Institutions,+Institutional+Change+and+Economic+Performance

- Douglass C. North, Institutions, Institutional Change and Economic Performance ,” (Cambridge University Press, 1990), chaps. 1 and 9-11, pp. 3-10 and 73-104.
 * __ Chapter 1 __**

Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. - Institutions are not organizations. - They are structures forming social, political, and economic interaction. - Current analytical frameworks fail to appreciate the importance of institutions. ** I ** - Institutions reduce uncertainty. - Organizations are like sports teams. Institutions are the sport’s written rules and informal code of conduct. - Institutions are created by humans, and can evolve through time. ** II ** - 1st role of institutions: To reduce certainty by establishing a stable structure to human interaction. (I think, the early days of any given religion will be great examples of institutions). - The main subject of the book is the difference between organizations and institutions (and their interaction during times of change). Part III (Differential performance of economies through time) - Transactions costs are the basis for the existence of the firm (p. 73, also pretty much everything we read on RTC) o Organizations are purposive entities designed by their creators to maximize wealth, income, or other objectives defined by the opportunities afforded by the institutional structure of the society. o Organizations alter institutional forms incrementally. ** I ** - Knowledge, skills, and learning of organization members will eventually reflect on institutional constraints. (Here we are talking about tacit knowledge – acquired by practice) - North also introduces pure knowledge and applied knowledge concepts. Basically, what he claims is that when knowledge and technology start to advance in one way, alternative ways will be less valuable (because of path dependency). (I think this explains why Apple is crazy about multi-touch technology and does not do anything else nowadays). ** II ** i) The institutional framework will shape the direction of the acquisition of knowledge and skills   ii) Direction will be the decisive factor for the long-run development of that society. - So, the desire to maximize profits in economic organizations affect the institutional framework through i) the resultant derived demand for investments in the knowledge of all kinds   ii) the ongoing interaction between organized economic activity, the stock of knowledge, and the institutional framework iii) incremental alteration of the informal constraints  ** III **   - Maximizing behavior can be through making decisions within the existing constraints or through altering the constraints.   ** IV **   - This part talks about efficiency, and how different institutions will find rules, knowledge, and skills that are best for them. Though both efficient and inefficient institutions have existed in the history.    - Change is sparkled (I hope this is the right word J ) by the individual entrepreneur responding to the incentives in the institutional framework.    - Change is usually marginal adjustments.    - Stability provided by an institution does not mean efficiency, it is just the framework for interaction.   ** I **   - Institutional changes are dominantly based on relative price changes (i.e. changes in ratio of land to labor)    - We don’t know much about the changes in preferences and tastes (this reminds me of KKV’s explanation of non-systematic variables. So, we know systematic variables – price based ones – but the research so far fails to explain non-systematic changes).  ** II **   - So, organizations evolve, prices change. But when do these changes lead to an institutional change?    o Institutional equilibrium is created within the existing institutional framework.    o Price changes create an environment when one or more parties can do better with an altered agreement.    o We are not able to explain how informal constraints change properly. Cultural evolutionary theories aim to answer this question.   ** III **   - Wars, revolutions, conquest, and natural disasters are sources of discontinuous institutional change (other factors create incremental-marginal changes)   ** IV **   - Incremental change, more or less, means actors re-negotiating the contracts (Recontracting is the word North uses)    - Inability to reach a conclusion might mean a lack of mediating institutions or might show the fact that parties don’t have any intersection (no new equilibrium point) - Parties might form groups to increase their bargaining powers in this new disputable environment to reach a favorable equilibrium. - Even violent action might be observed if there is an ideological commitment. - One faction might overcome the others – and here we have a discontinous change in the institution. - But still, the change in formal rules does not necessarily cause a change in informal constraints. - In a partial equilibrium context, formal constraints might be formed to suppress informal constraints. - At the end of the day, the result is usually a restructuring of both formal and informal constraints (in both ways) towards a less revolutionary equilibrium.
 * __ Chapter 9 __** (Organizations and how they interact with institutions)
 * __ Chapter 10 __** (The stability characteristics of institutions)

- What determines the divergent patterns of evolution of societies, polities, or economies over time? o In history, we had different bands and tribes confronted with different problems. However, in today’s global village, the divergence is more difficult to explain. - How do we account for the survival of economies with persistently poor performance over long periods of time? o As there is no ‘zero’ transaction costs, it is understandable the existence economies with different performance levels – but what about the really poor performers? ** I ** - North explains the study of Arthur on alternative technologies. He borrows the terms of multiple equilibria, possible inefficiencies, lock-in, and path dependence. - The claim is the competition is indirect between technologies. The direct competition is between organizations embodying the competing technologies. – So, as competition is related with the knowledge and skills of organizations, the explanation can be used to define institutional change (and diversity). ** II ** - Two forces shape the path of institutional change: increasing returns and imperfect markets. ** III ** - North uses common law to demonstrate the learning capability and path dependency. (Northwest Ordinance) o Once a path is chosen; network externalities, learning, and modeling just reinforce the course. - Similarly, unproductive paths can persist. o ECLA’s report on Latin American economies show international trade and other externalities as reasons for poor performance (thus a formal constraint in fact supports the poorly performing institution.) - Path dependence means history matters. If you want to understand contemporary decisions and institutions, you have to look at the history. ** IV ** - So, divergence is based on the history of the societies. ** V ** - Nothing really important here. North gives the examples of colonization and de-colonization movements to prove his points. ** VI ** - Technological change and institutional change are the basic keys to societal and economic evolution. o And they both have path dependency. - Long-run (economic) change is the cumulative consequence of several short-run decisions by political and economic entrepreneurs (that affect the performance)
 * __ Chapter 11 __** Incremental change, Environmental change, and the actors’ reaction to this change explained through path dependency)