An Evaluation of the Role of the State and Property Rights in Douglass North's Analysis

By Fiani, Ronaldo | Journal of Economic Issues, December 2004 | Go to article overview
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An Evaluation of the Role of the State and Property Rights in Douglass North's Analysis

Fiani, Ronaldo, Journal of Economic Issues

This paper intends to show that the role Douglass North has attributed in his latest works to the modern State in the working of economic system permits the development of a political economy theory which joins the political and economic dimensions with abstract generalizations quite different from and more interesting than the ahistorical and asocial neoclassical ones, at the same time avoiding a narrow descriptive character. Notwithstanding the fact that some of these ideas have been presented elsewhere, (1) more development is necessary, especially concerning the possibility of spontaneous cooperative behavior to dismiss the role of the State in property rights assignment and enforcement as a necessary condition for modern market functioning. Thus, the next section explores in North's analysis the links between transaction costs, multidimensional property rights, and third-party enforcement in modern societies, which demands the State's intervention not only in the enforcement but also in the definition of property rights, as a necessary condition for market operation.

The third section discusses the modern institutional analysis of spontaneous emergence of social cooperation essentially founded on Robert Axelrod's contribution, for its approach seems to contradict the role of the State as a third-party agent to define and enforce property rights. The fourth section discusses the determinants of the State's institutional action to define and enforce property rights according to North's analysis. Then, it will be demonstrated that North's analysis of these determinants is unsatisfactory but states a future research agenda for the study of the relationship between political and economic systems. The last section summarizes the most important questions for future research.

Development and Institutions in Douglass North's Analysis

The evolution of North's ideas is quite complex, and it is not our fundamental matter of concern here. We are interested in comparing North's approach in his latest work (during the 1990s) to the present trend of studying only the spontaneous emergence of norms through very abstract models in more orthodox approaches to institutions. However, some very brief remarks on the evolution of North's ideas are necessary, at least to let the unaware reader know about some quite dramatic changes in North's point of view in the course of his work.

North's first work (The Economic Growth of the United States from 1790 to 1860) was fundamentally concerned with an empirical analysis of the functioning of markets in a process of economic growth. This work would build the link between North and what have been called the "cliometric school" (also known as the "new economic history"), which was characterized by applying quantitative methods and (neoclassical) economic theory to historical analysis.

This initial link with neoclassical theory would prove very difficult to break in North's subsequent works. The most important difficulty with early North's neoclassical analysis would be to explain the permanence of inefficient institutions, that is, institutions that do not favor economic growth. (2) The problem of the definition of property rights, its assignments, and enforcement was directly related to the nature (efficient or inefficient) of institutions and has a central role in North's analysis.

The problem of the permanence of inefficient institutions would produce perhaps the most important changes in North's thought. In his early work on this issue (North and Thomas 1973), the definition, assignment, and enforcement of property rights always changed in an efficient way, in response to the variations in relative prices of land and labor. These variations were caused by the European demographic cycles during the Middle Ages, in a Malthusian-like cycle. Thus, a reduced population increased the relative price of labor in comparison to land and this, in turn, produced simultaneously a decrease in feudal obligations related to direct labor extraction and an increase in market-oriented usages of land, such as land tenancy.

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