谢谢，请全面的，不过如果加上S. Pejovich、Libcap应该全面些。
诺斯的资料我这里有一些：
Douglass C. North
President International Society of New Institutional Economics Washington University — Saint Louis, Missouri
WUSTL Contact Information: Work: (314) 935-8509 Fax: (314) 935-4156
E-mail: north@wueconc.wustl.edu
Address: Campus Box 1208 One Brookings Dr. St. Louis, Mo. 63130
I would like to say how pleased I am to be here. I am a fan of CIPE and I think it does wonderful work. I have known CIPE for some time, and I am impressed with what they are doing. I am also happy to see so many familiar faces around the table from work I’ve done before or from my wanderings around Latin America.
We know a lot about the sources of good economic performance. What we don’t know is how to get them. So the subject of my talk is really about something that economics has slighted throughout its life, still slights fundamentally, and that is the process of economic change. I will spend a lot of my time talking about this process, because I want to weave in all the things that I think are important to this new economic theory. This new economic theory is very impressive, particularly in microeconomic theory, but it is static. It is a theory about how an economy performs in a moment of time. What we need is a dynamic theory, a theory about the process of change. Neither economics nor indeed any of the social sciences provide us with such a framework, and I want to emphasize that without such a framework you are bound to do things wrong. Indeed, the central argument of much of my talk is how we get economic policy wrong — when we use a static framework in dealing with a world of dynamic change. You will see this theme surfacing over and over again.
Now, let me go through the simple mechanics of economic change. We begin with something that nobody knows what it is — we call it reality. Reality is nothing more than what we characterize as the things we are concerned with and what we attempt to build models of and analyze. Economists and social scientists in general have developed enormous amounts of statistical data. They have tried to give us a picture of this moment of time whether you are looking at income accounts, demographic accounts, and so on. We have enormous amounts of data, but the accounts do not put it together. I want to emphasize this, you may have all the statistics in the world about demography and national income and on and on, but what you really want is a framework that puts all of these pieces together. Ideally, that framework would put together three fundamental pieces. First, the framework would build on the theory of demography (fertility, mortality, and migration) and also on the quality of human beings. Second, the framework would build upon our stock of knowledge and the way it is used in society, and that is a complicated thing about which we know very little. Actually, we have a lot of information about technology issues, but we have very little information about the overall stock of knowledge that society uses and develops. Third, is the need for institutions. We need a good theory that would integrate all three of those pieces, because if you don’t integrate all three of them you will get it wrong a lot of the time. When you make a change in any one of these fundamental elements, then you must be conscious about its repercussions on the other elements. You must be self-conscious about the repercussions when you think about the dynamic process of change. That is true. I can think of a simple model that is straight economics or straight demography and it will give you all the answers you need, but for the issues that we are concerned with here — how whole economies perform over time — an integration of the three elements is essential. I am going to make it even tougher. It is one thing to have an integration of these three elements at a moment of time. However, it is a lot more difficult to have it over time. What you are interested in here is something that economics generally does quite badly. You are interested in how, when you alter the way the game is played at one margin, it affects the performance of the economy downstream. If you do not take those effects into account, then obviously you will fall flat on your face. An illustration of this are the economists who went to the transition economies in Central Europe or wherever and said that all they needed to do is get the prices right and then everything would fall into place. That may be true if you live long enough and you are not dead or hung by the end of it. Obviously, one of the things that happens when you get the prices right is that you alter the benefits and costs to all kinds of groups in society. They in turn react through the political process, and you may alter the demographic characteristics. I can go on and on about that.
If you don’t recognize the interplay between all of the pieces downstream, you are going to get it wrong, and that is really my theme. So we begin with this thing called reality that none of us fully understands even though it is at the heart of what we have to understand all of the time. From reality we have to construct models, theories, and/or ideologies. They are all various versions of what we do and of how we understand this reality. The reason why this is so intriguing is that our beliefs are always a simplified view of a complex world. If we have a belief system that is fairly good it captures the basic elements, at least at a moment of time, and gives us the basic building blocks. When we sometimes develop a model that makes sense out of the world it is because that model captures the fundamentals of the problem, and therefore, the implications with respect to policy bear some resemblance to what we originally had in mind.
The first step is whatever we perceive to be real, and the second step is the way we construct our understanding. This poses an interesting problem, because this automatically implies a world of uncertainty. In economics, we have had a long-standing view that while you can model a world of risk because you can determine some probability of outcomes, you cannot model a world of uncertainty. That holds true because by definition a world of uncertainty is one in which you don’t have a probability distribution outcome. Sometimes you don’t even know what the outcomes may be. Now let me tell you that an enormous amount of what we have to do as economists deals with a world of uncertainty. We do not have any good theories. Not only do we not have good theories about the integration of these three parts at a moment of time; we have almost no theory about how they have evolved through time. Now the reason why this is important to you is because, in spite of that, we all make decisions based on this uncertainty every day. How do we do it? Economists have always asserted that you can’t theorize in the face of uncertainty. Then how come we not only theorize in the face of uncertainty, but act on it? Whether we call them ideologies or belief systems, they are the way in which we act. Now one of the crucial parts about the things we are trying to understand in this world is why belief systems evolved, why they are accepted, and why they may fall apart. If you want the classic example of this, which has dominated our history in the 20th century, it is the rise and fall of the Soviet Union based upon a Marxist belief system. This belief system was used by Marx and Angles, and translated into a set of institutions, policies and so on. It shaped most of the history of the 20th century. No one is immune to belief systems. Let me emphasize that whether it is Marxism or free market ideology they are all belief systems. Some are just better than others are, but they are all belief systems and it is important that you realize how fallible all belief systems are with respect to understanding a world of dynamic change.
