American Economic Association
Institutions
Author(s): Douglass C. North
Source: The Journal of Economic Perspectives, Vol. 5, No. 1 (Winter, 1991), pp. 97-112
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Journal of EconomicPerspectives- Volume5, Number1-Winter 1991-Pages 97-112
Institutions
Douglass C. North
Institutionsare the
humanly devised constraints that structure political,
economic and social interaction. They consist of both informal constraints
(sanctions, taboos, customs, traditions, and codes of conduct), and formal
rules (constitutions, laws, property rights). Throughout history, institutions
have been devised by human beings to create order and reduce uncertainty in
exchange. Together with the standard constraints of economics they define the
choice set and therefore determine transaction and production costs and hence
the profitability and feasibility of engaging in economic activity. They evolve
incrementally, connecting the past with the present and the future; history in
consequence is largely a story of institutional evolution in which the historical
performance of economies can only be understood as a part of a sequential
story. Institutions provide the incentive structure of an economy; as that
structure evolves, it shapes the direction of economic change towards growth,
stagnation, or decline. In this essay I intend to elaborate on the role of
institutions in the performance of economies and illustrate my analysis from
economic history.
What makes it necessary to constrain human interaction with institutions?
The issue can be most succinctly summarized in a game theoretic context.
Wealth-maximizing individuals will usually find it worthwhile to cooperate with
other players when the play is repeated, when they possess complete information about the other player's past performance, and when there are small
numbers of players. But turn the game upside down. Cooperation is difficult to
sustain when the game is not repeated (or there is an endgame), when
information on the other players is lacking, and when there are large numbers
of players.
* Douglass C. North is Luce Professorof Law and Libertyand Directorof the Centerin
Political Economy, WashingtonUniversity,St. Louis, Missouri.
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These polar extremes reflect contrasting economic settings in real life.
There are many examples of simple exchange institutions that permit low cost
transacting under the former conditions. But institutions that permit low cost
transacting and producing in a world of specialization and division of labor
require solving the problems of human cooperation under the latter conditions.
It takes resources to define and enforce exchange agreements. Even if
everyone had the same objective function (like maximizing the firm's profits),
transacting would take substantial resources; but in the context of individual
wealth-maximizing behavior and asymmetric information about the valuable
attributes of what is being exchanged (or the performance of agents), transaction costs are a critical determinant of economic performance. Institutions and
the effectiveness of enforcement (together with the technology employed)
determine the cost of transacting. Effective institutions raise the benefits of
cooperative solutions or the costs of defection, to use game theoretic terms. In
transaction cost terms, institutions reduce transaction and production costs per
exchange so that the potential gains from trade are realizeable. Both political
and economic institutions are essential parts of an effective institutional matrix.
The major focus of the literature on institutions and transaction costs has
been on institutions as efficient solutions to problems of organization in a
competitive framework (Williamson, 1975; 1985). Thus market exchange, franchising, or vertical integration are conceived in this literature as efficient
solutions to the complex problems confronting entrepreneurs under various
competitive conditions. Valuable as this work has been, such an approach
assumes away the central concern of this essay: to explain the varied performance of economies both over time and in the current world.
How does an economy achieve the efficient, competitive markets assumed
in the foregoing approach? The formal economic constraints or property rights
are specified and enforced by political institutions, and the literature simply
takes those as a given. But economic history is overwhelmingly a story of
economies that failed to produce a set of economic rules of the game (with
enforcement) that induce sustained economic growth. The central issue of
economic history and of economic development is to account for the evolution
of political and economic institutions that create an economic environment that
induces increasing productivity.
Institutions to Capture the Gains from Trade
Many readers will be at least somewhat familiar with the idea of economic
history over time as a series of staged stories. The earliest economies are
thought of as local exchange within a village (or even within a simple hunting
and gathering society). Gradually, trade expands beyond the village: first to the
region, perhaps as a bazaar-like economy; then to longer distances, through
particular caravan or shipping routes; and eventually to much of the world. At
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DouglassC. North 99
each stage, the economy involves increasing specializationand division of labor
and continuously more productive technology. This story of gradual evolution
from local autarky to specializationand division of labor was derived from the
German historical school. However, there is no implication in this paper that
the real historicalevolution of economies necessarilyparalleled the sequence of
stages of exchange described here.'
I begin with local exchange within the village or even the simple exchange
of hunting and gathering societies(in which women gathered and men hunted).
Specialization in this world is rudimentary and self-sufficiencycharacterizes
most individual households. Small-scale village trade exists within a "dense"
social network of informal constraints that facilitates local exchange, and the
costs of transactingin this context are low. (Although the basic societal costs of
tribal and village organization may be high, they will not be reflected in
additional costs in the process of transacting.)People have an intimate understanding of each other, and the threat of violence is a continuous force for
preserving order because of its implicationsfor other members of society.2
As trade expands beyond a single village, however, the possibilities for
conflict over the exchange grow. The size of the market grows and transaction
costs increase sharply because the dense social network is replaced; hence,
more resources must be devoted to measurement and enforcement. In the
absence of a state that enforced contracts, religious precepts usually imposed
standards of conduct on the players. Needless to say, their effectiveness in
lowering the costs of transacting varied widely, depending on the degree to
which these precepts were held to be binding.
The development of long-distance trade, perhaps through caravans or
lengthy ship voyages, requires a sharp break in the characteristics of an
economic structure. It entails substantialspecializationin exchange by individuals whose livelihood is confined to trading and the development of trading
centers, which may be temporary gathering places (as were the early fairs in
Europe) or more permanent towns or cities. Some economies of scale-for
example, in plantationagriculture-are characteristicof this world. Geographic
specializationbegins to emerge as a major characteristicand some occupational
specialization is occurring as well.
The growth of long distance trade poses two distinct transaction cost
problems. One is a classical problem of agency, which historicallywas met by
IIn an article written many years ago (North, 1955), I pointed out that many regional economies
evolved from the very beginning as export economies and built their development around the
export sector. This is in comparison and in contrast to the old stage theory of history deri-,ed from
the German historical school, in which the evolution was always from local autarky to gradual
evolution of specialization and division of labor. It is this last pattern that is described here, even
though it may not characterize the particular evolution that in fact has occurred.
2For an excellent summary of the anthropological literature dealing with trade in tribal societies,
see Elizabeth Colson (1974).
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use of kin in long-distance trade. That is, a sedentary merchant would send a
relative with the cargo to negotiate sale and to obtain a return cargo. The
costliness of measuring performance, the strength of kinship ties, and the price
of "defection" all determined the outcome of such agreements. As the size and
volume of trade grew, agency problems became an increasingly major dilemma.3
A second problem consisted of contract negotiation and enforcement in alien
parts of the world, where there is no easily available way to achieve agreement
and enforce contracts. Enforcement means not only such enforcement of
agreements but also protection of the goods and services en route from pirates,
brigands, and so on.
