Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions) Review

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Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions) ReviewThese are strange times in the economics profession. Most economists insist upon representing actual economic systems with mathematical models that bear little resemblance to reality. The results of these models are often quite strange. Government deficits are offset by taxpayers who save more money in anticipation of higher future taxes. Monetary policy is neutral; it has no real predictable effects. We are in equilibrium in every phase of the business cycle. Investors might as well pick stocks by throwing darts. Economic analysis is judged by its formalism, not its realism.
This book by Douglass North is a refreshing change from `economics as usual'. Here the factors that matter most are real institutions and actual history. North draws upon the right kind sources for his theoretical underpinnings (Coase, Hayek, Ostrom, Olson, Veblen- yes Veblen too). North also focuses on an issue of primary importance- economic performance through time. How does economic development happen? Why does it happen in some nations and not others?
There are some important ideas here. We need to think in terms of adaptive efficency (p80-81). Incremental changes in institutions comes from entrepreneurs (p8). We should understand institutional change in terms of transaction costs, relative prices, and ideology (p86). North has constructed a theory of institutional change using a blend of common sense and subtlety that is rare in modern economics. This book should be required reading for all econ grad students.
There are some historical examples sprinkled through this book. Personally, I would have liked to see more history. But it is still the case that there is more history here than one typically finds in contemporary economics. Institutions, Institutional Change, and Economic performance is not easy reading, but it is easier to read and vastly more informative than the math models that most economists try to pass off as proper economic analysis.Institutions, Institutional Change and Economic Performance (Political Economy of Institutions and Decisions) Overview

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