Abstract
This review essay considers the importance of 1993 Nobel Prize winner Douglass C. North's works for research on organization and strategy and critically contrasts his perspective on institutional economics with that of Oliver Williamson's. An examination of North and tensions within institutional economics offers a refreshing view of how proponents of behavioral and economic perspectives can cooperatively develop new theoretical and research directions without either perspective seeming to displace the other. The evolution of North's thinking on institutions and the importance of infrastructure, environmental variation, and change is important for all researchers who are interested in addressing the challenges of balancing institutional dynamics with the rigor of neoclassical economic thought. In the sections to follow, we briefly review North's impressive body of scholarship, contrast his conception of institutional economics and transaction costs with Williamson's, and suggest how and why strategy and organizational researchers may find his emphasis on variability and change especially timely and valuable. Although organization theory and the field of strategy have widely incorporated the efficiency arguments of Williamson, North's approach seeks to explain the persistence of both inefficiency and noneconomic rationalities, focusing on processual issues that characterize changing environments between equilibrium states. Widely acknowledged as one of the founders of the New Economic History, North has developed a volitional institutional approach that is distinctive for the increasing importance and causal primacy accorded behavioral concepts to explain economic and political structures and the dynamics of structural change. His intellectual trajectory commenced nearly 40 years ago with an innovative effort to conduct historical analyses within a rigorous, neoclassical framework. Frustrated by the limitations imposed by this paradigm on his interest in explaining institutional change, North developed the unorthodox conception of economic outcomes as epiphenomena. He recounted his stepping outside the boundaries of neoclassical economics to chart this new ground in the following words:
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