The problems of enforcement en route were met by armed forces protecting the ship or caravan or by the payment of tolls or protection money to local
coercive groups. Negotiation and enforcement in alien parts of the world
entailed typically the development of standardized weights and measures, units
of account, a medium of exchange, notaries, consuls, merchant law courts, and
enclaves of foreign merchants protected by foreign princes in return for
revenue. By lowering information costs and providing incentives for contract
fulfillment this complex of institutions, organizations, and instruments made
possible transacting and engaging in long-distance trade. A mixture of voluntary and semi-coercive bodies, or at least bodies that effectively could cause
ostracism of merchants that didn't live up to agreements, enabled long-distance
trade to occur.4
This expansion of the market entails more specialized producers.
Economies of scale result in the beginnings of hierarchical producing organizations, with full-time workers working either in a central place or in a sequential
production process. Towns and some central cities are emerging, and occupational distribution of the population now shows, in addition, a substantial
increase in the proportion of the labor force engaged in manufacturing and in
services, although the traditional preponderance in agriculture continues. These
evolving stages also reflect a significant shift towards urbanization of the society.
Such societies need effective, impersonal contract enforcement, because
personal ties, voluntaristic constraints, and ostracism are no longer effective as
more complex and impersonal forms of exchange emerge. It is not that these
personal and social alternatives are unimportant; they are still significant even
in today's interdependent world. But in the absence of effective impersonal
contracting, the gains from "defection" are great enough to forestall the
development of complex exchange. Two illustrations deal with the creation of a
3Jewish traders in the Mediterranean in the 11th century "solved" the agency problem as a result
of close community relationships amongst themselves that lowered information costs and enabled
them to act as a group to ostracize and retaliate against agents who violated their commercial code.
See Avner Greif (1989).
4Philip Curtin's Cross Cultural Trade in World History (1984) summarizes a good deal of the
literature, but is short on analysis and examination of the mechanisms essential to the structure of
such trade. The Cambridge Economic History, Volume III (1966), has more useful details on the
organization of such trade.
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Institutions 101
capital market and with the interplay between institutions and the technology
employed.
A capital market entails security of property rights over time and will
simply not evolve where political rulers can arbitrarily seize assets or radically
alter their value. Establishing a credible commitment to secure property rights
over time requires either a ruler who exercises forebearance and restraint in
using coercive force, or the shackling of the ruler's power to prevent arbitrary
seizure of assets. The first alternative was seldom successful for very long in the
face of the ubiquitous fiscal crises of rulers (largely as a consequence of
repeated warfare). The latter entailed a fundamental restructuring of the polity
such as occurred in England as a result of the Glorious Revolution of 1688,
which resulted in parliamentary supremacy over the crown.5
The technology associated with the growth of manufacturing entailed
increased fixed capital in plant and equipment, uninterrupted production, a
disciplined labor force, and a developed transport network; in short, it required
effective factor and product markets. Undergirding such markets are secure
property rights, which entail a polity and judicial system to permit low costs
contracting, flexible laws permitting a wide latitude of organizational structures, and the creation of complex governance structures to limit the problems
of agency in hierarchical organizations.6
In the last stage, the one we observe in modern western societies, specialization has increased, agriculture requires a small percentage of the labor force,
and markets have become nationwide and worldwide. Economies of scale imply
large-scale organization, not only in manufacturing but also in agriculture.
Everyone lives by undertaking a specialized function and relying on the vast
network of interconnected parts to provide the multitude of goods and services
necessary to them. The occupational distribution of the labor force shifts
gradually from dominance by manufacturing to dominance, eventually, by
what are characterized as services. Society is overwhelmingly urban.
In this final stage, specialization requires increasing percentages of the
resources of the society to be engaged in transacting, so that the transaction
sector rises to be a large percentage of gross national product. This is so
because specialization in trade, finance, banking, insurance, as well as the
simple coordination of economic activity, involves an increasing proportion of
the labor force.7 Of necessity, therefore, highly specialized forms of transaction
organizations emerge. International specialization and division of labor requires institutions and organizations to safeguard property rights across inter-
5North and Weingast (1989) provide a history and analysis of the political institutions of 17th
century England leading up to the Revolution of 1688 and of the consequences for the development of the English capital market.
6see North (1981), particularly chapter 13, and Chandler (1977). Joseph Stiglitz's (1989) essay,
"Markets, Market Failures, and Development," details some of the theoretical issues.
7The transaction sector (that proportion of transaction costs going through the market and
therefore measureable) of the U.S. economy was 25 percent of GNP in 1870 and 45 percent of GNP
in 1970 (Wallis and North, 1986).
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102 Journalof EconomicPerspectives
national boundaries so that capital markets (as well as other kinds of exchange)
can take place with credible commitment on the part of the players.
These very schematic stages appear to merge one into another in a smooth
story of evolving cooperation. But do they? Does any necessary connection
move the players from less complicated to more complicated forms of exchange? At stake in this evolution is not only whether information costs and
economies of scale together with the development of improved enforcement of
contracts will permit and indeed encourage more complicated forms of exchange, but also whether organizations have the incentive to acquire knowledge and information that will induce them to evolve in more socially productive directions.
In fact, throughout history, there is no necessary reason for this development to occur. Indeed, most of the early forms of organization that I have
mentioned in these sections still exist today in parts of the world. There still
exist primitive tribal societies; the Suq (bazaar economies engaged in regional
trade) still flourishes in many parts of the world; and while the caravan trade
has disappeared, its demise (as well as the gradual undermining of the other
two forms of "primitive" exchange) has reflected external forces rather than
internal evolution. In contrast, the development of European long-distance
trade initiated a sequential development of more complex forms of organization.
The remainder of this paper will examine first some seemingly primitive
forms of exchange that failed to evolve and then the institutional evolution that
occurred in early modern Europe. The concluding section of the paper will
attempt to enunciate why some societies and exchange institutions evolve and
others do not, and to apply that framework in the context of economic
development in the western hemisphere during the 18th and 19th centuries.
When Institutions Do Not Evolve
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. But in some primitive institutional settings, the kind of
knowledge and skills that will pay off will not result in institutional evolution
towards more productive economies. To illustrate this argument, I consider
three primitive types of exchange-tribal society, a regional economy with
bazaar trading, and the long-distance caravan trade-that are unlikely to
evolve from within.
As noted earlier, exchange in a tribal society relies on a dense social
network. Elizabeth Colson (1974, p. 59) describes the network this way:
The communities in which all these people live were governed by a
delicate balance of power, always endangered and never to be taken for
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DouglassC. North 103
granted: each person was constantly involved in securing his own position
in situations where he had to show his good intentions. Usages and
customs appear to be flexible and fluid given that judgement on whether
or not someone has done rightly varies from case to case... . But this is
because it is the individual who is being judged and not the crime. Under
these conditions, a flouting of generally accepted standards is tantamount
to a claim to illegitimate power and becomes part of the evidence against
one.
The implication of Colson's analysis as well as that of Richard Posner in his
account of primitive institutions (1980) is that deviance and innovation are
viewed as threats to group survival.
