North and Fogel “renewed research in economic history by applying economic theory and quantitative methods in order girton college essay competition explain economic and institutional change. A collection of North’s papers is housed at the Rubenstein Library at Duke University.
Douglass North’s 1991 paper summarizes much of his earlier research relating to economic and institutional change. In this paper, North defines institutions as “humanly devised constraints that structure political, economic and social interactions”. The degree to which they are effective is subject to varying circumstances, such as a government’s limited coercive force, a lack of organized state, or the presence of strong religious precept. North begins with local exchange within the village.
In this setting, specialization “is rudimentary and self-sufficiency characterizes most individual households”, with small-scale village trade existing within dense social networks of informal constraints that facilitate local exchange, and a relatively low transaction cost. With growth, the market extends beyond the village into larger, interconnected regions. As the participants of a transaction become more socially distant, the terms of exchange must be made more explicit. This increase in transaction costs necessitates institutions that reduce the risks of being cheated, either by raising “the benefits of cooperative solutions or the costs of defection”. As long-distance trade becomes more feasible, generally through caravans or lengthy ship voyages, individuals and groups experience occupational and geographic specialization. From the development of long-distance trade arise two transactional cost problems. The first transactional cost problem is agency: the transfer of one’s goods or services outside the control of local rule leaves the rules of exchange undefined, the risk of unfair trade high, and the contracts within society unenforced.