints, what can we do? The first thing is to recognize the constraints. A pre-condition for intelligent reform is to recognize the nature of the constraints imposed by the cultural beliefs of the society where you are going to work. When I started in this field, I thought
My next point is that there are times, windows of opportunity when you can make dramatic change. The "crisis" is the clearest window of opportunity because at times like this the strength of the interest groups that maintain the status quo is weakened, and therefore, you can make significant changes.
Now, let me turn to what I think you can do in reform over time. First of all, I think you need a comprehensive vision about where you want to go. That comprehensive vision needs to take into account the process of change. There is no such thing as being in one place. A vision needs to be dynamic, and it needs to include how political economic systems are evolving. It is crucial to understand that it is a dynamic system. You are not trying to make a once and for all change and assume that it is going to solve your problem. Even if you succeed (which is very unlikely because usually when you enact policies you get unanticipated results), and the policy produces everything you want, you must realize that downstream you are going to have to keep modifying it.
I am going to start with something that you are all familiar with. You know more about it than I do. What you are trying to do first of all is to modify the way markets work. There are several components to modifying the way markets work. The most subversive way to improve market performance is an easy one. You must have free trade because with out it you are undermining, so fundamentally, all the things you are concerned with. It is subversive in endless more ways than it appears to be on the surface. It is not just getting a particular market to work better. It is also fundamentally altering the whole structure, the competitive structure, and the way in which you have to reorganize institutions and activities. Real free trade is the most revolutionary single thing in the world to force you into doing things. In
The second, I won’t talk long about because its been raised before, is legal reform. We all say this, but you won’t have low cost enforcement of contracts, which is a crucial transaction cost, until you get a judicial system that allows you to make long-term contracts in the face of all the problems we have. That requires an effective judicial system.
The third is educational reform. I feel very strongly that in
I want to come back to something that has been hidden throughout my discussion so far and that is that there is no such thing as laissez faire in this world. All markets, factor markets and product markets, have to be structured if they are going to work well and get people to compete via price and quality as opposed to killing each other like they do in
The next point is tougher. A market that works well at one moment of time with one kind of technology with one kind of structure may not work well next week. It came out earlier, but I want to emphasize, that there is no such thing as having a market with one set of rules that works all of the time. Markets keep changing, and as they do you have to structure, restructure, and modify. The way that financial and capital markets have evolved is to perceive that if the markets work even tolerably well, like in
Market-induced federalism, the attempt to get political markets to work like economic markets by forcing improved quality and efficiency in whatever you are trying to produce, is not a panacea. If you are trying to develop imaginative creative ways to get the incentive structure to do the work for you, market induced federalism is just one way of doing this.
Let me conclude with a story from
When you look at the details of Chinese institutional development it does not look like anything we know, but it has created incentive structures. There are many ways to create incentives, to get players to do the things you want them to do. That is what you want to look at, not the existing institutions that work someplace else in the world. You want to adapt them to your own culture, your own heritage. On my last night in
Thank you.
| Nov. 5, 2003 — "The Future of Freedom" will be the topic of "Conversation" when scholars gather Nov. 13 at Washington University for the second of a four-part series of discussions on key issues that will affect the future of the university, the community and the world. Arts & Sciences is sponsoring the four "Conversations," which are free and open to the public, as part of the university's 150th anniversary celebration. "The Future of Freedom Conversation" will be held from |
| Showing 1 Stories. |
| |
Additional Background: Douglass C. North, Ph.D., the Spencer T. Olin Professor in Arts & Sciences at
Born in
| |
| Douglas North |
North began his academic career at the
He was the Peterkin Professor of Political Economics at
North joined
In 1987, he was elected to the
North is the author of 10 books, including Growth and Welfare in the American Past, 1966; The Rise of the Western World (with Robert P. Thomas) 1973; Structure and Change in Economic History, 1981; and Institutions, Institutional Change and Economic Performance, 1990. His most recent research is forthcoming in a book titled The Process of Economic Change.
His research has focused on the formation of political and economic institutions and the consequences of these institutions on the performance of economies through time, including such areas as property rights, transaction costs, and the free rider problem.