A second form of exchange that has existed for thousands of years, and still
exists today in North Africa and the Middle East is that of the Suq, where
widespread and relatively impersonal exchange and relatively high costs of
transacting exist.8 The basic characteristics are a multiplicity of small-scale
enterprises with as much as 40 to 50 percent of the town's labor force engaged
in this exchange process; low fixed costs in terms of rent and machinery; a very
finely drawn division of labor; an enormous number of small transactions, each
more or less independent of the next; face to face contacts; and goods and
services that are not homogeneous.
There are no institutions devoted to assembling and distributing market
information; that is, no price quotations, production reports, employment
agencies, consumer guides, and so on. Systems of weights and measures are
intricate and incompletely standardized. Exchange skills are very elaborately
developed, and are the primary determinant of who prospers in the bazaar and
who does not. Haggling over terms with respect to any aspect or condition of
exchange is pervasive, strenuous, and unremitting. Buying and selling are
virtually undifferentiated, essentially a single activity; trading involves a continual search for specific partners, not the mere offers of goods to the general
public. Regulation of disputes involves testimony by reliable witnesses to factual
matters, not the weighting of competing, juridical principles. Governmental
controls over marketplace activity are marginal, decentralized, and mostly
rhetorical.
To summarize, the central features of the Suq are (1) high measurement
costs; (2) continuous effort at clientization (the development of repeat-exchange
relationships with other partners, however imperfect); and (3) intensive bargaining at every margin. In essence, the name of the game is to raise the costs
of transacting to the other party to exchange. One makes money by having
better information than one's adversary.
8There is an extensive literature on the Suq. A sophisticated analysis (on which I have relied)
focused on the Suq in Sefrou, Morocco is contained in Geertz, Geertz, and Rosen (1979).
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104 Journalof EconomicPerspectives
It is easy to understand why innovation would be seen to threaten survival
in a tribal society but harder to understand why these "inefficient" forms of
bargaining would continue in the Suq. One would anticipate, in the societies
with which we are familiar, that voluntary organizations would evolve to insure
against the hazards and uncertainties of such information asymmetries. But
that is precisely the issue. What is missing in the Suq are the fundamental
underpinnings of institutions that would make such voluntary organizations
viable and profitable. These include an effective legal structure and court
system to enforce contracts which in turn depend on the development of
political institutions that will create such a framework. In their absence there is
no incentive to alter the system.
The third form of exchange, caravan trade, illustrates the informal constraints that made trade possible in a world where protection was essential and
no organized state existed. Clifford Geertz (1979, p. 137) provides a description
of the caravan trades in Morocco at the turn of the century:
In the narrow sense, a zettata (from the Berber TAZETTAT, 'a small piece
of cloth') is a passage toll, a sum paid to a local power... for protection
when crossing localities where he is such a power. But in fact it is, or more
properly was, rather more than a mere payment. It was part of a whole
complex of moral rituals, customs with the force of law and the weight of
sanctity-centering around the guest-host, client-patron, petitioner-petiof which are
tioned, exile-protector, suppliant-divinity relations-all
somehow of a package in rural Morocco. Entering the tribal world
physically, the outreaching trader (or at least his agents) had also to enter
it culturally.
Despite the vast variety of particular forms through which they
manifest themselves, the characteristics of protection in the Berber societies of the High and Middle Atlas are clear and constant. Protection is
personal, unqualified, explicit, and conceived of as the dressing of one
man in the reputation of another. The reputation may be political, moral,
spiritual, or even idiosyncratic, or, often enough, all four at once. But the
essential transaction is that a man who counts 'stands up and says' (quam
wa qal, as the classical tag has it) to those to whom he counts: 'this man is
mine; harm him and you insult me; insult me and you will answer for it.'
Benediction (the famous baraka), hospitality, sanctuary, and safe passage
are alike in this: they rest on the perhaps somewhat paradoxical notion
that though personal identity is radically individual in both its roots and
its expressions, it is not incapable of being stamped onto the self of
someone else.
While tribal chieftains found it profitable to protect merchant caravans they
had neither the military muscle nor the political structure to extend, develop,
and enforce more permanent property rights.
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Institutions 105
Institutional Evolution in Early Modern Europe
In contrast to many primitive systems of exchange, long distance trade in
early modern Europe from the 11th to the 16th centuries was a story of
sequentially more complex organization that eventually led to the rise of the
western world. Let me first briefly describe the innovations and then explore
some of their underlying sources.9
Innovations that lowered transaction costs consisted of organizational
changes, instruments, and specific techniques and enforcement characteristics
that lowered the costs of engaging in exchange over long distances. These
innovations occurred at three cost margins:(1) those that increased the mobility of capital, (2) those that lowered informationcosts, and (3) those that spread
risk. Obviously,the categories are overlapping, but they provide a useful way to
distinguish cost-reducing features of transacting.All of these innovations had
their origins in earlier times; most of them were borrowed from medieval
Italian city states or Islam or Byzantiumand then elaborated upon.
Among the innovations that enhanced the mobility of capital were the
techniques and methods evolved to evade usury laws. The variety of ingenious
ways by which interest was disguised in loan contracts ranged from "penalties
for late payment,"to exchange rate manipulation(Lopez and Raymond, 1955,
p. 163), to the early form of the mortgage; but all increased the costs of
contracting. The costliness of usury laws was not only that they made the
writing of contracts to disguise interests complex and cumbersome, but also
that enforceabilityof such contractsbecame more problematic.As the demand
for capital increased and evasion became more general, usury laws gradually
broke down and rates of interest were permitted. In consequence, the costs of
writing contracts and the costs of enforcing them declined.
A second innovation that improved the mobilityof capital, and the one that
has received the most attention, was the evolution of the bill of exchange (a
dated order to pay, say 120 days after issuance, conventionally drawn by a
seller against a purchaser of goods delivered) and particularlythe development
of techniques and instrumentsthat allowed for its negotiabilityas well as for the
development of discounting methods. Negotiability and discounting in turn
depended on the creation of institutions that would permit their use and the
development of centers where such events could occur: first in fairs, such as the
Champagne fairs that played such a prominent part in economic exchange in
12th and 13th century Europe; then through banks; and finally through
financial houses that could specialize in discounting. These developments were
a function not only of specific institutions but also of the scale of economic
activity. Increasing volume obviously made such institutional developments
9For a much more detailed descriptionand analysisof the evolution of Europeantrade see Tracy
(forthcoming),particularlyVolume II. For a game theoretic analysisof one aspect of this trade
revivalsee Milgrom,North and Weingast(1990).
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106 Journalof EconomicPerspectives
possible. In addition to the economies of scale necessary for the development of
the bills of exchange, improved enforceability of contracts was critical, and the
interrelationship between the development of accounting and auditing methods and their use as evidence in the collection of debts and in the enforcement
of contracts was an important part of this process (Yamey, 1949; Watts and
Zimmerman, 1983).
