Douglass C. North's Contributions to Economics and Economic History

Abstract

Modern economic analysis was founded by the Scottish philosophers of the 18th century in their general analysis of the determination of observed facts in society. At the center of their analysis was a desire to understand the interaction of human beings. The ingenious invention of the idea of a spontaneous order, mechanisms through which a good result was achieved without an authority giving central commands, is one of the greatest insights in human intellectual history. Adam Smith's invisible hand turned out to be so successful in economic analysis that 100 years later, the whole profession almost unconsciously neglected other methods of coordinating human interaction. With the construction of the general equilibrium model by Leon Walras, the price mechanism moved to center stage in economic analysis and became ever more refined through the analyses of Hicks, Samuelson, and Arrow-Debreu. Other forms of human relations than the price system, such as rules and principles, political decisions and collective group actions, were crowded out by disciplines such as law, political science and sociology. The classical authors, Smith, Mill, and Marshall, in their broad analysis, made some allowance for these factors, but they have since been purged from pure economics. One exceptional man, Joseph Schumpeter, in his monumental work History of Economic Analysis (1954)1 argued for the role of economic history and sociology, but in vain. Schumpeter writes: What distinguishes the 'scientific' economist from all the other people who think, talk, and write about economic topics is a command of techniques that we class under three heads: history, statistics, and 'theory'.