Currently, he is deeply involved in the new and growing branch of economics called institutional economics, which draws heavily on his work and that of fellow Nobel laureate Ronald Coase. In 1999, North founded the Center for New Institutional Social Sciences at
For the last 15 years, North and his wife, Elisabeth Case, have spent summers in northern
"It is a wonderful place for that mixture of research and leisure which has made my life such a rich experience," North notes in a brief biographical sketch.
"I would be remiss if I left the impression that my life has been totally preoccupied with scholarly research," he writes in closing.
"True, it has been the fundamental focus of my life, but it has been intermingled with a variety of activities that have complemented that central preoccupation and enriched my life. I continue to be a photographer; I have enjoyed fishing and hunting with a close friend; and have owned two ranches, first in northern
Douglass C. North
President International Society of New Institutional
WUSTL Contact Information: Work: (314) 935-8509 Fax: (314) 935-4156
E-mail: north@wueconc.wustl.edu
Address: Campus Box
I would like to say how pleased I am to be here. I am a fan of CIPE and I think it does wonderful work. I have known CIPE for some time, and I am impressed with what they are doing. I am also happy to see so many familiar faces around the table from work I’ve done before or from my wanderings around
We know a lot about the sources of good economic performance. What we don’t know is how to get them. So the subject of my talk is really about something that economics has slighted throughout its life, still slights fundamentally, and that is the process of economic change. I will spend a lot of my time talking about this process, because I want to weave in all the things that I think are important to this new economic theory. This new economic theory is very impressive, particularly in microeconomic theory, but it is static. It is a theory about how an economy performs in a moment of time. What we need is a dynamic theory, a theory about the process of change. Neither economics nor indeed any of the social sciences provide us with such a framework, and I want to emphasize that without such a framework you are bound to do things wrong. Indeed, the central argument of much of my talk is how we get economic policy wrong — when we use a static framework in dealing with a world of dynamic change. You will see this theme surfacing over and over again.
Now, let me go through the simple mechanics of economic change. We begin with something that nobody knows what it is — we call it reality. Reality is nothing more than what we characterize as the things we are concerned with and what we attempt to build models of and analyze. Economists and social scientists in general have developed enormous amounts of statistical data. They have tried to give us a picture of this moment of time whether you are looking at income accounts, demographic accounts, and so on. We have enormous amounts of data, but the accounts do not put it together. I want to emphasize this, you may have all the statistics in the world about demography and national income and on and on, but what you really want is a framework that puts all of these pieces together. Ideally, that framework would put together three fundamental pieces. First, the framework would build on the theory of demography (fertility, mortality, and migration) and also on the quality of human beings. Second, the framework would build upon our stock of knowledge and the way it is used in society, and that is a complicated thing about which we know very little. Actually, we have a lot of information about technology issues, but we have very little information about the overall stock of knowledge that society uses and develops. Third, is the need for institutions. We need a good theory that would integrate all three of those pieces, because if you don’t integrate all three of them you will get it wrong a lot of the time. When you make a change in any one of these fundamental elements, then you must be conscious about its repercussions on the other elements. You must be self-conscious about the repercussions when you think about the dynamic process of change. That is true. I can think of a simple model that is straight economics or straight demography and it will give you all the answers you need, but for the issues that we are concerned with here — how whole economies perform over time — an integration of the three elements is essential. I am going to make it even tougher. It is one thing to have an integration of these three elements at a moment of time. However, it is a lot more difficult to have it over time. What you are interested in here is something that economics generally does quite badly. You are interested in how, when you alter the way the game is played at one margin, it affects the performance of the economy downstream. If you do not take those effects into account, then obviously you will fall flat on your face. An illustration of this are the economists who went to the transition economies in
If you don’t recognize the interplay between all of the pieces downstream, you are going to get it wrong, and that is really my theme. So we begin with this thing called reality that none of us fully understands even though it is at the heart of what we have to understand all of the time. From reality we have to construct models, theories, and/or ideologies. They are all various versions of what we do and of how we understand this reality. The reason why this is so intriguing is that our beliefs are always a simplified view of a complex world. If we have a belief system that is fairly good it captures the basic elements, at least at a moment of time, and gives us the basic building blocks. When we sometimes develop a model that makes sense out of the world it is because that model captures the fundamentals of the problem, and therefore, the implications with respect to policy bear some resemblance to what we originally had in mind.