Still a third innovation affecting the mobility of capital arose from the
problems associated with maintaining control of agents involved in long distance trade. The traditional resolution of this problem in medieval and early
modern times was the use of kinship and family ties to bind agents to principals. However, as the size and scope of merchant trading empires grew, the
extension of discretionary behavior to others than kin of the principal required
the development of more elaborate accounting procedures for monitoring the
behavior of agents.
The major developments in the area of information costs were the printing
of prices of various commodities, as well as the printing of manuals that
provided information on weights, measures, customs, brokerage fees, postal
systems, and, particularly, the complex exchange rates between monies in
Europe and the trading world. Obviously these developments were primarily a
function of the volume of international trade and therefore a consequence of
economies of scale.
The final innovation was the transformation of uncertainty into risk. By
uncertainty, I mean here a condition wherein one cannot ascertain the probability of an event and therefore cannot arrive at a way of insuring against such
an occurrence. Risk, on the other hand, implies the ability to make an actuarial
determination of the likelihood of an event and hence insure against such an
outcome. In the modern world, insurance and portfolio diversification are
methods for converting uncertainty into risks and thereby reducing, through
the provision of a hedge against variability, the costs of transacting. In the
medieval and early modern world, precisely the same conversion occurred. For
example, marine insurance evolved from sporadic individual contracts covering
partial payments for losses to contracts issued by specialized firms. As De
Roover (1945, p. 198) described:
By the fifteenth century marine insurance was established on a secure
basis. The wording of the policies had already become stereotyped and
changed very little during the next three or four hundred years. ... In
the sixteenth century it was already current practice to use printed forms
provided with a few blank spaces for the name of the ship, the name of the
master, the amount of the insurance, the premium, and a few other items
that were apt to change from one contract to another.
Another example of the development of actuarial, ascertainable risk was
the business organization that spread risk through either portfolio diversifica-
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DouglassC. North 107
tion or institutions that permitted a large number of investors to engage in
risky activities. For example, the commenda was a contract employed in long
distance trade between a sedentary partner and an active partner who accompanied the goods. It evolved from its Jewish, Byzantine, and Muslim origins
(Udovitch, 1962) through its use at the hands of Italians to the English
Regulated Company and finally the Joint Stock Company, thus providing an
evolutionary story of the institutionalization of risk.
These specific innovations and particular institutional instruments evolved
from interplay between two fundamental economic forces: the economies of
scale associated with a growing volume of trade, and the development of
improved mechanisms to enforce contracts at lower costs. The causation ran
both ways. That is, the increasing volume of long distance trade raised the rate
of return to merchants of devising effective mechanisms for enforcing contracts.
In turn, the development of such mechanisms lowered the costs of contracting
and made trade more profitable, thereby increasing its volume.
The process of developing new enforcement mechanisms was a long one.
While a variety of courts handled commercial disputes, it is the development of
enforcement mechanisms by merchants themselves that is significant. Enforceability appears to have had its beginnings in the development of internal codes
of conduct in fraternal orders of guild merchants; those who did not live up to
them were threatened with ostracism. A further step was the evolution of
mercantile law. Merchants carried with them in long distance trade mercantile
codes of conduct, so that Pisan laws passed into the sea codes of Marseilles;
Oleron and Lubeck gave laws to the north of Europe, Barcelona to the south of
Europe; and from Italy came the legal principle of insurance and bills of
exchange (Mitchell, 1969, p. 156).
The development of more sophisticated accounting methods and of notarial records provided evidence for ascertaining facts in disputes. The gradual
blending of the voluntaristic structure of enforcement of contracts via internal
merchant organizations with enforcement by the state is an important part of
the story of increasing the enforceability of contracts. The long evolution of
merchant law from its voluntary beginnings and the differences in resolutions
that it had with both the common and Roman law are a part of the story.
The state was a major player in this whole process, and there was continuous interplay between the state's fiscal needs and its credibility in its relationships with merchants and the citizenry in general. In particular, the evolution
of capital markets was critically influenced by the policies of the state, since to
the extent the state was bound by commitments that it would not confiscate
assets or use its coercive power to increase uncertainty in exchange, it made
possible the evolution of financial institutions and the creation of more efficient
capital markets. The shackling of arbitrary behavior of rulers and the development of impersonal rules that successfully bound both the state and voluntary
organizations were a key part of this whole process. The development of an
institutional process by which government debt could be circulated, become a
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108
Journal of EconomicPerspectives
part of a regular capital market, and be funded by regular sources of taxation
was also a key part (Tracy, 1985; North and Weingast, 1989).
It was in the Netherlands, Amsterdam specifically, that these diverse
innovations and institutions were combined to create the predecessor of the
efficient modern set of markets that make possible the growth of exchange and
commerce. An open immigration policy attracted businessmen. Efficient methods of financing long distance trade were developed, as were capital markets
and discounting methods in financial houses that lowered the costs of underwriting this trade. The development of techniques for spreading risk and
transforming uncertainty into actuarial, ascertainable risks as well as the creation of large scale markets that allowed for lowering the costs of information,
and the development of negotiable government indebtedness all were a part of
this story (Barbour, 1949).
Contrasting Stories of Stability and Change
These contrasting stories of stability and change go to the heart of the
puzzle of accounting for changes in the human economic condition. In the
former cases, maximizing activity by the actors will not induce increments to
knowledge and skills which will modify the institutional framework to induce
greater productivity; in the latter case, evolution is a consistent story of
incremental change induced by the private gains to be realized by
productivity-raising organizational and institutional changes.
What distinguished the institutional context of western Europe from the
other illustrations? The traditional answer of economic historians has been
competition among the fragmented European political units accentuated by
changing military technology which forced rulers to seek more revenue (by
making bargains with constituents) in order to survive (North and Thomas,
1973; Jones, 1981; Rosenberg and Birdzell, 1986). That is surely part of the
answer; political competition for survival in early modern Europe was certainly
more acute than in other parts of the world. But it is only a partial answer. Why
the contrasting results within western Europe? Why did Spain, the great power
of 16th century Europe, decline while the Netherlands and England developed?
To begin to get an answer (and it is only a beginning), we need to dig
deeper into two key (and related) parts of the puzzle: the relationship between
the basic institutional framework, the consequent organizational structure, and
institutional change; and the path dependent nature of economic change that is
a consequence of the increasing returns characteristic of an institutional framework.
In the institutional accounts given earlier, the direction and form of
economic activity by individuals and organizations reflected the opportunities
thrown up by the basic institutional framework of customs, religious precepts,
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Institutions 109
and formal rules (and the effectiveness of enforcement). Whether we examine
the organization of trade in the Suq or that in the Champagne Fairs, in each
case the trader was constrained by the institutional framework, as well as the
traditional constraints common to economic theory.
