Institutional Change and American Economic Growth: A critique of Davis and North

Abstract

Lance Davis and Douglass North’s Institutional Change and American Economic Growth’ redirects (at least in its title) the emphasis of the profession back 50 years to the days when Ely, Commons, and Veblen pondered the evolution of economic institutions. In the first four chapters Davis and North develop a theory which they proceed to apply to major historical issues ranging from the growth of unions to the development of financial markets. Their theory is a blend and extension of recent developments in the theories of public choice, property rights, and technological change. Individuals combining in primary action groups and seeking profits provide the moving force leading to institutional change in Davis and North’s mode1.2 Innovators will be able to profit mainly by capturing scale economies, internalizing externalities, reducing risks, lowering transaction costs, or by redistributing income. The speed with which primary action groups will seize an opportunity and develop new institutions depends on a host of factors affecting the perceived benefits and costs of the innovations. For example, the greater the profits, or the easier the organizational problems, the faster will new innovations develop. Davis and North divide the world into two parts consisting of exogenous variables, the entire set of which make up the institutional environment, and endogenous variables, which they call institutional arrangements. They define the institutional environment as: