Karl Marx and Douglass C. North

Abstract

The Theory of Institutional Change by Douglass C. North traces the long-term economic performance of a nation back to the quality of its institutions because they are able to ensure sustainable reductions in transaction costs. The approach claims to provide an interpretive framework applicable to all of recorded human history. It thus has an undeniably historical dimension. The theory explains institutional change as an induced change in relative prices caused by technological progress, which inverts the existing balance of power between suppliers of the factors of production, thus leading to a renegotiation of the content of the institutional arrangement. By tracing institutions as ideal superstructure back to a negotiating equilibrium between the owners of the factors of production as a material basis, the Theory of Institutional Change includes a materialistic component. For this reason, it is argued that North’s theory should be considered as a variety of Historical Materialism, an idea first formulated by Karl Marx.