In each case the trader would invest in acquiring knowledge and skills to
increase his wealth. But in the former case, improved knowledge and skills
meant getting better information on opportunities and having greater bargaining skills than other traders, since profitable opportunities came from being
better informed and being a more skilled bargainer than other traders. Neither
activity induced alteration in the basic institutional framework. On the other
hand, while a merchant at a medieval European Fair would certainly gain from
acquiring such information and skills, he would gain also from devising ways to
bond fellow merchants, to establish merchant courts, to induce princes
to protect goods from brigandage in return for revenue, to devise ways to
discount bills of exchange. His investment in knowledge and skills would
gradually and incrementally alter the basic institutional framework.
Note that the institutional evolution entailed not only voluntary organizations that expanded trade and made exchange more productive, but also the
development of the state to take over protection and enforcement of property
rights as impersonal exchange made contract enforcement increasingly costly
for voluntary organizations which lacked effective coercive power. Another
essential part of the institutional evolution entails a shackling of the arbitrary
behavior of the state over economic activity.
Path dependence is more than the incremental process of institutional
evolution in which yesterday's institutional framework provides the opportunity
set for today's organizations and individual entrepreneurs (political or economic). The institutional matrix consists of an interdependent web of institutions and consequent political and economic organizations that are characterized by massive increasing returns.10 That is, the organizations owe their
existence to the opportunities provided by the institutional framework. Network externalities arise because of the initial setup costs (like the de novo
creation of the U.S. Constitution in 1787), the learning effects described above,
coordination effects via contracts with other organizations, and adaptive expectations arising from the prevalence of contracting based on the existing institutions.
When economies do evolve, therefore, nothing about that process assures
economic growth. It has commonly been the case that the incentive structure
provided by the basic institutional framework creates opportunities for the
consequent organizations to evolve, but the direction of their development has
10The concept of path dependence was developed by Brian Arthur (1988, 1989) and Paul David
(1985) to explore the path of technological change. I believe the concept has equal explanatory
power in helping us understand institutional change. In both cases increasing returns are the key
to path dependence, but in the case of institutional change the process is more complex because of
the key role of political organizations in the process.
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110
Journal of EconomicPerspectives
not been to promote productivity-raisingactivities.Rather,private profitability
has been enhanced by creating monopolies, by restricting entry and factor
mobility, and by political organizationsthat established property rights that
redistributedrather than increasedincome.
The contrastinghistoriesof the Netherlandsand Englandon the one hand
and Spain on the other hand reflected the differing opportunity sets of the
actors in each case. To appreciatethe pervasiveinfluence of path dependence,
let us extend the historical account of Spain and England to the economic
history of the New World and the strikingcontrast in the history of the areas
north and south of the Rio Grande River.
In the case of North America, the English colonies were formed in the
centurywhen the struggle between Parliamentand the Crownwas coming to a
head. Religious and politicaldiversityin the mother country was paralleledin
the colonies. The general developmentin the directionof local politicalcontrol
and the growth of assemblieswas unambiguous.Similarly,the colonist carried
over free and common socage tenure of land (fee simple ownershiprights) and
secure property rights in other factor and product markets.
The French and Indian War from 1755-63 is a familiarbreakingpoint in
American history. British efforts to impose a very modest tax on colonial
subjects,as well as curb westwardmigration,produced a violent reaction that
led via a series of steps, by individualsand organizations,to the Revolution,the
Declaration of Independence, the Articles of Confederation, the Northwest
Ordinance, and the Constitution,a sequence of institutionalexpressions that
formed a consistent evolutionary pattern despite the precariousnessof the
process. While the AmericanRevolutioncreated the United States,post-revolutionary history is only intelligible in terms of the continuity of informal and
formal institutionalconstraintscarried over from before the Revolution and
incrementallymodified (Hughes, 1989).
Now turn to the Spanish (and Portuguese)case in Latin America. In the
case of the Spanish Indies, conquestcame at the precise time that the influence
of the CastilianCortes(parliament)was declining and the monarchyof Castile,
which was the seat of power of Spain, was firmly establishing centralized
bureaucraticcontrol over Spain and the Spanish Indies." The conquerors
imposed a uniform religion and a uniform bureaucraticadministrationon an
already existing agriculturalsociety. The bureaucracydetailed every aspect of
politicaland economic policy. There were recurrentcrises over the problem of
agency. Wealth-maximizingbehavior by organizations and entrepreneurs
(political and economic) entailed getting control of, or influence over, the
bureaucraticmachinery.While the nineteenth century Wars of Independence
in LatinAmericaturned out to be a struggle for control of the bureaucracyand
consequent policy as between local colonial control and imperial control,
nevertheless the struggle was imbued with the ideological overtones that
"The subsequent history of Spanish rise and decline is summarized in North and Thomas (1973).
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Douglass C. North 111
stemmed from the American and French revolutions. Independence brought
U.S.-inspired constitutions, but the results were radically different. In contrast
to those of the United States, Latin American federal schemes and efforts at
decentralization had one thing in common after the Revolutions. None worked.
The gradual country-by-country reversion to centralized bureaucratic control
characterized Latin America in the 19th century.12
The divergent paths established by England and Spain in the New World
have not converged despite the mediating factors of common ideological
influences. In the former, an institutional framework has evolved that permits
complex impersonal exchange necessary to political stability as well as to
capture the potential economic benefits of modern technology. In the latter,
"personalistic" relationships are still the key to much of the political and
economic exchange. They are the consequence of an evolving institutional
framework that has produced erratic economic growth in Latin America, but
neither political nor economic stability, nor realization of the potential of
modern technology.
The foregoing comparative sketch probably raises more questions than it
answers about institutions and the role that they play in the performance of
economies. Under what conditions does a path get reversed, like the revival of
Spain in modern times? What is it about informal constraints that gives them
such a pervasive influence upon the long-run character of economies? What is
the relationship between formal and informal constraints? How does an economy develop the informal constraints that make individuals constrain their
behavior so that they make political and judicial systems effective forces for
third party enforcement? Clearly we have a long way to go for complete
answers, but the modern study of institutions offers the promise of dramatic
new understanding of economic performance and economic change.
* I would like to thank the editorsof thisjournal for their commentson an earlier draft,
which has resulted in substantial improvementsin this essay, and Elisabeth Case for
editorial improvements.This essay is based in part on a forthcoming bookby the author
entitled Institutions, Institutional Change, and Economic Performance.
12For a summary account of the Latin American experience, see Veliz (1980) or Glade (1969).
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Colson,Elizabeth, Traditionand Contract:The
Problemof Order.Chicago: Adeline Publishing,
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Curtin, Philip D., Cross-CulturalTrade in
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David, Paul, "Clio and the Economics of
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Greif, Avner, "Reputation and Economic
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Response Paper #2 Before beginning this assignment, please read one of the articles
in the Response Paper #2 folder. Then please type your answers within this file, then
save it and upload it to the corresponding Compass assignment. Each question will be
graded out of 5 points.
A full credit answer will typically require at least several sentences. The grade for
each question will be determined by the thoughtfulness of your answer and your
demonstrated ability to comprehend the article and the specific issues raised by each
question.
