Distinguishing Agreements that Reduce Uncertainty in Human Interactions — Recommended Reading

North, Douglass C.  Institutions, Institutional Change and Economic Performance1990, New York: Cambridge University Press.   Click here for an excerpt.

What rules of the game lead to success?  Why do some societies thrive in certain games and others don’t, supposedly using the same rules of the game?  In this classic, very easy to read book, the late Nobel laureate in economics Professor North suggests that the interplay of institutions and organizations determines whether a set of rules leads a society to equitable growth and health or persistent inequitable collapse.  He starts by differentiating between the rules and the players (p 4), with institutions (the rules) as the “humanly devised constraints that shape human interaction” (p 3), and organizations (the players) as “groups of individuals bound by some common purpose to achieve objectives” (p 5).  “The purpose of the rules is to define the way the game is played.  But the objective of the team within that set of rules is to win the game…Modeling the strategies and the skills of the team as it develops is a separate process from modeling the creation, evolution, and consequences of the rules” (p 4-5).  From a holonic perspective, the organization is a whole that is also a part of a larger whole, defined by the institution.

With this distinction between institutions and organizations, Professor North provides a framework for understanding the myriad political-economic social forms that have evolved throughout history across the globe.  He suggests a model for how these different forms and their varied success result from the dynamic, historic interplay of institutions and organizations.  The framework integrates (1) the evolution of institutions as a form of rules to reduce the uncertainty inherent in human interaction, executed well or not, with (2) the costs of transactions (i.e., measurement and enforcement) and transformation, and (3) path dependence, to show how some forms are much more efficient than others at providing for stability or change in human interactions.  Two different groups can take up what seem to be similar rules, and because they start from different initial conditions and have different contexts, they can end up having completely different experiences and achieve completely different results, from great success to deep collapse.  I find this book to be a profoundly reorienting look at how the formal and informal constraints of a society, in the form of its institutions, influence daily human interactions and their evolution over time.  Providing great insights with easy language and rich examples from history, I highly recommend this book.

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