We have reality and we have belief systems. Then those with belief systems construct a system of institutions based upon those beliefs. These institutions are in fact incentive systems. The institutions are designed to carry on or implement the beliefs of those people who are in a position to influence political, economic, and social policy. So we have the reality, beliefs and institutions, and then, on the margin you keep on evolving. And as different organizations and entrepreneurs seek chances to improve their lot, they modify policies. Policies being modified at the margin in turn have altered the original institutional framework. Then you have altered reality and reality in-turn is going to alter the belief system and on and on in a circular flow that goes on forever.
I could spend the next ten hours telling you about each part of each piece on this because each part is complicated, and indeed, I am writing a book about it. We have very imperfect knowledge about this and when you start to think it is easy to see how throughout economic history we have almost always gotten it wrong. There are times when we got it right, but I am not going to talk about those now, because we get it wrong lots more often than we get it right.
Now we get it wrong for three reasons. First, because we don’t understand this reality or we have an imperfect understanding of it. Sometimes we are close enough so that we see it pretty well, and therefore, we are able to come to terms with it and to make policies that produce the desired results. But the more complicated it is the more uncertain it becomes, and the more likely we are to get it wrong. Now if I had time, I would go into the cognitive science foundations of this environment because a lot of the work I do these days is attempting to understand how these beliefs evolve and why they are adopted. That is really a very exciting frontier that were all involved in these days and in which I am now involved in a big way. In fact, I helped to create a center in cognitive science at Washington University just for this reason. We know very little about this, yet when we get it wrong it is because we don’t understand what is going on and we don’t understand the dynamics of it. We may have a feeling about it at a moment of time, but we very seldom understand the dynamic process involved.
Second, is that the belief system we have may be like Marxism, which incidentally was an impressive belief system that worked well over some areas of activity. Marxism did indeed lead to the Soviet Union becoming a superpower in the 50s, 60s, and 70s, before it got into trouble and led to stagnation by the end of the 70s, and early 80s. But all belief systems are like that, and I will come back to this point. Belief systems, no matter what they are, over time will always get into trouble. This typically occurs because they don’t evolve in ways that reflect the fundamental change in the nature of reality.
The third way is one that is a big dilemma for all of us in this room, and one that I have been confronted with over and over again. When I get asked to play God around the world, usually with more disastrous results than God, the only real tool that we have is to change the way the game is played. We must change the formal rules of the game and institutions are the formal rules for informal rules of behavior. Enforcement and operating characteristics shape the way in which economies and polities in society work, and we can only change one. It is true we have some control over enforcement mechanisms, although very imperfect control. In most cases, we don’t have much control at all over norms of behavior and values in the short-run.
Let me give you just a couple of simple illustrations to point this out. When Latin American countries became independent in the late 19th century, they generally adopted variations of the U.S. Constitution as formal rules of the game. However, results in Latin America were wildly different than those in North America. Currently, I am co-authoring a book in which we are trying to compare the way Latin and North America evolved over the last three centuries. What we have in the case of Latin America was a world where the formal rules were adopted to imitate the US but neither the informal rules nor the enforcement characteristics were the same as the US. Therefore, you got very different results.
The second illustration is from when I was invited by the Soviet Academy of Science to go to Moscow and advise the Soviet government about reform. Four Americans and I were asked to go. The first American got up and said "All you have to do is privatize and all will be well." The second said "All you have to do is eliminate government and all will be well." The third one said, "All you need are computers and all will be well." I was the fourth, and I said, "Don’t pay any attention to these people they don’t know what they are talking about." The reason is obvious; you don’t get the results that you want by changing the formal rules, unless the formal rules are embedded in a framework of property rights and enforcement characteristics. Then they may produce results something like what we in the US take for granted. In this case, these economists took the same for granted and did not bother to analyze the realities.
What we are concerned with is how to shape reform. However, since we can only change the formal rules, we are left with only a very blunt instrument with which to shape reform. I want to emphasize that, because if you don’t understand that, you are going to be continually disappointed. If you do understand it, you will be much more sensible about the way you structure reform or at least about what you can and cannot do in the short-run. Later, I am going to talk about ways by which you can shape the other two aspects of institutional change so that they work in favor of your desired results.
There are three sources of these problems. They relate to a dependent pattern by which unchanged constraints are built into the system. This is important because it gets you into the dynamics of the things I mentioned. We go from reality to beliefs to institutional change, but one thing that I left out is that any institution that you have, you actually inherited from the past. You have inherited not only the formal rules of the game, but you have inherited the informal rules, values, and so on. You have also inherited the way in which the rules of the game are enforced, whether that is through formal means or the reputation of a coercive third party.
So even though you may be the one entrepreneur who is making the political decisions, you are enormously constrained by what you’ve got. You are constrained by the fact that through your inheritance of formal rules and informal norms, you can only affect change at certain margins. Some of the rules you can’t change and some of them you can. It is crucial to understand how this constrains your set of choices. In Latin America, many of the problems I have listened to possess this fundamental dilemma because it means you are unable to get to the source of the problem. You must get to the source obliquely or indirectly and then you are stuck with the fact that you cannot affect change overnight. A dictator once asked me "Why is it that economy x works so badly (his own economy)?" He also asked, "Why can’t I just change the whole system overnight?" We had some discussion about this and in the end he knew why he couldn’t change things overnight even though he had dictatorial powers and lacked many of the constraints that we have in more democratic societies. He was still constrained from making some fundamental changes. We all are. The beginning of wisdom is being able to understand those constraints.