The rubric is as follows: 5 points: The question was answered fully. The issue raised
in the question was addressed directly, concisely, and with an appreciation for the
complexity of the subject matter. 4 points: The question is answered correctly but
important details are missing, the point was not fully grasped, or an error is made that
doesn't detract from the main point. 3 points: The issue was addressed, though not
completely. The answer was off-point or unclear, or the answer was not concise (e.g.
rambling, bringing up irrelevant information, etc.) 2 points: Some coherent point was
made, but it didn't properly answer the question being asked. 1 point: Some coherent
point was made, but it didn't properly answer the question being asked. 0 points: The
answer was incoherent, nonsensical, or simply left blank. In addition, points may be
deducted for grammar or spelling errors that affect the reader's comprehension of your
answer. Please read the article at least once before you begin the assignment. It will
often be the case that you can provide a superficial answer to a question after only
reading the abstract of the article, but that a complete (i.e. full credit) answer requires
more detail, obtainable only by reading and thinking critically about the entire article.
Question 1 is worth 10 points, and a similar rubric will apply for that question but
with double the point values described above.
1. On p. 97 North writes: "Cooperation is difficult to
sustain when the game is not repeated (or there is an
endgame), when information on the other players is
lacking, and when there are large numbers of players."
For each of these three, concisely describe why this is
the case. (Note that this question is worth 6 points
instead of the usual 3 points.)
2. In describing the transition from local trade within a
village or between nearby villages to long distance trade,
North writes on p.99: "The development of longdistance trade, perhaps through caravans or lengthy
ship voyages, requires a sharp break in the
characteristics of an economic structure." According to
North what is the key difference between a society in
which people are engaged only in local trade and a
society in which people are also engaged in longdistance trade--the "sharp break" in characteristics?
According to North, how is this related to the concept of
"economies of scale"?
3. On pp. 99-100 North describes "two distinct
transaction cost problems" that long distance trade
entails: agency problems and contract enforcement.
What is the difference between these two?
4. On p. 101 North writes: "The technology associated
with the growth of manufacturing ... required effective
factor and product markets." He then goes on to write:
"Undergirding such markets are secure property
rights." Describe in more detail why property rights are
important to "effective factor and product markets," and
why this is contrasted with the case of "local exchange
within the village" described on p. 99. In other words,
why are secure property rights more important for the
growth of manufacturing than they are for an economy
characterized by local production and exchange within
one village?
5. Pundits often decry the fact that the percentage of the
American labor force employed in manufacturing has
been falling for the past several decades. Using this
article as a guide, explain how North would respond to
this.
6. According to North, why do "inefficient" forms of
bargaining continue in the Suq? Why don't the
institutions of the Suq evolve to resemble those of the
more productive modern capitalist societies?
7. In the 1800s, as countries in Latin America fought for
and won independence from European colonial powers,
they adopted constitutions that closely resembled the
US Constitution. With such similar political structures,
why did the US experience sustained economic growth,
while most Latin American countries experienced only
erratic economic growth, and political and economic
instability? Concisely describe North's argument.
Response Paper Instructions
The basic goal of these assignments is for you not only to learn about specific events in economic history,
but also to learn to read and understand peer-reviewed academic journal articles in economics.
For each response paper you will be writing about one article in particular. For response papers 2, 3, 5,
and 6 there are multiple articles for you to choose from. For response papers 1, 4, and 7 there is only
one article for each assignment. In addition to the article you will write about directly, you should also
read other related material, including other academic journal articles in the Course Content section on
Compass, the textbook, or resources that you find on your own. After your reading you can click on the
assignment link to submit your answers.
My use of the term “paper” to describe this assignment is somewhat misleading, because you will not be
writing a single piece, but a series of answers to specific questions. The purpose of this is to guide you
through the process of reading and analyzing an academic article. If you wanted to, you could assemble
these separate answers into one paper, but keeping them separate helps you keep your thoughts
organized and it helps me grade more efficiently.
Here are the directions and grading rubric, which you will see when you open each assignment:
Please answer each of the following questions. Each question will be graded out of 5 points. A full credit
answer will typically require at least several sentences. The grade for each question will be determined
by the thoughtfulness of your answer and your demonstrated ability to comprehend the article and the
specific issues raised by each question. Note that simply answering the question correctly does not
constitute a full credit answer. The rubric is as follows:
•
•
•
•
•
•
5 points: The question was answered fully. The issue raised in the question was addressed
directly, concisely, and with an appreciation for the complexity of the subject matter.
4 points: The question is answered correctly but important details are missing, the point was not
fully grasped, or an error is made that doesn't detract from the main point.
3 points: The issue was addressed, though not completely. The answer was off-point or unclear,
or the answer was not concise (e.g. rambling, bringing up irrelevant information, etc.)
2 points: Some coherent point was made, but it didn't properly answer the question being asked.
1 point: Some coherent point was made, but it didn't properly answer the question being asked.
0 points: The answer was incoherent, nonsensical, or simply left blank.
In addition, points may be deducted for grammar or spelling errors that affect the reader's
comprehension of your answer.
Each response paper has a due date, indicated on Compass. You have to submit the paper by that date
or you will get a zero for that assignment. There are no exceptions; you will have plenty of time to do
the assignments, so if you are concerned about the possibility of technological problems or other issues
then you can submit them early, before the due date.
Please note that because of the way Compass works, the due time on the due date is 11:59pm and zero
seconds, NOT 11:59 and 59 seconds. So if you are going to submit a response paper at literally the last
minute, note that the last minute is 11:58, not 11:59. Note also that Compass has a time-out period for
inactivity (probably one hour; this is set at the university level and I have no control over it).
How to Read an Academic Article
Academic journal articles are peer-reviewed. What this means is that before they are published, other
people who specialize in the topic of the article will read it and advise the journal’s editor about whether
it is worth publishing. Generally, in order to be worth publishing an article has to show awareness of
other work on the same topic, it has to present some new argument or new information, and it has to be
well supported by logic and evidence.
Different journals have different methods, but in economics the typical procedure works like this:
First, an economist does some research, individually or with other people. This could be historical
research, data analysis, math modeling, or something else, depending on the topic. Often—though not
always—the results of this research are presented at an academic conference. At those conferences,
there are other economists present who will raise questions or criticisms of the work.
The second big step is that the author or authors will write up the article and send it to a journal. The
same paper can only be sent to one journal at a time. So while one journal is looking at it and
considering whether to accept it, you can’t simultaneously send it to other journals. (This is not the case
in some fields, but it is in economics.)
The third step is peer review. The editor will send the article out to two or three other scholars who
specialize in the topic. Those reviewers will read the article and choose one of three options to tell the
editor: 1) publish it, 2) reject it, or 3) revise and resubmit. If they choose “revise and resubmit,” they tell
the editor what was wrong with the paper, and what should be fixed before it can be accepted. The
editor then makes the final decision about what to do, and conveys the reviewers’ comments
anonymously to the article’s authors. This anonymity is part of the process. Sometimes the reviewers
know who the authors are, and sometimes they don’t—different journals have different policies. But
what is universal is that the authors never know who the reviewers are. They can only read the
comments.
