In this landmark work, a Nobel Prize-winning economist develops a new
way of understanding the process by which economies change. Douglass
North inspired a revolution in economic history a generation ago by
demonstrating that economic performance is determined largely by the
kind and quality of institutions that support markets. As he showed in
two now classic books that inspired the New Institutional Economics
(today a subfield of economics), property rights and transaction costs
are fundamental determinants. Here, North explains how different
societies arrive at the institutional infrastructure that greatly
determines their economic trajectories.
North argues that economic change depends largely on "adaptive
efficiency," a society's effectiveness in creating institutions that are
productive, stable, fair, and broadly accepted--and, importantly,
flexible enough to be changed or replaced in response to political and
economic feedback. While adhering to his earlier definition of
institutions as the formal and informal rules that constrain human
economic behavior, he extends his analysis to explore the deeper
determinants of how these rules evolve and how economies change. Drawing
on recent work by psychologists, he identifies intentionality as the
crucial variable and proceeds to demonstrate how intentionality emerges
as the product of social learning and how it then shapes the economy's
institutional foundations and thus its capacity to adapt to changing
circumstances.
Understanding the Process of Economic Change accounts not only for
past institutional change but also for the diverse performance of
present-day economies. This major work is therefore also an essential
guide to improving the performance of developing countries.