Constraints come from at least three sources that I’ll mention. The first source is straightforward and that is the constraints of heritage from which we have evolved. The heritage of Latin America is radically different than that of North America. North America evolved from an English heritage. The English endowed the colonies with relatively free self-government and secure property rights at the beginning. In other words, these were the foundations of polity and economy that we in the US have built on ever since. Indeed the US Constitution is really nothing but an embodiment of the colonial charters. It was not a unique document. In Latin America, the Spanish and Portuguese heritage, was completely different. The Latin American colonies did not have self-government. They were governed by either Lisbon or Madrid, whose sole objective was to maximize the size of the government treasury. They did not provide for secure property rights and granted monopolistic privileges to individual groups. So by the time Latin America became independent you had a heritage that was nothing like the North American heritage. That heritage has been enormously powerful ever since. It has shaped and modified the way in which Latin America’s development contrasted the development of North America for hundreds of years. Its pervasiveness is crucial to understanding the differences between the Americas in my view.
The second constraint that I think makes a crucial difference is the structure of the polity. Economists don’t really do very well when they try to model polities. First, we don’t have a theory about political economy or at least one that is worth a hoot. Second, political scientists, at least until recently, had not done anything interesting on the subject. We are beginning to change. We are beginning to develop models about political economic relationships over time, but so far we really don’t have anything. When I go to advise any country in the world it usually turns out that the fundamental problems come back to polity, the way the polity is organized. But, we don’t have a theory about how to organize polities to produce the kinds of results we like, and that poses a really big dilemma. As a result, we are at a loss on how to get polities to do what we want. How do you get them to put in place efficient property rights, enforcement mechanisms, the rule of law, and judicial systems? These are generally the things we want.
The last constraint that hampers us with respect to change is very straightforward. It is not new. It is just that organizations and interest groups that have evolved as a result of the institutional framework obviously have a stake in perpetuating it. Realize that they are going to try and thwart you in making institutional change and this is the reason why you have to have a crisis. A crisis typically weakens the power of existing interest groups, which would generally prevent you from making changes. That is not always true, but generally you will have interest group pressures that prevent you from making changes. This is always a problem.
Enough of my doomsday talk. Now, let me be positive. Given the constraints, what can we do? The first thing is to recognize the constraints. A pre-condition for intelligent reform is to recognize the nature of the constraints imposed by the cultural beliefs of the society where you are going to work. When I started in this field, I thought Latin America was Latin America. Portugal had Brazil and Spain had the rest. I thought that I did not need to know any more than that. Did I get an education. Every country is different. They all have different heritages, cultures, backgrounds, and the way the political, economic and social structures have evolved. Unless you understand this and understand it very deeply, you are obviously going to make a fool of yourself, something economists have been very good at doing around the world. Some economists believe that all you have to do is walk in without knowing about any of these other things. It is important to understand that you must try to make incremental changes in policy with a deep understanding of the cultures, values, norms, and history. Only then, can you begin to make changes at the margin, knowing where you have malleability to make changes, and where you don’t.
My next point is that there are times, windows of opportunity when you can make dramatic change. The "crisis" is the clearest window of opportunity because at times like this the strength of the interest groups that maintain the status quo is weakened, and therefore, you can make significant changes.
Now, let me turn to what I think you can do in reform over time. First of all, I think you need a comprehensive vision about where you want to go. That comprehensive vision needs to take into account the process of change. There is no such thing as being in one place. A vision needs to be dynamic, and it needs to include how political economic systems are evolving. It is crucial to understand that it is a dynamic system. You are not trying to make a once and for all change and assume that it is going to solve your problem. Even if you succeed (which is very unlikely because usually when you enact policies you get unanticipated results), and the policy produces everything you want, you must realize that downstream you are going to have to keep modifying it.
I am going to start with something that you are all familiar with. You know more about it than I do. What you are trying to do first of all is to modify the way markets work. There are several components to modifying the way markets work. The most subversive way to improve market performance is an easy one. You must have free trade because with out it you are undermining, so fundamentally, all the things you are concerned with. It is subversive in endless more ways than it appears to be on the surface. It is not just getting a particular market to work better. It is also fundamentally altering the whole structure, the competitive structure, and the way in which you have to reorganize institutions and activities. Real free trade is the most revolutionary single thing in the world to force you into doing things. In Latin America, that will be good. I want to emphasize that. What it does is directly answer your concern about reducing transaction costs. If you do free trade, it will force you to reduce financial costs automatically, but what you want to do along the way is concern yourself with why you have high costs of transacting in particular markets, and why they persist. I have been involved over the last few years in making markets more efficient in different contexts around the world, in part with the World Bank. When you dig deeply, and really see how the interplay between transaction and production costs exists and how to modify them to improve performance, is truly an education.
The second, I won’t talk long about because its been raised before, is legal reform. We all say this, but you won’t have low cost enforcement of contracts, which is a crucial transaction cost, until you get a judicial system that allows you to make long-term contracts in the face of all the problems we have. That requires an effective judicial system.
The third is educational reform. I feel very strongly that in Latin America, where you have enormous inequality in income distribution, you are never going to improve political stability unless you improve income distribution. I think that the only way to do that is through improvements in education, where you raise the skill and knowledge level of low income groups in society. Education reform is fundamental. The delivery of education is so terrible in most of Latin America that even if you throw money at it you will get very little for your money.
I want to come back to something that has been hidden throughout my discussion so far and that is that there is no such thing as laissez faire in this world. All markets, factor markets and product markets, have to be structured if they are going to work well and get people to compete via price and quality as opposed to killing each other like they do in Moscow. That doesn’t mean that the government has a lot of intervention but rather that you have a structure of property rights, sometimes by regulation. They have to be structured so that the players compete via price and quality and that is not automatic. What has been a big education for me is when I get into the details of any particular market and the problems of making that particular market perform the way I want it to, it requires structure. Economists usually got so enamored with getting the government out of things that they failed to recognize when you want to keep them involved. You do want to see that government structures the market so that it produces competition.
