Douglas C. North “Institutions.” The Journal of Economic Perspectives, Vol. 5, No. 1 (Winter, 1991), pp. 97-112.
The modern study of institutions in context of historical perspective offers the promise of dramatic new understanding of economic performance and economic change. Here, North, examines first some seemingly primitive forms of exchange that failed to evolve, and then the institutional evolution that occurred in early modem Europe as a result of stability and change. Individual actions are governed by interests shaped by relative prices endowments, and constraints; we can explain changes in the organization of human interaction on the basis of the rational interests of individuals attempting to structure the world around them in ways that maximize net benefits. In every system of exchange, economic actors have an incentive to
invest their time, resources, and energy in knowledge and skills that will improve their material status. Merchants in medieval Europe used investment in knowledge and skills to gradually and incrementally alter the basic institutional framework. This institutional framework evolved to permit complex impersonal exchange necessary to political stability as well as to capture the potential economic benefits of modem technology.
- How does North define institutions?
- According to North why do humans devise institutions?
- What makes it necessary to constrain human interaction with institutions?
- According to North, what distinguished the institutional context of western Europe from the other illustrations presented within the article? In other
words, why did some societies and exchange institutions evolve, and others did not in the 18th and 19th centuries?
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