Douglass North Quotes

A final aspect of all open access orders is Schumpeter’s notion of creative destruction, one of the most powerful descriptions of a competitive, open access economy. When Schumpeter wrote Capitalism, Socialism, and Democracy in the early 1940s, the economic theory of perfect competition among atomistic firms (i.e., firms too small to have market power) had come under sustained attack as unrealistic. Large and powerful economic organizations dominated the new economy, and their behavior did not match the textbooks. Despite this dominance, the economy produced historically unprecedented, sustained economic development. Schumpeter asked, How could large businesses that were supposed to choke off competition and growth nonetheless generate such spectacular productivity increases in a world that seemed ever more competitive?

By that time a structure of property rights had developed in the Netherlands and England which provided the incentives necessary for sustained growth. These included the inducements required to encourage innovation and the consequent industrialization. The industrial revolution was not the source of modern economic growth. It was the outcome of raising the private rate of return on developing new techniques and applying them to the production process.

International specialization and division of labor requires institutions and organizations to safeguard property rights across international boundaries so that capital markets as well as other kinds of exchange can take place with credible commitment on the part of the players.

We are far from understanding how to achieve adaptively efficient economies because allocative efficiency and adaptive efficiency may not always be consistent. Allocatively efficient rules would make today's firms and decisions secure - but frequently at the expense of the creative destruction process that Schumpeter had in mind.

Karl Marx and Adam Smith both subscribed to this view. They both saw successful growth as dependent on the development of efficient property rights. Their followers appear in the main to have forgotten this.

Economic growth occurs if output grows faster than population. Given the described assumptions about the way people behave, economic growth will occur if property rights make it worthwhile to undertake socially productive activity. The creating, specifying and enacting of such property rights are costly... As the potential grows for private gains to exceed transaction costs, efforts will be made to establish such property rights. Governments take over the protection and enforcement of property rights because they can do it at a lower cost than private volunteer groups. However, the fiscal needs of government may induce the protection of certain property rights which hinder rather than promote growth; therefore we have no guarantee that productive institutional arrangements will emerge.

Effective institutions raise the benefits of cooperative solutions or the costs of defection, to use game theoretic terms.

Schumpeter’s approach has an important implication for political behavior. If the constellation of economic interests regularly changes because of innovation and entry, politicians face a fundamentally different world than those in a natural state: open access orders cannot manipulate interests in the same way as natural states do. Too much behavior and formation of interests take place beyond the state’s control. Politicians in both natural states and open access orders want to create rents. Rent-creation at once rewards their supporters and binds their constituents to support them. Because, however, open access orders enable any citizen to form an organization for a wide variety of purposes, rents created by either the political process or economic innovation attract competitors in the form of new organizations. In Schumpeterian terms, political entrepreneurs put together new organizations to compete for the rents and, in so doing, reduce existing rents and struggle to create new ones. As a result, creative destruction reigns in open access politics just as it does in open access economies. Much of the creation of new interests is beyond the control of the state. The creation of new interests and the generation of new sources of rents occur continuously in open access orders.

Order in the societies they describe is the result of a dense social network where people have an intimate understanding of each other and the threat of violence is a continuous force for preserving order because of its implications for other members of society.

The factors we have listed (innovation, economies of scale, education, capital accumulation, etc.) are not causes of growth; they are growth.

In some respects this is intended to be a revolutionary book, but in other respects it is very traditional indeed. It is revolutionary in that we have developed a comprehensive analytical framework to examine and explain the rise of the Western world; a framework consistent with and complementary to standard neoclassical economic theory.

Institutions are the humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange.

Its objectives to suggest new paths for the study of European economic history rather than fit either of these standard formats. It is more than anything an agenda for new research.

Specialization in this world is rudimentary and self-sufficiency characterizes most individual households

Regarding social order, Fukuyama writes, "The systematic study of how order, and thus social capital, can emerge in spontaneous and decentralized fashion is one of the most important intellectual developments of the late twentieth century." He correctly attributes the modern origins of this argument to F.A. Hayek, whose pioneering contributions to cognitive science, the study of cultural evolution, and the dynamics of social change put him in the forefront of the most creative scholars of the 20th century. But Hayek's views about the "spontaneity" of social order remain controversial. In their extreme form, they imply that all deliberate efforts to manipulate social order — social engineering — are doomed to failure because the complex nature of our cultural heritage makes a complete understanding of the human condition impossible. Hayek was certainly correct that we have, at best, a very imperfect understanding of the human landscape, but "spontaneous" it is not. What distinguishes human evolution from the Darwinian model is the intentionality of the players. The mechanism of variation in evolutionary theory (mutation) is not informed by beliefs about eventual consequences. In contrast, human evolution is guided by the perceptions of the players; their choices (decisions) are made in the light of the theories the actors have, which provide expectations about outcomes.