The next point is tougher. A market that works well at one moment of time with one kind of technology with one kind of structure may not work well next week. It came out earlier, but I want to emphasize, that there is no such thing as having a market with one set of rules that works all of the time. Markets keep changing, and as they do you have to structure, restructure, and modify. The way that financial and capital markets have evolved is to perceive that if the markets work even tolerably well, like in Asia at the beginning of their expansion, then you have successfully modified the structure. If you are having enormous growth and expansion, sitting back and having a static view that now we must have efficiency, is not the best course of action. The market may work today and tomorrow, but it’s not going to work the day after tomorrow. If we are going to have an economy that works well over time, you will have it because you keep on adapting the system, modifying the institutional framework. Indeed, adaptive efficiency has characterized the US. With all the flaws the US has, one of the striking things is that we have had growth and democracy for over two hundred years. That is an impressive achievement. The US went through a devastating civil war, moved from an originally agrarian economy with a small population to one that is the most complex in all realms, and it was done with some degree of success. What I am trying to say is that adaptive efficiency is different from allocative efficiency. Allocative efficiency is a static concept that deals with how you allocate resources at a point in time. Adaptive efficiency requires that the institutions be malleable and adjustable, and that they adapt to new changes.
Market-induced federalism, the attempt to get political markets to work like economic markets by forcing improved quality and efficiency in whatever you are trying to produce, is not a panacea. If you are trying to develop imaginative creative ways to get the incentive structure to do the work for you, market induced federalism is just one way of doing this.
Let me conclude with a story from China.
When you look at the details of Chinese institutional development it does not look like anything we know, but it has created incentive structures. There are many ways to create incentives, to get players to do the things you want them to do. That is what you want to look at, not the existing institutions that work someplace else in the world. You want to adapt them to your own culture, your own heritage. On my last night in Beijing I had dinner with a Chinese minister and when I was about to leave he said, "Doug, I have one more problem for you. We are going to have 200 million people moving out of agriculture over the next two years." And I said, "I am going home."
Thank you.
| Nov. 5, 2003 — "The Future of Freedom" will be the topic of "Conversation" when scholars gather Nov. 13 at Washington University for the second of a four-part series of discussions on key issues that will affect the future of the university, the community and the world. Arts & Sciences is sponsoring the four "Conversations," which are free and open to the public, as part of the university's 150th anniversary celebration. "The Future of Freedom Conversation" will be held from 10 to 11:30 a.m. in Graham Chapel.
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Additional Background: Douglass C. North, Ph.D., the Spencer T. Olin Professor in Arts & Sciences at Washington University and co-recipient of the 1993 Nobel Memorial Prize in Economic Science, has spent more than 50 years pondering complex variations of a simple question: Why do some countries become rich, while others remain poor?
Born in Cambridge, Massachusetts, North graduated with a triple bachelor's degree in political science, philosophy and economics from the University of California at Berkeley in 1942, and later, in 1952, earned a doctorate in economics there. He served as a U.S. Merchant Marine from 1941 to 1946.
North began his academic career at the University of Washington in Seattle, where he spent 33 years as a member of the economics faculty, including a 12-year tenure as department chair and five years as director of the Institute for Economic Research.
He was the Peterkin Professor of Political Economics at Rice University in 1979, Pitt Professor of American Institutions at Cambridge University in 1981, and Visiting Fellow of the Center for Advanced Studies in the Behavioral Sciences at Stanford University in 1987-88. He has been a visiting scholar at Stanford's Hoover Institution since 1995.
North joined Washington University in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics in Arts & Sciences, and served as director of the Center in Political Economy here from 1984 to 1990.
In 1987, he was elected to the American Academy of Arts and Sciences, and, in 1992, he became the first economic historian ever to win one of the economics profession's most prestigious honors, the John R. Commons Award. He was elected a Fellow of the British Academy in July 1996 and installed as Washington University's Spencer T. Olin Professor in Arts & Sciences in October 1996. He received the University's William Greenleaf Eliot Society "Search" Award in April 2002.
North is the author of 10 books, including Growth and Welfare in the American Past, 1966; The Rise of the Western World (with Robert P. Thomas) 1973; Structure and Change in Economic History, 1981; and Institutions, Institutional Change and Economic Performance, 1990. His most recent research is forthcoming in a book titled The Process of Economic Change.
His research has focused on the formation of political and economic institutions and the consequences of these institutions on the performance of economies through time, including such areas as property rights, transaction costs, and the free rider problem.
Currently, he is deeply involved in the new and growing branch of economics called institutional economics, which draws heavily on his work and that of fellow Nobel laureate Ronald Coase. In 1999, North founded the Center for New Institutional Social Sciences at Washington University to foster research into the evolution of social, political and economic institutions that shape societies and economies around the world.
For the last 15 years, North and his wife, Elisabeth Case, have spent summers in northern Michigan. He works on research all morning, hikes with his dog, plays tennis or goes swimming in the afternoons, and often spends evenings listening to music at the nearby Interlochen Music Camp.
"It is a wonderful place for that mixture of research and leisure which has made my life such a rich experience," North notes in a brief biographical sketch.
"I would be remiss if I left the impression that my life has been totally preoccupied with scholarly research," he writes in closing.
"True, it has been the fundamental focus of my life, but it has been intermingled with a variety of activities that have complemented that central preoccupation and enriched my life. I continue to be a photographer; I have enjoyed fishing and hunting with a close friend; and have owned two ranches, first in northern California and then in the state of Washington. I learned to fly an airplane, and had my own airplane during the 1960s. I have always taken seriously good food and wine. In addition, music has continued to be an important part of my life."