The first step is whatever we perceive to be real, and the second step is the way we construct our understanding. This poses an interesting problem, because this automatically implies a world of uncertainty. In economics, we have had a long-standing view that while you can model a world of risk because you can determine some probability of outcomes, you cannot model a world of uncertainty. That holds true because by definition a world of uncertainty is one in which you don’t have a probability distribution outcome. Sometimes you don’t even know what the outcomes may be. Now let me tell you that an enormous amount of what we have to do as economists deals with a world of uncertainty. We do not have any good theories. Not only do we not have good theories about the integration of these three parts at a moment of time; we have almost no theory about how they have evolved through time. Now the reason why this is important to you is because, in spite of that, we all make decisions based on this uncertainty every day. How do we do it? Economists have always asserted that you can’t theorize in the face of uncertainty. Then how come we not only theorize in the face of uncertainty, but act on it? Whether we call them ideologies or belief systems, they are the way in which we act. Now one of the crucial parts about the things we are trying to understand in this world is why belief systems evolved, why they are accepted, and why they may fall apart. If you want the classic example of this, which has dominated our history in the 20th century, it is the rise and fall of the
We have reality and we have belief systems. Then those with belief systems construct a system of institutions based upon those beliefs. These institutions are in fact incentive systems. The institutions are designed to carry on or implement the beliefs of those people who are in a position to influence political, economic, and social policy. So we have the reality, beliefs and institutions, and then, on the margin you keep on evolving. And as different organizations and entrepreneurs seek chances to improve their lot, they modify policies. Policies being modified at the margin in turn have altered the original institutional framework. Then you have altered reality and reality in-turn is going to alter the belief system and on and on in a circular flow that goes on forever.
I could spend the next ten hours telling you about each part of each piece on this because each part is complicated, and indeed, I am writing a book about it. We have very imperfect knowledge about this and when you start to think it is easy to see how throughout economic history we have almost always gotten it wrong. There are times when we got it right, but I am not going to talk about those now, because we get it wrong lots more often than we get it right.
Now we get it wrong for three reasons. First, because we don’t understand this reality or we have an imperfect understanding of it. Sometimes we are close enough so that we see it pretty well, and therefore, we are able to come to terms with it and to make policies that produce the desired results. But the more complicated it is the more uncertain it becomes, and the more likely we are to get it wrong. Now if I had time, I would go into the cognitive science foundations of this environment because a lot of the work I do these days is attempting to understand how these beliefs evolve and why they are adopted. That is really a very exciting frontier that were all involved in these days and in which I am now involved in a big way. In fact, I helped to create a center in cognitive science at
Second, is that the belief system we have may be like Marxism, which incidentally was an impressive belief system that worked well over some areas of activity. Marxism did indeed lead to the
The third way is one that is a big dilemma for all of us in this room, and one that I have been confronted with over and over again. When I get asked to play God around the world, usually with more disastrous results than God, the only real tool that we have is to change the way the game is played. We must change the formal rules of the game and institutions are the formal rules for informal rules of behavior. Enforcement and operating characteristics shape the way in which economies and polities in society work, and we can only change one. It is true we have some control over enforcement mechanisms, although very imperfect control. In most cases, we don’t have much control at all over norms of behavior and values in the short-run.
Let me give you just a couple of simple illustrations to point this out. When Latin American countries became independent in the late 19th century, they generally adopted variations of the U.S. Constitution as formal rules of the game. However, results in
The second illustration is from when I was invited by the Soviet Academy of Science to go to
What we are concerned with is how to shape reform. However, since we can only change the formal rules, we are left with only a very blunt instrument with which to shape reform. I want to emphasize that, because if you don’t understand that, you are going to be continually disappointed. If you do understand it, you will be much more sensible about the way you structure reform or at least about what you can and cannot do in the short-run. Later, I am going to talk about ways by which you can shape the other two aspects of institutional change so that they work in favor of your desired results.
