Review by Phil Agre of Book on Institutions by Douglass North

Douglass C. North, Institutions, Institutional Change, and Economic
Performance, Cambridge: Cambridge University Press, 1990.  Douglass North
is by far the most interesting of a vast school of conservative economists and
lawyers who have been trying to implement the deceptively simple intellectual
program that Ronald Coase laid out in two papers, "The nature of the firm" and
"The problem of social cost".  It is often observed that reality fails to
correspond to classical economics, and Coase suggests that these very failures
can be used as explanatory principles: if the world fails to correspond to the
conclusions of the classical theory, for example by not allocating resources
efficiently, then the world must also fail to correspond to the assumptions of
the classical theory, for example by not circulating market information to
everybody who needs it; and if the world changes so that it corresponds better
to the assumptions, then we can predict that it will also change so that it
corresponds better to the conclusions.  North turns these forms of argument
into a conceptual basis for economic history, as well as the comparative study
of modern economies.  He focuses particularly on institutions, which he has
influentially defined as the "rules of the game" -- the "rules" that define
the most basic relationships in social life, and particularly economic
relationships.  Institutions can include the family firm, capital markets, the
credit system, the legal system, standard contracts, relationships between
firms and the government, and so on.  Implicit in North's theory is a
normative, teleological view of history: all history is a march toward the
English ideal of liberal individualism, impersonal market dealings, the rule
of law, and laissez- faire economic policy -- in short, to Adam Smith's market
-- and we can ask about the conditions under which this march moves, and in
what direction.  This literature is at its most persuasive when studying the
fine details of particular institutions, such as slavery or particular regimes
of property rights.  It is least persuasive when explaining shifts from one
institutional scheme to another.  But whereas most authors in this literature
have stuck with a superficial, rationalistic view of the matter, North has
explored increasingly daring -- from the standpoint of the academic field of
economics -- integrations between economics and cognitive science.  The point
is not that any particular theory of cognition is the last word, but that
forms of cognition are now taken to be (as economists say) endogenous -- that
is, historically variable, affecting other features of the system and affected
by other features of the system.  This broadening of the scope of economics
has made it conceivable that the undeniably powerful modes of economic
reasoning can be integrated with other fields that do not share the narrowness
of most economic theorizing.