Douglass C. North
President International Society of New Institutional Economics Washington University — Saint Louis, Missouri
WUSTL Contact Information: Work: (314) 935-8509 Fax: (314) 935-4156
E-mail: north@wueconc.wustl.edu
Address: Campus Box 1208 One Brookings Dr. St. Louis, Mo. 63130
I would like to say how pleased I am to be here. I am a fan of CIPE and I think it does wonderful work. I have known CIPE for some time, and I am impressed with what they are doing. I am also happy to see so many familiar faces around the table from work I’ve done before or from my wanderings around Latin America.
We know a lot about the sources of good economic performance. What we don’t know is how to get them. So the subject of my talk is really about something that economics has slighted throughout its life, still slights fundamentally, and that is the process of economic change. I will spend a lot of my time talking about this process, because I want to weave in all the things that I think are important to this new economic theory. This new economic theory is very impressive, particularly in microeconomic theory, but it is static. It is a theory about how an economy performs in a moment of time. What we need is a dynamic theory, a theory about the process of change. Neither economics nor indeed any of the social sciences provide us with such a framework, and I want to emphasize that without such a framework you are bound to do things wrong. Indeed, the central argument of much of my talk is how we get economic policy wrong — when we use a static framework in dealing with a world of dynamic change. You will see this theme surfacing over and over again.
Now, let me go through the simple mechanics of economic change. We begin with something that nobody knows what it is — we call it reality. Reality is nothing more than what we characterize as the things we are concerned with and what we attempt to build models of and analyze. Economists and social scientists in general have developed enormous amounts of statistical data. They have tried to give us a picture of this moment of time whether you are looking at income accounts, demographic accounts, and so on. We have enormous amounts of data, but the accounts do not put it together. I want to emphasize this, you may have all the statistics in the world about demography and national income and on and on, but what you really want is a framework that puts all of these pieces together. Ideally, that framework would put together three fundamental pieces. First, the framework would build on the theory of demography (fertility, mortality, and migration) and also on the quality of human beings. Second, the framework would build upon our stock of knowledge and the way it is used in society, and that is a complicated thing about which we know very little. Actually, we have a lot of information about technology issues, but we have very little information about the overall stock of knowledge that society uses and develops. Third, is the need for institutions. We need a good theory that would integrate all three of those pieces, because if you don’t integrate all three of them you will get it wrong a lot of the time. When you make a change in any one of these fundamental elements, then you must be conscious about its repercussions on the other elements. You must be self-conscious about the repercussions when you think about the dynamic process of change. That is true. I can think of a simple model that is straight economics or straight demography and it will give you all the answers you need, but for the issues that we are concerned with here — how whole economies perform over time — an integration of the three elements is essential. I am going to make it even tougher. It is one thing to have an integration of these three elements at a moment of time. However, it is a lot more difficult to have it over time. What you are interested in here is something that economics generally does quite badly. You are interested in how, when you alter the way the game is played at one margin, it affects the performance of the economy downstream. If you do not take those effects into account, then obviously you will fall flat on your face. An illustration of this are the economists who went to the transition economies in Central Europe or wherever and said that all they needed to do is get the prices right and then everything would fall into place. That may be true if you live long enough and you are not dead or hung by the end of it. Obviously, one of the things that happens when you get the prices right is that you alter the benefits and costs to all kinds of groups in society. They in turn react through the political process, and you may alter the demographic characteristics. I can go on and on about that.
If you don’t recognize the interplay between all of the pieces downstream, you are going to get it wrong, and that is really my theme. So we begin with this thing called reality that none of us fully understands even though it is at the heart of what we have to understand all of the time. From reality we have to construct models, theories, and/or ideologies. They are all various versions of what we do and of how we understand this reality. The reason why this is so intriguing is that our beliefs are always a simplified view of a complex world. If we have a belief system that is fairly good it captures the basic elements, at least at a moment of time, and gives us the basic building blocks. When we sometimes develop a model that makes sense out of the world it is because that model captures the fundamentals of the problem, and therefore, the implications with respect to policy bear some resemblance to what we originally had in mind.
The first step is whatever we perceive to be real, and the second step is the way we construct our understanding. This poses an interesting problem, because this automatically implies a world of uncertainty. In economics, we have had a long-standing view that while you can model a world of risk because you can determine some probability of outcomes, you cannot model a world of uncertainty. That holds true because by definition a world of uncertainty is one in which you don’t have a probability distribution outcome. Sometimes you don’t even know what the outcomes may be. Now let me tell you that an enormous amount of what we have to do as economists deals with a world of uncertainty. We do not have any good theories. Not only do we not have good theories about the integration of these three parts at a moment of time; we have almost no theory about how they have evolved through time. Now the reason why this is important to you is because, in spite of that, we all make decisions based on this uncertainty every day. How do we do it? Economists have always asserted that you can’t theorize in the face of uncertainty. Then how come we not only theorize in the face of uncertainty, but act on it? Whether we call them ideologies or belief systems, they are the way in which we act. Now one of the crucial parts about the things we are trying to understand in this world is why belief systems evolved, why they are accepted, and why they may fall apart. If you want the classic example of this, which has dominated our history in the 20th century, it is the rise and fall of the Soviet Union based upon a Marxist belief system. This belief system was used by Marx and Angles, and translated into a set of institutions, policies and so on. It shaped most of the history of the 20th century. No one is immune to belief systems. Let me emphasize that whether it is Marxism or free market ideology they are all belief systems. Some are just better than others are, but they are all belief systems and it is important that you realize how fallible all belief systems are with respect to understanding a world of dynamic change.
