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Institutional Change and American Economic Growth: A First Step Towards a Theory of Institutional Innovation

Published online by Cambridge University Press:  03 February 2011

Lance Davis  and
Douglass North
Lance Davis
Affiliation:
California Institute of Technology
Douglass North
Affiliation:
University of Washington
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Extract

This paper attempts to provide an explanation of the formation and mutation of economic institutions. It is specifically concerned with that process as it has developed over the past one hundred and seventy-five years of American history, but with appropriate changes the model might be used to predict institutional change in the future and to explain institutional change in other nations and in other eras. Like more traditional theory, the model has been formulated in a manner that makes it in principle operational, although we admit that it predicts relatively little. Profit maximization is the motivating force, and in this sense too the model fits into the stream of neo-classical economics, although like the macro models of Keynes its subject has not traditionally been considered a part of that discipline. Finally, we admit that the theory is at some points woefully weak and the explanations at times incredibly simplistic. The work, however, does, we feel, represent a first step towards a useful theory of institutional change.

Type
Articles
Information
The Journal of Economic History , Volume 30 , Issue 1 , March 1970 , pp. 131 - 149
Copyright
Copyright © The Economic History Association 1970

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References

This essay is a drastic condensation of a forthcoming book by the authors. We are indebted to Stanley Engerman for valuable comments on an earlier draft.

1 This paper draws heavily on the work of Buchanan, J. and Tullock, G., The Calculus of Consent (Ann Arbor: Univ. of Michigan Press, 1962)CrossRefGoogle Scholar; Arrow, K., “Political and Economic Evaluations of Social Effect and Externaltiies,” paper given at the NBER Conference on the Economics of Public Output, April 1968Google Scholar; and Downs, A., An Economic Theory of Democracy (New York: Harper, 1957).Google Scholar

2 The Mafia, for example, was able to effect an income redistribution by monopolizing the traffic in some illegal drugs. The monopolization, however, rested on considerable extra-legal coercive power—a power that is available to relatively few others in society.

3 On the average, the more issues are involved in any election, the less any single issue will weigh in the mind of the voter.

4 There may be positive “stuck” costs for voluntary cooperative groups if there are costs associated with withdrawing from membership in the group.

5 If the finance is invested in capital for which there is a ready market, the problems exist but their effect is minimized. If, however, the capital has no market, the demise of the owner may signal the default of the loan.

6 R. Kessel, “Price Discrimination in Medicine,” Journal of Law and Economics, I, No. 1, 26.

7 Data from Royack, Elton, Professional Power and American Medicine (Cleveland: World Publishing Co., 1967)Google Scholar, chs. 3 and 4.