ABSTRACT
Introduction The underlying premise of North’s framework is the centrality of human mental models to the process of economic change. North observes that economics is a theory of choice, that people choose among alternatives that are themselves constructions of the human mind and that therefore how the human mind works should form the foundation of any inquiry on economic development.1 According to North, therefore, economic change is the result of changes in the quantity and quality of human beings, the stock of human knowledge particularly as applied to the human command over nature, and the institutional framework that defines the deliberate incentive structure of a society. There is therefore need of a complete theory to integrate the theories of demographics, stock of knowledge and institutional change.2 In a classic intellectual journey, North has over a period of time developed a framework for economic change that is capable of plugging most of the gaps in economic theory that were ignored by classical economic theorists. Aided by his economic history pedigree, North first sought to understand the development of legal institutions that orchestrated the rise of the Western powers to economic dominance.3 With this understanding, he later developed an institutional framework describing how the West achieved its economic success at a structural level.4 He then reinforced this framework by explaining the dynamics and the processes that are involved in the process of economic change by incorporating work from human sciences other than economics and economic history.5 This is why North’s framework is unique, as it goes beyond the usual tenets of economic theorising. The starting point of North’s framework is the analytical distinction between “institutions” and “organisations”. Institutions are “the rules of the game in a society”6 or the humanly devised constraints that structure human interaction and may be either formal or informal. Both types of institution are important to how an economy functions. Examples of formal rules include statute law, common law and regulations, while informal rules manifest in the form of conventions, norms of behaviour and self-imposed codes of conduct. The distinction between formal and informal rules is vital in order to understand the process of economic
change. Thus, while laws are formal institutions, how people understand laws, and whether they respect them, are elements of society’s informal institutions. On the other hand, organisations are the players of the social game. Organisations are basically groups of individuals bound by a common purpose to achieve objectives. It has been noted that the terms “institution” and “organisation” are analytical terms, not expressive of any essential nature.7 This means that a single feature of the world, such as a court, may be viewed as either institutional – when seen as a part of the context in which an organisation is situated – or, organisational – when viewed as a group of people that act in concert to protect or extend their power and influence. The significance of the institutional structure and the organisations that develop within that institutional structure is that they determine the incentives of the society, which in turn determine how a society operates. These incentives may determine whether a society will have higher or lower transaction costs, cooperation or predation behaviours, will encourage effective investment and productivity growth or focus on rent-seeking behaviour.8 North identifies three major challenges to economic change, namely uncertainty, the evolving human environment (he calls this non-ergodicity) and institutional path dependence. According to North, any development agenda should take into account these potential problems and be able to devise ways of getting around them.