We have reality and we have belief systems. Then those with belief systems construct a system of institutions based upon those beliefs. These institutions are in fact incentive systems. The institutions are designed to carry on or implement the beliefs of those people who are in a position to influence political, economic, and social policy. So we have the reality, beliefs and institutions, and then, on the margin you keep on evolving. And as different organizations and entrepreneurs seek chances to improve their lot, they modify policies. Policies being modified at the margin in turn have altered the original institutional framework. Then you have altered reality and reality in-turn is going to alter the belief system and on and on in a circular flow that goes on forever.
I could spend the next ten hours telling you about each part of each piece on this because each part is complicated, and indeed, I am writing a book about it. We have very imperfect knowledge about this and when you start to think it is easy to see how throughout economic history we have almost always gotten it wrong. There are times when we got it right, but I am not going to talk about those now, because we get it wrong lots more often than we get it right.
Now we get it wrong for three reasons. First, because we don’t understand this reality or we have an imperfect understanding of it. Sometimes we are close enough so that we see it pretty well, and therefore, we are able to come to terms with it and to make policies that produce the desired results. But the more complicated it is the more uncertain it becomes, and the more likely we are to get it wrong. Now if I had time, I would go into the cognitive science foundations of this environment because a lot of the work I do these days is attempting to understand how these beliefs evolve and why they are adopted. That is really a very exciting frontier that were all involved in these days and in which I am now involved in a big way. In fact, I helped to create a center in cognitive science at Washington University just for this reason. We know very little about this, yet when we get it wrong it is because we don’t understand what is going on and we don’t understand the dynamics of it. We may have a feeling about it at a moment of time, but we very seldom understand the dynamic process involved.
Second, is that the belief system we have may be like Marxism, which incidentally was an impressive belief system that worked well over some areas of activity. Marxism did indeed lead to the Soviet Union becoming a superpower in the 50s, 60s, and 70s, before it got into trouble and led to stagnation by the end of the 70s, and early 80s. But all belief systems are like that, and I will come back to this point. Belief systems, no matter what they are, over time will always get into trouble. This typically occurs because they don’t evolve in ways that reflect the fundamental change in the nature of reality.
The third way is one that is a big dilemma for all of us in this room, and one that I have been confronted with over and over again. When I get asked to play God around the world, usually with more disastrous results than God, the only real tool that we have is to change the way the game is played. We must change the formal rules of the game and institutions are the formal rules for informal rules of behavior. Enforcement and operating characteristics shape the way in which economies and polities in society work, and we can only change one. It is true we have some control over enforcement mechanisms, although very imperfect control. In most cases, we don’t have much control at all over norms of behavior and values in the short-run.
Let me give you just a couple of simple illustrations to point this out. When Latin American countries became independent in the late 19th century, they generally adopted variations of the U.S. Constitution as formal rules of the game. However, results in Latin America were wildly different than those in North America. Currently, I am co-authoring a book in which we are trying to compare the way Latin and North America evolved over the last three centuries. What we have in the case of Latin America was a world where the formal rules were adopted to imitate the US but neither the informal rules nor the enforcement characteristics were the same as the US. Therefore, you got very different results.
The second illustration is from when I was invited by the Soviet Academy of Science to go to Moscow and advise the Soviet government about reform. Four Americans and I were asked to go. The first American got up and said "All you have to do is privatize and all will be well." The second said "All you have to do is eliminate government and all will be well." The third one said, "All you need are computers and all will be well." I was the fourth, and I said, "Don’t pay any attention to these people they don’t know what they are talking about." The reason is obvious; you don’t get the results that you want by changing the formal rules, unless the formal rules are embedded in a framework of property rights and enforcement characteristics. Then they may produce results something like what we in the US take for granted. In this case, these economists took the same for granted and did not bother to analyze the realities.
What we are concerned with is how to shape reform. However, since we can only change the formal rules, we are left with only a very blunt instrument with which to shape reform. I want to emphasize that, because if you don’t understand that, you are going to be continually disappointed. If you do understand it, you will be much more sensible about the way you structure reform or at least about what you can and cannot do in the short-run. Later, I am going to talk about ways by which you can shape the other two aspects of institutional change so that they work in favor of your desired results.
There are three sources of these problems. They relate to a dependent pattern by which unchanged constraints are built into the system. This is important because it gets you into the dynamics of the things I mentioned. We go from reality to beliefs to institutional change, but one thing that I left out is that any institution that you have, you actually inherited from the past. You have inherited not only the formal rules of the game, but you have inherited the informal rules, values, and so on. You have also inherited the way in which the rules of the game are enforced, whether that is through formal means or the reputation of a coercive third party.
So even though you may be the one entrepreneur who is making the political decisions, you are enormously constrained by what you’ve got. You are constrained by the fact that through your inheritance of formal rules and informal norms, you can only affect change at certain margins. Some of the rules you can’t change and some of them you can. It is crucial to understand how this constrains your set of choices. In Latin America, many of the problems I have listened to possess this fundamental dilemma because it means you are unable to get to the source of the problem. You must get to the source obliquely or indirectly and then you are stuck with the fact that you cannot affect change overnight. A dictator once asked me "Why is it that economy x works so badly (his own economy)?" He also asked, "Why can’t I just change the whole system overnight?" We had some discussion about this and in the end he knew why he couldn’t change things overnight even though he had dictatorial powers and lacked many of the constraints that we have in more democratic societies. He was still constrained from making some fundamental changes. We all are. The beginning of wisdom is being able to understand those constraints.