There are three sources of these problems. They relate to a dependent pattern by which unchanged constraints are built into the system. This is important because it gets you into the dynamics of the things I mentioned. We go from reality to beliefs to institutional change, but one thing that I left out is that any institution that you have, you actually inherited from the past. You have inherited not only the formal rules of the game, but you have inherited the informal rules, values, and so on. You have also inherited the way in which the rules of the game are enforced, whether that is through formal means or the reputation of a coercive third party.
So even though you may be the one entrepreneur who is making the political decisions, you are enormously constrained by what you’ve got. You are constrained by the fact that through your inheritance of formal rules and informal norms, you can only affect change at certain margins. Some of the rules you can’t change and some of them you can. It is crucial to understand how this constrains your set of choices. In
Constraints come from at least three sources that I’ll mention. The first source is straightforward and that is the constraints of heritage from which we have evolved. The heritage of
The second constraint that I think makes a crucial difference is the structure of the polity. Economists don’t really do very well when they try to model polities. First, we don’t have a theory about political economy or at least one that is worth a hoot. Second, political scientists, at least until recently, had not done anything interesting on the subject. We are beginning to change. We are beginning to develop models about political economic relationships over time, but so far we really don’t have anything. When I go to advise any country in the world it usually turns out that the fundamental problems come back to polity, the way the polity is organized. But, we don’t have a theory about how to organize polities to produce the kinds of results we like, and that poses a really big dilemma. As a result, we are at a loss on how to get polities to do what we want. How do you get them to put in place efficient property rights, enforcement mechanisms, the rule of law, and judicial systems? These are generally the things we want.
The last constraint that hampers us with respect to change is very straightforward. It is not new. It is just that organizations and interest groups that have evolved as a result of the institutional framework obviously have a stake in perpetuating it. Realize that they are going to try and thwart you in making institutional change and this is the reason why you have to have a crisis. A crisis typically weakens the power of existing interest groups, which would generally prevent you from making changes. That is not always true, but generally you will have interest group pressures that prevent you from making changes. This is always a problem.
Enough of my doomsday talk. Now, let me be positive. Given the constraints, what can we do? The first thing is to recognize the constraints. A pre-condition for intelligent reform is to recognize the nature of the constraints imposed by the cultural beliefs of the society where you are going to work. When I started in this field, I thought
My next point is that there are times, windows of opportunity when you can make dramatic change. The "crisis" is the clearest window of opportunity because at times like this the strength of the interest groups that maintain the status quo is weakened, and therefore, you can make significant changes.
Now, let me turn to what I think you can do in reform over time. First of all, I think you need a comprehensive vision about where you want to go. That comprehensive vision needs to take into account the process of change. There is no such thing as being in one place. A vision needs to be dynamic, and it needs to include how political economic systems are evolving. It is crucial to understand that it is a dynamic system. You are not trying to make a once and for all change and assume that it is going to solve your problem. Even if you succeed (which is very unlikely because usually when you enact policies you get unanticipated results), and the policy produces everything you want, you must realize that downstream you are going to have to keep modifying it.
I am going to start with something that you are all familiar with. You know more about it than I do. What you are trying to do first of all is to modify the way markets work. There are several components to modifying the way markets work. The most subversive way to improve market performance is an easy one. You must have free trade because with out it you are undermining, so fundamentally, all the things you are concerned with. It is subversive in endless more ways than it appears to be on the surface. It is not just getting a particular market to work better. It is also fundamentally altering the whole structure, the competitive structure, and the way in which you have to reorganize institutions and activities. Real free trade is the most revolutionary single thing in the world to force you into doing things. In
The second, I won’t talk long about because its been raised before, is legal reform. We all say this, but you won’t have low cost enforcement of contracts, which is a crucial transaction cost, until you get a judicial system that allows you to make long-term contracts in the face of all the problems we have. That requires an effective judicial system.