The last step is that if the editor has decided to accept the paper, then they publish it in the next issue of
the journal. If the editor decides to reject it, the author can choose to send it to another journal if they
want.
Because of the nature of the peer-review process and the expectations of new articles, there is a typical
pattern to the way these articles are written.
They usually have an abstract at the beginning, before the article itself. This just summarizes the point
of the article. Some articles don’t have one; every journal has its own policy on this.
The first part of the actual article, after the introductory paragraph, is what is called a literature review
(lit review). This is a summary of other scholars’ work on the subject. This serves three purposes:
1. If authors have to read all previous work on the subject, this avoids situations where they just
repeat something that someone else has already written, and don’t contribute anything new.
2. It sets up the terms of the debate. Academic articles are arguments. In cases where the topic is
under debate, the argument may be that someone else is wrong. In cases where the topic is
new, the argument may just be that this issue deserves people’s attention. But in either case,
the writing is framed as an argument, and the lit review helps lay out the context in which the
argument is being made.
3. Readers who are not familiar with the specific topic at hand can use the lit review as a guide to
what else they should read if they want to look into it in more detail.
After the lit review the authors typically start making their argument, including whatever logic and
evidence they have for it. There might be examples, data analysis, analogous situations, or something
else.
After the argument, or sometimes as a part of it, authors take some time to address opposing views.
Ideally, this means finding the best argument against your position and explaining why that viewpoint is
less convincing than your own.
Finally, at the end some authors will include related issues that might be too small to publish in separate
articles. This may involve a repeat in miniature of all the previous steps, with a new short lit review, a
concise argument, and a brief response to opposing views. Or it might just elaborate on other material in
the main part of the article.
Knowing how to read academic journal articles is rewarding, and useful, and hopefully fun. And that’s
partly what these response papers are intended to teach you. Having to read real academic articles that
were written for professional economists, and answer the response paper questions, will not only teach
you the specific subjects about which the articles were written; it will also teach you how academic
research, writing, and debate is conducted.
How to Do Well on the Response Papers
This might sound obvious, but answer the questions that are being asked. For example, if the
question asks you to "describe the viewpoint that the author is responding to" and you instead describe
the author's own viewpoint, you will not get credit. In the past, this type of mistake has been the most
common reason for lost points. Read each question carefully before you answer it, then again after you
answer it just to double check.
Don’t simply quote the author. Explain your answer in your own words. If the question asks for a
supporting quote, then of course provide one. But note that the quote is there for support only. You still
need to answer the question yourself.
Read (a lot) before you write. Read several different articles and pick the one you think you can do best
on. Once you have chosen, read other articles and book chapters that are related to the same
topic. Look up the topic online to get more information. Read the questions in the response paper
assignment. (You can open the response paper, close it, and come back to it as many times as you want
before the due date, as long as you don't click "Submit" until you are done.) After you read, think. Take
a day or two to go over it all in your mind. If you do this, your answers will be much more thoughtful,
and get a higher grade. Of course, to do this you have to start at least a week ahead of time.
For response papers 1, 4, and 7 the questions are tailored to the paper being assigned. The other
response papers give you a choice between a number of different articles. Because different students
choose different papers, these assignments will use this set of more generic questions:
1.
2.
3.
4.
5.
6.
7.
8.
Which article did you choose to write about? Include the year, author’s name, and article
title. (Note that your answer to this question actually does count towards your grade on this
assignment.)
Concisely describe the viewpoint that the author is responding to with this article.
Summarize the reasoning and/or evidence that has been offered to support this viewpoint.
According to the author, what is the most important problem with this viewpoint?
What viewpoint does the author argue for instead?
What reasoning or evidence does the author provide to support his or her own viewpoint?
What further evidence, if discovered, might strengthen the author’s argument?
What further evidence, if discovered, might weaken the author’s argument?
The last two questions are the most important and also the most difficult. These require more active,
personal, creative thought than the others, which are mostly about making sure you understand the
nature and context of the author’s argument. As these are open ended questions, a number of different
full-credit answers are possible. However, there are several types of answers that will earn few, if any,
points:
"More of the same" and "If the author's data is in error…"
Here's the basic idea: We use evidence to establish a certain level of confidence in a position, but that
level is always less than 100%. For example, if you park your car in a bad neighborhood, then return to
find it missing, based on the evidence you would probably conclude that it was stolen. But that wouldn't
be a position in which you have 100% confidence. And even if your confidence level is high, other
evidence could arise that would weaken that position. For example, imagine you then discover that the
spare car key in your home is missing, and that one of your friends who stayed at your house recently
lives near that bad neighborhood. Now it might seem more likely that your friend borrowed your car for
some emergency. This new evidence reduces your confidence in your previous position--it "weakens the
argument" that your car was stolen.
That's the approach I want you to take towards these two questions.
For the question on what would strengthen the author's argument, the reason why I don't want to see
answers that are just "more of the same" is because it misses the point, which is to think about the
various types of data that could be studied to learn more about the issue. To use the car analogy above,
it would be as if another person testified that you parked your car, and then when you returned it was
gone. It's just saying something that we already know.
For the question on what would weaken the author's argument, the reason I don't want to see answers
that just say "if this data was found to be in error" is because that is, again, missing the point. The
authors of these articles are professionals and their findings have been peer reviewed. The chance that
the data is in error is very small. By contrast, their interpretation of the data has a higher chance of
being wrong. And the way to find out if this is the case is to find more information. That's what I want
you to think about. To use the car analogy above, if you think your car is stolen, it is not helpful for me
to say "Well, you thought you parked your car there and then it was gone, but what if you're
wrong?" It's not helpful because if you believe your car has been stolen, you will obviously think very
carefully about where you parked it and make sure this wasn't a simple mistake. The chance that you
simply forgot where you parked it, then jumped to the conclusion that it was stolen, and never realized
this error even after reporting it to the police and telling all of your friends about the theft, is very
small. On the other hand, new evidence (your missing spare key, your friend's situation, etc.) that fits
with the existing evidence but points to a new conclusion, would certainly weaken your position that it
was stolen.
Note that the goal is not to describe evidence that would cause the author to change his or her mind.
The goal is to describe evidence that would strengthen or weaken the argument. To apply this to the car
example, if you are 80% certain that your car has been stolen, discovering that the spare car key in your
home is missing might reduce your certainty to 70%. If someone were to ask you if you believe your car
was stolen, you would still answer “yes.” You haven’t changed your mind. But the argument that your
car has been stolen is weaker than it was before. Approach these assignments with this in mind. Even if
you think an author has made a superb argument, supported by extensive amounts of data, it is still the
case that no argument is airtight. It is always possible to find evidence that would weaken the argument.
The point is to think about what that evidence would look like.
Let me give you another example. Data indicates that among Christians in the United States, those who
attend church regularly are, on average, healthier. Based on this data, some have concluded that this
means that going to church is good for your health. This is their argument. Now, what if the same type
of pattern in the data was found in Canada as well as the United States? Would this strengthen the
argument? Not really--or, at least, not by much. Why not? Because whatever is causing this pattern in
the US would most likely cause the same pattern in Canada. And if there is something wrong with the
interpretation, it will be equally wrong in Canada. Finding "more of the same" evidence is not all that
meaningful.
