How do you address the hard problem of institutional change? Dr. Noel Johnson tackled this question head-on at the June 2020 IHS Summer Seminar. Dr. Johnson had the opportunity as a doctoral student to study with Nobel laureate Douglass North and draws upon North’s life’s work to answer the question.
He opens by addressing North’s 1968 paper from the Journal of Political Economy in which he discusses the changes in productivity to ocean shipping. This paper marked a revolutionary new approach for economists in analyzing improvement output. North argued that ship design ultimately changed because piracy had been eradicated by national navies, and not as a result of technological advancement.
The argument wasn’t the technological change per se, the technological change didn’t matter until you actually started enforcing property rights.-Dr. Noel Johnson
This approach to economics falls into the neo-classical school of thought, the idea that institutional change can be explained by rational agents responding to relative price movements. For Douglass North, this meant that education, capital accumulation, technological change, and economies of scale were not the cause of growth but rather actual growth itself.
To illustrate this further, Dr. Johnson discusses North’s case for the “Black Death” as a source of institutional change. According to North, every now and then a major event occurs that acts as the catalyst for massive change in relative prices. “You have to think about the world as a whole a world of institutions,” he says. “And these institutions inform constraints and guidelines for how people can contract within them.”
In the example of the Black Death, 40% of Europe’s population is eradicated. As a result, feudal institutions wind up becoming abandoned with the loss of laborers, whereas the bargaining advantage for the laborer becomes higher. This leads to a significant rise in prices and wages for laborers.
Eventually, North alters his theories on institutional change away from the neo-classical tools and instead focuses on beliefs, culture, ideology, and religion to address assist in addressing institutional change. He addresses these types of theories in his final book, Violence and Social Order.
The premise behind North’s final book hinges on the following premise:
In order to understand institutional change, we must understand how organizations interact with institutions.-Dr. Noel Johnson
The danger with these rents is that they create monopiles that the political entities now control. An example of this can be seen with the cigarette industry in China, which is controlled by the government. As a result, it’s unlikely to want free trade surrounding this product, and even less likely to adhere to guidance set by the World Health Organization regarding them.
In this case, organizations are defined as political groups or parties, lobbying firms, religious groups, and so on. These types of institutions can contribute to the idea of the Limited Access Order, which is a concept for controlling violence. To control violence, political entities create barriers to entry, which in turn create rents that can be used to purchase and obtain peace.
For more on Douglass North’s work and the full lecture by Dr. Noel Johnson, visit our YouTube channel. You can find additional details on Summer Seminars, graduate and faculty programs, and funding opportunities, at TheIHS.org.