The third is educational reform. I feel very strongly that in
I want to come back to something that has been hidden throughout my discussion so far and that is that there is no such thing as laissez faire in this world. All markets, factor markets and product markets, have to be structured if they are going to work well and get people to compete via price and quality as opposed to killing each other like they do in
The next point is tougher. A market that works well at one moment of time with one kind of technology with one kind of structure may not work well next week. It came out earlier, but I want to emphasize, that there is no such thing as having a market with one set of rules that works all of the time. Markets keep changing, and as they do you have to structure, restructure, and modify. The way that financial and capital markets have evolved is to perceive that if the markets work even tolerably well, like in
Market-induced federalism, the attempt to get political markets to work like economic markets by forcing improved quality and efficiency in whatever you are trying to produce, is not a panacea. If you are trying to develop imaginative creative ways to get the incentive structure to do the work for you, market induced federalism is just one way of doing this.
Let me conclude with a story from
When you look at the details of Chinese institutional development it does not look like anything we know, but it has created incentive structures. There are many ways to create incentives, to get players to do the things you want them to do. That is what you want to look at, not the existing institutions that work someplace else in the world. You want to adapt them to your own culture, your own heritage. On my last night in
Thank you.
| Nov. 5, 2003 — "The Future of Freedom" will be the topic of "Conversation" when scholars gather Nov. 13 at Washington University for the second of a four-part series of discussions on key issues that will affect the future of the university, the community and the world. Arts & Sciences is sponsoring the four "Conversations," which are free and open to the public, as part of the university's 150th anniversary celebration. "The Future of Freedom Conversation" will be held from |
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Additional Background: Douglass C. North, Ph.D., the Spencer T. Olin Professor in Arts & Sciences at
Born in
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| Douglas North |
North began his academic career at the
He was the Peterkin Professor of Political Economics at
North joined
In 1987, he was elected to the
North is the author of 10 books, including Growth and Welfare in the American Past, 1966; The Rise of the Western World (with Robert P. Thomas) 1973; Structure and Change in Economic History, 1981; and Institutions, Institutional Change and Economic Performance, 1990. His most recent research is forthcoming in a book titled The Process of Economic Change.
His research has focused on the formation of political and economic institutions and the consequences of these institutions on the performance of economies through time, including such areas as property rights, transaction costs, and the free rider problem.
Currently, he is deeply involved in the new and growing branch of economics called institutional economics, which draws heavily on his work and that of fellow Nobel laureate Ronald Coase. In 1999, North founded the Center for New Institutional Social Sciences at
For the last 15 years, North and his wife, Elisabeth Case, have spent summers in northern
"It is a wonderful place for that mixture of research and leisure which has made my life such a rich experience," North notes in a brief biographical sketch.
"I would be remiss if I left the impression that my life has been totally preoccupied with scholarly research," he writes in closing.
"True, it has been the fundamental focus of my life, but it has been intermingled with a variety of activities that have complemented that central preoccupation and enriched my life. I continue to be a photographer; I have enjoyed fishing and hunting with a close friend; and have owned two ranches, first in northern
MARY SHIRLEY
http://www.worldbank.org/research/bios/mshirley.htm
Ms. Shirley is a co-founder and board member of the International Society for New Institutional Economics, and President of the Ronald Coarse Institute
