Douglas North - Effect of Institutions on Market Performance at FCC

Effect of Institutions on Market Performance Douglas North, Nobel Laureate, Washington University June 30, 2003 In this 70 minute lecture, Dr. North talks about institutions and economic development. He focuses on two issues. One is what prevents economies from working well and the other is what can we do about it. He begins with Neoclassical economics, the theory we use to understand the problems. He observes that its objective was to explain efficient resource allocation in developed economies and, thus, was never intended to deal with the issues of economic development. He argues that, when we try to Neoclassical theory to development issues, we find that it has two serious problems: first, it mistakenly assumes the economy is frictionless and, second, it incorrectly assumes the economy is timeless (i.e., static rather than dynamic). Dr. North then talks about how government should deal with those two problems. He notes that Neo-classical economists have gone into countries and said that all you have to do is get the prices right and everything works, but they have fallen flat on their faces over and over again. What is needed, he says, is to know enough about the background and cultural heritage of a society so you have some feeling for the interplay between the formal rules and the informal norms and the way they work. That is, we must understand the countrys institutions which are the incentive systems that structure human interaction and reduce uncertainty. What is also needed, he explains, is to have a sense of the margins where changes will be effective and what the implications of those changes will be. Dr. North received the Nobel Prize in 1993 for his research on the economic history of the U.S. and Europe, as well as for his contributions to understanding how economic and political institutions change over time. He is a professor in the Department of Economics at Washington University in St. Louis and holds a PhD from the University of California, Berkeley. This lecture is the first in the Chief Economists Distinguished Speaker Series at the FCC. That series is part of the FCCs Excellence in Economics Program which is intended to train FCC staff members. (Public Domain)