Constraints come from at least three sources that I’ll mention. The first source is straightforward and that is the constraints of heritage from which we have evolved. The heritage of Latin America is radically different than that of North America. North America evolved from an English heritage. The English endowed the colonies with relatively free self-government and secure property rights at the beginning. In other words, these were the foundations of polity and economy that we in the US have built on ever since. Indeed the US Constitution is really nothing but an embodiment of the colonial charters. It was not a unique document. In Latin America, the Spanish and Portuguese heritage, was completely different. The Latin American colonies did not have self-government. They were governed by either Lisbon or Madrid, whose sole objective was to maximize the size of the government treasury. They did not provide for secure property rights and granted monopolistic privileges to individual groups. So by the time Latin America became independent you had a heritage that was nothing like the North American heritage. That heritage has been enormously powerful ever since. It has shaped and modified the way in which Latin America’s development contrasted the development of North America for hundreds of years. Its pervasiveness is crucial to understanding the differences between the Americas in my view.
The second constraint that I think makes a crucial difference is the structure of the polity. Economists don’t really do very well when they try to model polities. First, we don’t have a theory about political economy or at least one that is worth a hoot. Second, political scientists, at least until recently, had not done anything interesting on the subject. We are beginning to change. We are beginning to develop models about political economic relationships over time, but so far we really don’t have anything. When I go to advise any country in the world it usually turns out that the fundamental problems come back to polity, the way the polity is organized. But, we don’t have a theory about how to organize polities to produce the kinds of results we like, and that poses a really big dilemma. As a result, we are at a loss on how to get polities to do what we want. How do you get them to put in place efficient property rights, enforcement mechanisms, the rule of law, and judicial systems? These are generally the things we want.
The last constraint that hampers us with respect to change is very straightforward. It is not new. It is just that organizations and interest groups that have evolved as a result of the institutional framework obviously have a stake in perpetuating it. Realize that they are going to try and thwart you in making institutional change and this is the reason why you have to have a crisis. A crisis typically weakens the power of existing interest groups, which would generally prevent you from making changes. That is not always true, but generally you will have interest group pressures that prevent you from making changes. This is always a problem.
Enough of my doomsday talk. Now, let me be positive. Given the constraints, what can we do? The first thing is to recognize the constraints. A pre-condition for intelligent reform is to recognize the nature of the constraints imposed by the cultural beliefs of the society where you are going to work. When I started in this field, I thought Latin America was Latin America. Portugal had Brazil and Spain had the rest. I thought that I did not need to know any more than that. Did I get an education. Every country is different. They all have different heritages, cultures, backgrounds, and the way the political, economic and social structures have evolved. Unless you understand this and understand it very deeply, you are obviously going to make a fool of yourself, something economists have been very good at doing around the world. Some economists believe that all you have to do is walk in without knowing about any of these other things. It is important to understand that you must try to make incremental changes in policy with a deep understanding of the cultures, values, norms, and history. Only then, can you begin to make changes at the margin, knowing where you have malleability to make changes, and where you don’t.
My next point is that there are times, windows of opportunity when you can make dramatic change. The "crisis" is the clearest window of opportunity because at times like this the strength of the interest groups that maintain the status quo is weakened, and therefore, you can make significant changes.
Now, let me turn to what I think you can do in reform over time. First of all, I think you need a comprehensive vision about where you want to go. That comprehensive vision needs to take into account the process of change. There is no such thing as being in one place. A vision needs to be dynamic, and it needs to include how political economic systems are evolving. It is crucial to understand that it is a dynamic system. You are not trying to make a once and for all change and assume that it is going to solve your problem. Even if you succeed (which is very unlikely because usually when you enact policies you get unanticipated results), and the policy produces everything you want, you must realize that downstream you are going to have to keep modifying it.
I am going to start with something that you are all familiar with. You know more about it than I do. What you are trying to do first of all is to modify the way markets work. There are several components to modifying the way markets work. The most subversive way to improve market performance is an easy one. You must have free trade because with out it you are undermining, so fundamentally, all the things you are concerned with. It is subversive in endless more ways than it appears to be on the surface. It is not just getting a particular market to work better. It is also fundamentally altering the whole structure, the competitive structure, and the way in which you have to reorganize institutions and activities. Real free trade is the most revolutionary single thing in the world to force you into doing things. In Latin America, that will be good. I want to emphasize that. What it does is directly answer your concern about reducing transaction costs. If you do free trade, it will force you to reduce financial costs automatically, but what you want to do along the way is concern yourself with why you have high costs of transacting in particular markets, and why they persist. I have been involved over the last few years in making markets more efficient in different contexts around the world, in part with the World Bank. When you dig deeply, and really see how the interplay between transaction and production costs exists and how to modify them to improve performance, is truly an education.
The second, I won’t talk long about because its been raised before, is legal reform. We all say this, but you won’t have low cost enforcement of contracts, which is a crucial transaction cost, until you get a judicial system that allows you to make long-term contracts in the face of all the problems we have. That requires an effective judicial system.
The third is educational reform. I feel very strongly that in Latin America, where you have enormous inequality in income distribution, you are never going to improve political stability unless you improve income distribution. I think that the only way to do that is through improvements in education, where you raise the skill and knowledge level of low income groups in society. Education reform is fundamental. The delivery of education is so terrible in most of Latin America that even if you throw money at it you will get very little for your money.
I want to come back to something that has been hidden throughout my discussion so far and that is that there is no such thing as laissez faire in this world. All markets, factor markets and product markets, have to be structured if they are going to work well and get people to compete via price and quality as opposed to killing each other like they do in Moscow. That doesn’t mean that the government has a lot of intervention but rather that you have a structure of property rights, sometimes by regulation. They have to be structured so that the players compete via price and quality and that is not automatic. What has been a big education for me is when I get into the details of any particular market and the problems of making that particular market perform the way I want it to, it requires structure. Economists usually got so enamored with getting the government out of things that they failed to recognize when you want to keep them involved. You do want to see that government structures the market so that it produces competition.
