Douglass North, the American Nobel laureate who passed away at the age of 95, was a unique economist who tackled one of the biggest questions in the field: how do some countries become prosperous while others remain poor? While mainstream neoclassical economics focuses mainly on markets, it fails to fully address this issue. North, on the other hand, highlighted the important role of institutions in explaining the differences in long-term economic growth. Institutions are the rules and conventions of a society, which include laws, property rights, politics, customs, and belief systems, among others.
North took on a new approach to economic interactions by emphasizing the transaction costs and frictions experienced in the real world that impede the ideal market outcome. He explained that Britain industrialized faster than other comparable countries because their guild rules about work practices and hiring restrictions were weaker.
While his earlier work was limited to mainstream economics, he later became one of the founders of the influential new institutional economics together with Ronald Coase. His later work integrated insights from different economic traditions and disciplines, pioneering a field known as cliometrics, which merges economic theory with statistical analysis to provide more rigor in the study of economic history.
North’s approach to institutions and economic growth has significant practical implications, impacting strategies of international economic organizations such as the World Bank, where good governance is emphasized as a means of promoting economic growth. His innovative ideas have also opened new avenues for promising research agendas across the social sciences. He was awarded the Nobel Prize in 1993 for his work on the long-term economic development of Europe and the US.
Born in Cambridge, Massachusetts, North’s family background provided no indication that he would become a renowned academic. However, his intellectual curiosity, credited to his mother, led him to Ashbury College, Ottawa, the Choate School in Wallingford, Connecticut, and eventually, the University of California, Berkeley, where he graduated in 1942 with a degree he described as mediocre at best due to his time-consuming commitment to Marxism and left-wing activism.
As a pacifist, North joined the Merchant Marine during World War II but later chose to continue his academic studies instead of pursuing his passion for photography because he wanted to improve societies through economics. North earned his doctorate from Berkeley in 1952 and taught at the University of Washington (1950-83) until he moved to Washington University, St. Louis, where he taught for 28 years.
North believed that markets are embedded in institutions, meaning that markets function differently depending on the specific institutional framework in each country. Institutions are the humanly devised constraints, such as formal rules and social norms that shape incentives in economic exchange. While some institutions promote economic efficiency by providing secure property rights, low-cost conflict resolution, and incentives for productive activity, others do not.
North initially believed that institutions would change when powerful economic actors found inefficiencies holding them back from making bigger profits. However, he showed that institutions change only incrementally, even when dysfunctional – lacking the rule of law, a judicial system that enforces contracts and property rights, and perpetuating corruption and a lack of entrepreneurship.
North challenged core assumptions in economic theory by drawing on insights from psychology, politics, and sociology to understand how human cognition, habits, religious beliefs, and ideology shape economic behavior and explain different long-term growth patterns. He became an influential adviser to governments in China, Latin America, and elsewhere, insisting on spending at least six months in a country to understand its belief systems and institutional framework before offering advice.
After tying the knot in 1972, he is survived by his beloved second wife, Elizabeth Case. He also leaves behind three sons named Douglass, Christopher, and Malcolm from his prior marriage to Lois Heister, which eventually led to separation.
