[转贴自“学习经济”论坛：http://www.learning-economy.org/]
North: "The beginning of wisdom is to understand how the game is played in any society."

Why do some economies grow, while others remain stagnant? This question lies at the heart of economic growth theory and was the focus of a recent IMF Institute seminar offered by Douglas North, Professor of Economics at Washington University (St. Louis). North, who was awarded the Nobel Prize in economics in 1993 with Robert Fogel for their work in reviewing research in economic history by applying economic theory and quantitative methods to explain economic change, outlined why he believes institutions are at the heart of the dynamic process of economic development.

Economists know a great deal about the benefits of economic development, but much less about how to generate it. Why this incomplete picture? North contended that economists have long struggled with two fundamental limitations.

First, the neoclassical economic theory they use is mostly static-that is, concerned with the performance of an economy at an instant in time, while economies are dynamic and their players change all the time. Indeed, most of the interesting problems that occupy national policymakers and IMF economists deal with how to make economies perform over time.

Second, neoclassical economic thought originally viewed economies as frictionless, assuming markets worked perfectly, information was symmetrical, governments were neutral, and institutions did not matter. North, who came to the study of neo-institutional economics from the perspective of a historian, holds that institutions do, in fact, matter a great deal. From his vantage point, institutions form the incentive structure of a society and, as such, provide the underlying determinants of economic performance. Any economic prescription that fails to take institutions into account, he emphasized, is bound to fail.

What are institutions? According to North, they are, broadly speaking, the rules of the game in a society. They are the way humans structure their interactions.


Without them, there is no order, no civilization. These rules of the game, he said, have three components:


Formal rules-namely, constitutions, laws, and regulations -are straightforward and are put in place and enforced by political entities.

Informal rules-that is, the norms of behavior, conventions, and self-imposed codes of conduct that govern so much of human interaction-are more complicated and much less well understood. North cited the example of many Latin American countries that adopted the U.S. Constitution when they gained their independence in the nineteenth century, but whose economic and political results differed radically from those of the United States. What determines a country's performance, he said, is a combination of formal rules, modified by informal rules and enforcement characteristics. If informal rules do not complement the formal rules, the results will be radically different from what was intended. And while formal rules can be put in place quickly, informal rules, such as norms of behavior, take hold over a long period. A country can adopt property rights in an afternoon, but enforcing them and developing the norms to complement them can take another 20 or 30 years, he noted.

Enforcement, which typically takes place in multiple, often reenforcing, ways in societies, takes place on three levels. First-party enforcement relies on self-enforced codes of ethics or behavior; second party enforcement depends on the ability to retaliate; and third-party enforcement depends on governments to carry out the terms of agreements.

It is the mixture of formal and informal rules and enforcement characteristics that shape a society's incentive structure, North observed. And it is the incentive structure, in turn, that determines the way in which participants in the economy, such as organizations and firms, play the game. When incentives encourage people to be productive, economies grow, and when they encourage unproductive behavior, economies stagnate. The beginning of wisdom, according to North, is to understand how the game is played in any society.

Determining transaction costs

Political entities establish the formal rules and specify how they are enforced. For this reason, they are always at the heart of the incentive structure. But political organizations, which are the result of aggregated choices, are also imperfect. The choices of certain groups have mattered more in this process, and thus political entities are never completely impartial, even in working democracies. And herein lies the dilemma, according to North, because far less is known about how to make political markets work well in the short run than is known about economic markets.

To explore this dilemma, North used the transaction cost framework. Transaction costs are the costs of engaging in exchange. As economic systems grow and become more successful, the aggregate resources invested in transactions also grow. In the United States, for example, transaction costs accounted for 25 percent of GNP in 1870. By 1970, they had grown to 45 percent and may be well over half of GNP today. They grow not because an economy becomes more inefficient but for the opposite reason: as economic activity increases, more resources are needed to handle transactions. But while transaction costs grow overall (providing employment for accountants, lawyers, regulators, and the like) in an expanding economy, they induce falling production costs and hence falling total costs. The reduced cost for each transaction encourages further exchange and, hence, increased growth and productivity.

But in political markets, participant incentives are so diluted that they are far less effective in reducing transaction costs. In a democracy, for example, knowledge that a single vote is unlikely to make a difference affects the behavior (and motivation) of the voter. Moreover, as already noted, it is the informal rules, more so than the formal rules, that constrain behavior.

Obstacles to good performance

What constraints keep economies from growing vigorously? North combed economic history to highlight three fundamental obstacles to good performance.

Institutional requirements for the transition from personal to impersonal forms of exchange.


Throughout most of history, North noted, transactions took place through personal exchanges based on the reputations and personal relations of the parties involved. But as markets grew, this form of exchange had to give way to more impersonal exchanges. This highly complex transformation required both institutions and enforcement mechanisms. From 1000 A.D. to 1800 A.D. in Western Europe, for example, a host of such institutions and institutional devices evolved. Such things as banks and bills of exchange made large-scale and impersonal exchange predictable, safe, and, therefore, possible. But look at poor economies, and you will see that these same institutions failed to develop. And, as mentioned earlier, enforcement must complement and sustain essential institutions as they develop. Economies need third-party enforcement, for example, to allow capital markets to develop and thrive. Third-party enforcement, of course, is established by governments that are rarely completely neutral, but to be effective, the system must be impartial enough to encourage people to engage in exchange. We do not know how to get governments to do that.

As markets grow, knowledge itself becomes specialized.


But specialized knowledge becomes valuable only when it can be combined with other knowledge at a low transaction cost. For example, for genetic research in the United States to produce economic results, a vast network of entities from disparate parts of the economy must be able to interact. This does not occur automatically, even in an advanced country with a well-developed price system. Economies have to build bridges between different parts of their markets to allow the exchange of knowledge to take place at a low transaction cost. Poor countries find it difficult to achieve this type of integration over a short time span.

Knowing how to make markets work efficiently.


Every market is different, and to work well, each market must find the right mix of formal and informal rules and the appropriate enforcement characteristics. But what makes a market work well in one moment in time may not necessarily continue to work well over time. Important elements (technology, information costs, and political entities) can change, raising transaction costs in the process (Japan is a case in point). Thus, to provide prescriptions that work, economists need to view constraints over time rather than at a single point in time.

What lessons can be drawn from all this? First, North said, history tells us that the world does not have an inherent structure built upon predetermined rules. We can learn from the past, but we cannot rely solely on past experience to provide solutions to today's complex problems. Second, because we are limited in our ability to influence informal rules and enforcement, we are also limited in our ability to improve economic performance.

Finally, while we do not know how to make political entities work well, our knowledge is growing in this area. We know, for example, that successful economies, such as the U.S. economy, have flexible rather than rigid institutions, capable of adapting and evolving as change is needed. To cope with uncertainty, North concluded, institutions must have the scope to try different ways of doing things and discard those that do not work.