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June 1979

Economic History and Government

A review of Nobel laureate Douglass North’s 1978 paper “Structure and Performance: The Task of Economic History.”

“Structure and Performance: The Task of Economic History.” Journal of Economic Literature 16 (September 1978): 963–978.

Economic history, by adopting quantitative methods and the analytical framework of neoclassical economics, has “gained in rigor and scientific pretension.” But this rigor has neglected the vital relationship between changes in economic structure and changes in economic performance. North characterizes economics as a theory of choice subject to constraints, and he believes that economic history’s task is to theorize about the forces shaping the evolution of those constraints. With this framework, how do we explain the transformation of the American economy in the last century?

The past 100 years has profoundly transformed the structure of the American economy. In the century since 1875, government expenditures have ballooned from 2-3% of GNP to about 24% of GNP, and the proliferation of regulatory agencies has made access to government influence a key factor in economic decision making. These, and other changes that have altered the structure of the economy, are not explained by the cliometric efforts of the “new” economic historians. The work of Joseph Schumpeter fares better when measured against this standard, but seems fundamentally flawed because Schumpeter’s framework lacks an explicit analysis of the political process.

In developing an analytical framework useful to the economic historian, one must begin by examining the constitutional structure established by the Founding Fathers. The Constitution imposes heavy costs on attempts to use the political process to redistribute wealth and income. The critical question in light of the developments of the last 100 years, is “What energized groups to undertake the private costs of altering the political-legal structure?” Three lines of inquiry account for economic historians’ perplexity in explaining the transformation of economic structure.

  1. “Neoclassical theory simply ignores the losers… .” These losers seek to avoid the costs of being losers through political intervention in the market. Most importantly, the losers who undertook changing the political-legal system to reduce their losses were not the “proletarian losers” of the nineteenth century (e.g., Indians, exslaves), but propertied groups such as farmers.
  2. Economic historians have not grasped the organizational implications of science and technology’s application to economic activity in the past century. This produced a radical reduction in production costs; the growth of large scale enterprise; the creation of an urban society; a reduction in the cost of measuring the dimensions of the goods or services exchanged; and a reduction in the costs of measuring the externalities generated by economic activity. But the underlying cause of these changes was the enormous change in transaction costs that occurred. In addition, the advent of a highly technological economy has sharply decreased the costs of information and transportation that has widened the individual’s range of effective choice.
  3. “Tastes do change.” North notes that some studies show that the best indicator of legislative voting behavior is not visible economic interest but ideological attitudes. In general, political and judicial conceptions of the “public good” have changed in the last century. Understanding ideological change is one important key to understanding popular, legislative, and judicial behavior.