Perspectives from New Institutional Economics
Edited by Claude Ménard
Chapter 2: Understanding institutions
7 2. Understanding institutions Douglass C. North* In this chapter, I shall discuss the agenda for research I believe we should be undertaking. It will have three sections: the agenda with respect to theory, with respect to empirical work, and with respect to what I consider to be our biggest challenge – understanding economic change. We have already come some distance, but we have a long way to go. First, we should be developing a theory of institutions. Now if we took institutions seriously, and I hope we do, then we should start to rethink fundamentally what economics is about. We should begin by recognizing that there is no such thing as laissez-faire. Milton Friedman is a great man but we should realize that any society, economy or polity is structured and the structure is a person-made function of the way in which we order the society. This structure is a complex mixture of rules, norms, conventions and behavioral beliefs, all of which together form the way in which we operate and determine how successful we are in achieving our goals. Now once you understand that, then you are going to have a different view about institutions and you are going to think differently about them with respect to the theory we must develop because there is no such thing as an efﬁcient market that is not structured by the players to produce that result. You do not get it by having government in absence. You get it by government...
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