Wednesday, May 16, 2007

Institional Economics on People's Choices

In Structure and Change in Economic History (1981) I abandoned the notion that institutions were efficient and attempted to explain why "inefficient" rules would tend to exist and be perpetuated. This was tied to a very simple and still neo-classical theory of the state which could explain why the state could produce rules that did not encourage economic growth. I was still dissatisfied with our understanding of the political process, and indeed searched for colleagues who were interested in developing political-economic models. This led me to leave the University of Washington in 1983 after being there for 33 years, and to move to Washington University in St. Louis, where there was an exciting group of young political scientists and economists who were attempting to develop new models of political economy. This proved to be a felicitous move. I created the Center in Political Economy, which continues to be a creative research center.

The development of a political-economic framework to explore long-run institutional change occupied me during all of the 1980s and led to the publication of Institutions, Institutional Change and Economic Performance in 1990. In that book I began to puzzle seriously about the rationality postulate. It is clear that we had to have an explanation for why people make the choices they do; why ideologies such as communism or Muslim fundamentalism can shape the choices people make and direct the way economies evolve through long periods of time. One simply cannot get at ideologies without digging deeply into cognitive science in attempting to understand the way in which the mind acquires learning and makes choices. Since 1990, my research has been directed toward dealing with this issue. I still have a long way to go, but I believe that an understanding of how people make choices; under what conditions the rationality postulate is a useful tool; and how individuals make choices under conditions of uncertainty and ambiguity are fundamental questions that we must address in order to make further progress in the social sciences.

by Douglass North

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