So what is actually wrong with the interpretation? It reverses causation. Going to church is not causing
people to be healthier. Unhealthy people are, on average, less likely to be physically capable of getting
out of the house and traveling to church. Health levels determine church attendance, not the other way
around. Now you can see why "more of the same" evidence is not useful. If health levels determine
church attendance in the US, then they probably determine church attendance everywhere. Finding
more examples of the same pattern doesn't make it any more likely that church attendance makes people
healthy. It just confirms that a correlation does exist, which we already know from the data we have on
the US.
Likewise, if someone says "data indicate that church attendance and health are correlated, therefore
going to church makes you healthier", it would be pointless to oppose the argument by saying "Oh yeah?
But what if that data is wrong?" As it turns out, in reality the data is correct. The correlation does really
exist. What is incorrect is the interpretation of the data. And in order to see that, you need to come up
with other evidence or reasoning that fits the evidence we already have but points in a new direction.
To be clear, this does not mean that it is never acceptable to challenge somebody’s data. But the point is
that the challenge must itself be grounded in evidence. The author Christopher Hitchens once wrote:
“What can be asserted without evidence can be dismissed without evidence.” The same principle applies
when the assertion is that somebody’s data is in error.
Let me frame this a bit more concretely. In the papers that you will read the authors have presented
data and drawn conclusions. These conclusions have a certain probability of being true. Question 8 asks
you to describe data that would weaken these conclusions—i.e. that would reduce the probability that the
conclusions are true. Simply stating “the data might be wrong” does not do that, because data can
always be wrong, and everybody already knows this. So for example, imagine an author gathers data,
analyzes it, and on that basis concludes that toogits cause novanoids (these are imaginary words). Let’s
say you estimate that this conclusion has an 80% probability of being true. Then along comes a critic,
and this person says “But the data could be wrong!” After this, what is your estimate of the probability
that this conclusion is true? It is still 80%. It hasn’t changed, because you don’t have any new
information. You already knew that it was possible that the data could be wrong. That’s part of the
reason why your estimate was 80% and not 100%. By contrast, imagine that the critic says “This data
might not be representative because the author gathered it using surveys, and we know that the
presence of novanoids increases survey response rates, and the author has not controlled for this bias.”
Assuming that you really do believe that the presence of novanoids increases survey response rates, and
this specific insight is new to you (it is not something that you accounted for in your previous estimate),
then this argument would reduce your estimate of the probability that the conclusion is true.
In essence, a challenge to the data amounts to saying: “If I gathered data the results would be different
from this author’s.” In order for this to carry any weight, you would need to explain why the results
would be different.
Finally, it should be clear that “less of the same” is similar to “more of the same.” In other words, the
claim that the author’s argument would be strengthened if data from another country showed the same
pattern, is fundamentally similar to the claim that the author’s argument would be weakened if data from
another country showed a different pattern. Both claims are true, but both are weak answers to
questions 7 and 8, and will not earn many points.
Describing the interpretation instead of describing the evidence
Another common pitfall to avoid is the mistake of describing an interpretation of evidence rather than the
evidence itself. To continue the earlier example involving church attendance and health, imagine
somebody gave as the answer to #8: “If evidence was discovered that indicated that church attendance
didn’t cause health to improve, this would weaken the argument.” Notice that this does not actually
answer the question being asked. The question is asking for a description of evidence, and this response
does not describe evidence. It describes somebody’s interpretation of some evidence, but we are not
actually told what that evidence might be. This is basically just restating the question. “Q: What
evidence would weaken the argument? A: If evidence was found that weakened the argument, that
would weaken the argument.” This is a non-answer.
Here is a better answer: “If we found data that showed a similar correlation between attendance at other
venues (e.g. school classes, movie theaters, or even satanic rock concerts) and health, this would imply
that church attendance was not uniquely related to health. Perhaps an argument might still be made
that leaving the house improved one’s health, and that church attendance is one reason to leave the
house. But the argument that there is a causal link between church attendance in particular, and health
outcomes, would be weakened.”
Evidence from hypothetical future events
Imagine an economist is studying the effects of a certain law, and argues that the law caused the interest
rate to rise from 5% to 10%. You might be tempted to write something like: “If the law was repealed
and the interest rate fell from 10% to 5%, this would strengthen the author’s argument.” While this is
true, it’s not a good answer. The reason is because in the social sciences evidence almost never comes
from laboratory experiments, but from real world events. We don’t get to alter the legal system just to
test our hypotheses. It might be nice to think about what events might occur that would give us useful
data, but in practice what separates good empirical economists from bad ones is the ability to tease
unexpected insight out of events that have already occurred. This is why the questions are phrased as
“What further evidence, if discovered…” as opposed to “What future events, if they occurred…”
Note that in many natural science contexts, a focus on “future events” is the norm; this is in essence
what experimentation is about. The experimenter forms a hypothesis and then intentionally creates a
future event in a controlled setting in order to test it. So the problem with this type of answer in this
class is not that it is invalid reasoning or bad science, but that it is rarely practicable in the particular field
of science in which economists and economic historians work.
“Diary Entries”
The last mistake that I will describe is what I call the “diary entries” answer. This is when somebody
posits, as “new evidence,” personal accounts (such as diary entries) describing the situation being
analyzed. For example, if the argument is that American slaves were fed 200 units of food per week, an
example of this type of answer might be: “If the diaries of some slaveowners were found that described
feeding slaves 300 units of food per week, this would weaken the argument.”
The problem with this answer is not that it is false, but that it is very weak. There are two primary
reasons. First, personal accounts are anecdotal evidence, which is weak support for a general claim like
this one because the sample size is small relative to the population and the experiences of certain
individuals may not be representative of the larger group. Second, personal accounts suffer from biases.
These can include personal ignorance (does the writer feed the slaves himself?), vested interest (does
the writer have a reason to exaggerate?), and the probability of error (a diary is not an accounting book;
if the wrong number is written in a diary by mistake it is much less likely to be corrected), among others.
To use a variation on the earlier example involving church attendance and health, how reliable are diary
entries of churchgoers claiming that going to church cured their illnesses? The answer is: Not very.
People who make such claims tend to be ignorant of medical science, they tend to have a strong vested
interest in rationalizing their worldview to themselves and others, and cherry-picking is notorious in such
cases (miracle claims are typically made for diseases that are difficult to diagnose and for which mistakes
and misdiagnoses are more likely, and they are virtually never made for healings that would be easy to
verify, such as amputees regrowing limbs).
To be clear, this is evidence. It is just very, very weak evidence. For this reason, positing diary entries
or other forms of anecdotal evidence in answer to questions 7 and 8 will typically result in a low score.
Lastly: If the requirements are not clear or you need help understanding a particular article, ask me!
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