The next point is tougher. A market that works well at one moment of time with one kind of technology with one kind of structure may not work well next week. It came out earlier, but I want to emphasize, that there is no such thing as having a market with one set of rules that works all of the time. Markets keep changing, and as they do you have to structure, restructure, and modify. The way that financial and capital markets have evolved is to perceive that if the markets work even tolerably well, like in Asia at the beginning of their expansion, then you have successfully modified the structure. If you are having enormous growth and expansion, sitting back and having a static view that now we must have efficiency, is not the best course of action. The market may work today and tomorrow, but it’s not going to work the day after tomorrow. If we are going to have an economy that works well over time, you will have it because you keep on adapting the system, modifying the institutional framework. Indeed, adaptive efficiency has characterized the US. With all the flaws the US has, one of the striking things is that we have had growth and democracy for over two hundred years. That is an impressive achievement. The US went through a devastating civil war, moved from an originally agrarian economy with a small population to one that is the most complex in all realms, and it was done with some degree of success. What I am trying to say is that adaptive efficiency is different from allocative efficiency. Allocative efficiency is a static concept that deals with how you allocate resources at a point in time. Adaptive efficiency requires that the institutions be malleable and adjustable, and that they adapt to new changes.
Market-induced federalism, the attempt to get political markets to work like economic markets by forcing improved quality and efficiency in whatever you are trying to produce, is not a panacea. If you are trying to develop imaginative creative ways to get the incentive structure to do the work for you, market induced federalism is just one way of doing this.
Let me conclude with a story from China.
When you look at the details of Chinese institutional development it does not look like anything we know, but it has created incentive structures. There are many ways to create incentives, to get players to do the things you want them to do. That is what you want to look at, not the existing institutions that work someplace else in the world. You want to adapt them to your own culture, your own heritage. On my last night in Beijing I had dinner with a Chinese minister and when I was about to leave he said, "Doug, I have one more problem for you. We are going to have 200 million people moving out of agriculture over the next two years." And I said, "I am going home."
Thank you.
| Nov. 5, 2003 — "The Future of Freedom" will be the topic of "Conversation" when scholars gather Nov. 13 at Washington University for the second of a four-part series of discussions on key issues that will affect the future of the university, the community and the world. Arts & Sciences is sponsoring the four "Conversations," which are free and open to the public, as part of the university's 150th anniversary celebration. "The Future of Freedom Conversation" will be held from 10 to 11:30 a.m. in Graham Chapel.
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Additional Background: Douglass C. North, Ph.D., the Spencer T. Olin Professor in Arts & Sciences at Washington University and co-recipient of the 1993 Nobel Memorial Prize in Economic Science, has spent more than 50 years pondering complex variations of a simple question: Why do some countries become rich, while others remain poor?
Born in Cambridge, Massachusetts, North graduated with a triple bachelor's degree in political science, philosophy and economics from the University of California at Berkeley in 1942, and later, in 1952, earned a doctorate in economics there. He served as a U.S. Merchant Marine from 1941 to 1946.
North began his academic career at the University of Washington in Seattle, where he spent 33 years as a member of the economics faculty, including a 12-year tenure as department chair and five years as director of the Institute for Economic Research.
He was the Peterkin Professor of Political Economics at Rice University in 1979, Pitt Professor of American Institutions at Cambridge University in 1981, and Visiting Fellow of the Center for Advanced Studies in the Behavioral Sciences at Stanford University in 1987-88. He has been a visiting scholar at Stanford's Hoover Institution since 1995.
North joined Washington University in 1983 as the Henry R. Luce Professor of Law and Liberty in the Department of Economics in Arts & Sciences, and served as director of the Center in Political Economy here from 1984 to 1990.
In 1987, he was elected to the American Academy of Arts and Sciences, and, in 1992, he became the first economic historian ever to win one of the economics profession's most prestigious honors, the John R. Commons Award. He was elected a Fellow of the British Academy in July 1996 and installed as Washington University's Spencer T. Olin Professor in Arts & Sciences in October 1996. He received the University's William Greenleaf Eliot Society "Search" Award in April 2002.
North is the author of 10 books, including Growth and Welfare in the American Past, 1966; The Rise of the Western World (with Robert P. Thomas) 1973; Structure and Change in Economic History, 1981; and Institutions, Institutional Change and Economic Performance, 1990. His most recent research is forthcoming in a book titled The Process of Economic Change.
His research has focused on the formation of political and economic institutions and the consequences of these institutions on the performance of economies through time, including such areas as property rights, transaction costs, and the free rider problem.
Currently, he is deeply involved in the new and growing branch of economics called institutional economics, which draws heavily on his work and that of fellow Nobel laureate Ronald Coase. In 1999, North founded the Center for New Institutional Social Sciences at Washington University to foster research into the evolution of social, political and economic institutions that shape societies and economies around the world.
For the last 15 years, North and his wife, Elisabeth Case, have spent summers in northern Michigan. He works on research all morning, hikes with his dog, plays tennis or goes swimming in the afternoons, and often spends evenings listening to music at the nearby Interlochen Music Camp.
"It is a wonderful place for that mixture of research and leisure which has made my life such a rich experience," North notes in a brief biographical sketch.
"I would be remiss if I left the impression that my life has been totally preoccupied with scholarly research," he writes in closing.
"True, it has been the fundamental focus of my life, but it has been intermingled with a variety of activities that have complemented that central preoccupation and enriched my life. I continue to be a photographer; I have enjoyed fishing and hunting with a close friend; and have owned two ranches, first in northern California and then in the state of Washington. I learned to fly an airplane, and had my own airplane during the 1960s. I have always taken seriously good food and wine. In addition, music has continued to be an important part of my life."
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