The Nobel Prize-winning economist Douglass North passed away Monday at the age of 95. He had a remarkably fecund career and is one of the few laureates who managed to remain productive after receiving the award, even though he was well into his 70s when he received his summons from the Royal Swedish Academy of Sciences.
North will be remembered for forcing economists to quit obsessing over the business cycle and start talking about institutions-that is, the economic rules of the game, either explicit or implicit, that exist for commerce. This encompasses the role of unions in an economy, the strength of patent protections, and the extent to which the government regulates financial markets, prices, or wages, to cite but a few examples.
He came to realize the primacy of institutions late in his career. After spending his younger years making economic history respectable again (why would a “science” like economics need to look at the past, not a few members of my profession believed), he decided that the institutions in an economy mattered more than the statistical minutiae that most economic historians obsessed over when it came to understanding the factors that can create economic growth. This insight led him to radically alter his research agenda, for the benefit of us all.
Preventing the business cycle is a fool’s game, as the Great Recession certainly demonstrated, but if we can clearly identify policies that produce stronger long-term economic growth, that would be an unmitigated good. His work on economic history helped him divine lessons from the past.
In general we know some of the necessary institutions for economic growth: limited and sensible regulation, relatively low and stable taxes and government spending, a well-educated workforce, well-defined property rights, and functioning financial markets. North’s early research suggested that there’s reason to believe political exigencies can help push countries towards these outcomes. In other words, a market-oriented economy may be a long-term equilibrium for countries.
However, after the collapse of the Soviet Union and dissolution of the Iron Curtain failed to produce a bevy of new market democracies, he began to doubt his earlier conclusion, and he decided to study this issue some more. Winning the Nobel Prize afforded him the freedom to embark on an ambitious project to travel around the world and see if he could discover The Truth about economic growth. A few years after embarking on this voyage he came to the annual meeting of the American Economic Association to tell an overflow audience what he had learned from his peregrinations.
He told us, somewhat surprisingly, that he hadn’t learned a damn thing, and spent his time informing the 600 economists in attendance how little we know about the necessary ingredients for economic growth. The pithy rules we agree are necessary for growth to occur aren’t at all sufficient for growth, it turns out.
He concluded that this failure of the profession ought to be the primary preoccupation of us all and encouraged the audience members to pick up their staffs and start thinking about this issue along with him.
That same evening I happened upon North standing alone in a hotel bar. I introduced myself, and asked him if he had any advice for a newly minted economist. While he waited for the bartender to bring his change he gave me his 15-second dose of realism. Don’t write academic papers about topics no one cares about just to get tenure, he told me: Spend a few years trying to come up with something original that truly adds to the discipline, and if it doesn’t happen go do something else.
So I’m doing something else, grateful that Douglass North nudged me to escape the fate of an unproductive purgatory of academic mediocrity and still pondering the challenge he gave me-and many other economists-all those years ago.