MARY SHIRLEY is the Research Manager for Competition Policy and Regulation in the Development Research Group. She joined the Bank in 1980 as a country economist and has been a Senior Advisor, Chief of the Public Sector Management and Private Sector Development Division and Chief of the Finance and Private Sector Division. She worked extensively on reform and privatization of state-owned enterprises. Her recent research has focused on regulation of private investment in general and in infrastructure in particular, and reform of bureaucracy. Her work emphasizes problems of fostering competitive markets and effective government under conditions of weak institutions, poor information and divisive politics, drawing on new institutional economics to analyze problems of contracting. She has a B.A. from Occidental College and a Ph.D. in economics from the Fletcher School of Law and Diplomacy, Tufts University. Prior to joining the Bank she was a senior economist at the Organization of American States, a professor of economics at the Universidad de Bogotá in Bogotá, Colombia, and a researcher at MIT and the Harvard Economic Research Project. Ms. Shirley is a co-founder and board member of the International Society for New Institutional Economics, and President of the Ronald Coarse Institute. Contact information: EMail: MShirley@worldbank.org Recent publications: Journal articles "Information, Incentives and Commitment. An Empirical Analysis of Contracts Between Government and State Enterprises." with Colin Xu. Journal of Law, Economics and Organization. Vol. 14, No. 12. 358-378 (1998). "Bureaucrats in Business: The Roles of Privatization versus Corporatization in State-Owned Enterprise Reform" World Development. Vol 27, No. 1, 115-136 (1999). "Trends in Privatization" Economic Reform Today. No. 1, 1998. "Book Review: Mark Armstrong, Simon Cowan and John Vickers. Regulatory Reform: Economic Analysis and British Experience" Information Economics and Policy 10 (September, 1998) 389-401. "A New Database on State-Owned Enterprise Reform" with Luke Haggarty in World Bank Economic Review, Vol. 11, No. 3 (September 1997). "The Economics and Politics of Government Ownership" Journal of International Development, Vol. 9, No. 6 (September 1997). Reprinted in Privatization in Developing Countries, Paul Cook and Colin Kirkpatrick, eds. Aldershot, U.K. Edward Elgar. "Privatization in Latin America: Lessons for Transitional Europe" World Development, Vol. 22, No. 9, 1313-23 (September 1994). Reprinted in Vincent Wright and Luisa Perrotti, eds. Privatization and Public Policy. Aldershot: Elgar. 1999. Recent books and chapters in books "Reforming Urban Water Systems in Developing Countries" with Roger Noll and Simon Cowan in Anne O. Krueger (ed.) Economic Policy Reform: The Second Stage (Chicag The University of Chicago Press, 2000). "Formal versus Informal Institutions in Economic Development," with Philip Keefer in Claude Menard (ed.) Institutions, Contracts, Organizations: Perspectives from New Institutional Economics (Williston, VT: Edward Elgar, 2000). "Water Reform in Latin American: A Tale of Four Cities" in Luigi Manzetti (ed.) Post-Privatization Environments: The Latin American Experience (Miami: University of Miami Press, 2000). "Bureaucracy in Eastern Europe and the Former Soviet Union" in Peter Newman (ed.) The New Palgrave Dictionary of Economics and the Law (London: Macmillian, 1998). "Privatization in Transitional Economies: Politics as Usual?" with Philip Keefer forthcoming in Stephan Haggard and Mathew McCubbins eds. Political Institutions and the Determinants of Public Policy: When Do Institutions Matter? "Performance Contracts: A Tool for Improving Public Services? in Robert Picciotto and Eduardo Wiesner, eds. Evaluation and Development. The Institutional Dimension. (New Brunswick: Transaction Publishers, 1998.) "The Payoffs from Economics Reform: Commentary" in Nancy Birdsall and Frederick Jaspersen, Eds. Pathways to Growth: Comparing East Asia and Latin America, (Washington, D.C.: Interamerican Development Bank, 1997). Bureaucrats in Business: The Economics and Politics of Government Ownership, led team of authors (New York: Oxford University Press, 1995). Recent working papers and unpublished reports "Bad Corporate Governance or Looting? A Reexamination of the Czech Privatization Experience." With Robert Cull and Jana Matesova. March, 2000. "The Politics and Economics of Reforming Urban Water Systems." Paper presented at Stanford University. Political Institutions and Economic Growth in Latin America, April 14-15, 2000. "Experience With Privatization: A New Institutional Economics Perspective"" A Paper Prepared For Presentation At The African Economic Research Consortium Biannual Research Workshop, Nairobi, Kenya. December 5, 1999. http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=122630 Empirical Effects of Performance Contracts: Evidence From China Journal of Law, Economics, and Organization, Vol. 17, No. 1, 2000 Mary M. Shirley and Lixin Colin Xu World Bank - Development Economics Research Group (DECRG) and World Bank - Development Economics Research Group (DECRG) Date posted to database: January 12, 2001 Lixin Colin Xu 
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