Monday, November 24, 2008

What I've Been Reading

It's been a while since I posted a review. That's because I've been splitting my reading time between elementary level books for programs here at Collegiate, a little sci-fi to break things up, and a very interesting and thought-provoking book in economics. (It's the last one I'm reviewing. Don't go thinking I've abandoned the genre.)

The book, Understanding the Process of Economic Change, was written by Douglass C. North. North was the co-winner of the 1993 Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel - also referred to as the Nobel Prize in Economics. I enjoy reading his work because it always challenges me and yet maintains my level of interest without being overly theoretical.

The focus of this work, indeed on much of North's work, is the importance of economic institutions (the rules that guide choices) to growth. If you visit this blog regularly, you know I find institutional aspects of economics compelling. The idea that rules impact our choices is a logical one. The case that poorly designed and implemented rules can lead to faulty decisions is very convincing. And considering how our previous laws and beliefs may not keep pace with a dynamic economy could provide one explanation for the current situation.

Society designs institutions to reduce uncertainty, i.e. to make choice easier and less risky; but also to achieve preferred outcomes. Early in the book, North states

"Economic change is a process, and in this book I shall describe the nature of that process. In contrast to Darwinian evolutionary theory, the key to human evolutionary change is the intentionality of the players...human evolution is guided by the perceptions of the players; choices - decisions - are made in the light of those perceptions with the intent of producing outcomes downstream that will reduce uncertainty of the organization - political, economic, and social - in pursuit of their goals. Economic change, therefore, is for the most part a deliberate process shaped by the perceptions of the actors about the consequences of their actions. The perceptions come from the beliefs of the players - the theories they have about the consequences of their actions - beliefs that are typically blended with their preferences."

And it is those beliefs and the institutions that result that shape economic growth.

North goes on to discuss the role of early institutional structures (myths, superstitions, religions) in establishing order (and reducing uncertainty) in societies. He also talks about the stake of established organizations in maintaining an institutional structure. However, given the current context, I found the following one of the most interesting,

"The decision rules determined by the society will play the critical role in shaping whose choices matter and how they matter. The way humans structure the decision-making process determines whose beliefs matter. In terms of formal institutions this is the subject of political economy and although the literature is voluminous and immense progress has been made in our scholarly understanding of various aspects of the subject, we still have little understanding of dynamic aspects."

The significance of that statement, for me, is that the choices of the next months or years are important for the future path of our economy and economic system. Others may see that differently. And certainly, this book was written three years ago. Nevertheless, the value of good economics is its timeliness as well as its timelessness.

There is much to discuss in North's book - much that is relevant and much that is interesting. But it is a book to read and think over. Despite an unimposing size (it's only 208 pages); the thoughtful reader will read and ponder, reread and rethink. In my experience, it's the trademark of North's work and a reason why I enjoy his work. For the teacher who doesn't mind working to find gold, this is an excellent investment of time.

I look forward to your thoughts and comments.

1 comment:

Mike Fladlien said...

Does he discuss the Solow Growth Model? I'm not sure I believe the growth model and was looking for a counter arguement...