207
The German Bundestag (parliament)
was a new institution set up after 1945.
Its role was important in shaping
post-war Germany’s law and economy.See also: Property rights 20–21 ■ Public companies 38 ■ Economics and
tradition 166–67 ■ Social capital 280 ■ Resisting economic change 328–29
POST-WAR ECONOMICS
Formal constraints are the rules
that are rooted in the law and
politics of each country, while
informal constraints are a
society’s social codes, customs,
and traditions. Combined, these
make up North’s institutions, and
they set the broad rules of the game
within which humans interact as
workers, consumers, and investors.
Markets and property
Property rights—of physical and
intellectual property—are an
institution essential for economic
growth. North investigated the
emergence of property rights in
England, claiming that they began
in 1688, the year in which the
Crown was made subservient to
Parliament. Before then, the monarch
would commonly expropriate
resources, riding roughshod over
private property rights. North found
that after the power of the Crown
was restricted, exchange became
less costly and incentives improved.
His view has been challenged, but
the approach remains influential.
North’s example reveals a
tension that lies at the heart of
institutional economics. The state
guarantees order, which gives it the
power to activate property rights,
because they cannot survive under
anarchy. However, it is this very
power that also allows the state to
use resources for its own benefit.
The Turkish-American
economist Daron Acemog ̆ lu (1967– )
showed that this tension is rooted
in societies’ colonial origins. In
regions such as Africa where
infectious diseases threatened,
colonists did not stay long.
Institutions were set up with
the purpose of extracting natural
resources quickly for a state’s self-
enrichment, not to foster economic
growth. In the more congenial
North American colonies, however,
settlers established institutions
that promoted long-term growth.
Institutions determine the
success or failure of economies—
they create the essential structure.
Economists have yet to identify
clearly the institutional mutation
that triggers economic progress.
Reform to institutions is difficult,
with the past always leaving traces
in the present. ■Douglass North
Douglass North was born in
Cambridge, Massachusetts.
As a student at the University
of California in Berkeley, he
refused to serve in World War
II, and after graduating joined
the US merchant marines to
avoid fighting. During his
three-year service he read
many economics books, and
found it hard to choose
between studying
photography (a lifelong hobby)
and economics on his return
to the US. Economics won out,
and he received a PhD from
Berkeley in 1952. He began
teaching at the University of
Washington, where he helped
to found the new field of
cliometrics (the economic and
statistical analysis of history).
North taught at the
University of Washington until
1983, but in 1996 he spent
a year in Geneva studying
European economic history,
awakening his interest in the
role of institutions. He was
awarded the Nobel Prize for
economics in 1993.Key works1981 Structure and Change in
Economic History
1990 InstitutionsInstitutions provide the
incentive structure of
an economy.
Douglass North