Why do some countries become rich, while others remain poor? That question in its many forms has occupied economic historian Douglass C. North for more than 50 years. North received the Nobel Prize in 1993 for his research on the economic history of the U.S. and Europe, as well as for his contributions to understanding how economic and political institutions change over time. He was awarded the prize with University of Chicago economist Robert W. Fogel.
North "has pointed out that economic, political and social factors must be taken into account if we are to understand the development of those institutions that have played a role for economic growth and how these institutions have been affected by ideological and non-economic factors," said the Royal Swedish Academy of Sciences, which awarded the shared prize of $850,000.
After pursuing graduate studies in economics at the University of California, Berkeley, North began teaching economics at the University of Washington in 1950, where he pioneered the use of complex statistical analysis tools--"econometrics"--to analyze both economic and political history. At a national conference in the early 1960s, North and colleagues established this new econometric approach as a distinct economic discipline.
During World War II, North had sailed with the U.S. Merchant Marines. He later wrote an article on the economics of the shipping industry that has become one of the most-cited articles in the literature of economic history.2 North was on the faculty of the UW from 1950 to 1983, when he left to join the Center in Political Economy at Washington University in St. Louis. He remains Professor Emeritus at the UW.
In 1966 North spent a year in Geneva, studying European history with the support of a Ford Fellowship. That goal required North to explore and question some of the basic theories of European economic and political history, which he found lacking. North advanced the notion that institutional structures, especially how property rights are handled within a society, made a considerable difference in that society's economic well-being. Institutions, by North's definition, are the basic rules of the road in an economy, including formal systems, such as constitutions, laws, taxation, insurance, and market regulations, as well as informal norms of behavior, such as habits, customs, and ideologies. North was among the first to voice this theory in the 1970s, and he is credited with transforming the way many economists think about economic history and the development of market institutions.
North cites an example of how formal and informal institutions can affect economic productivity in a country. Businesses in the U.S., for example, are willing to deliver products on credit because they have reasonable expectations of payment. Many institutions exist to protect property rights: liens, bankruptcy laws, contracts, insurance, and the court system, in addition to the basic ethical religious, and cultural sanctions against thievery. Some institutions provide incentives for people to be productive, others do the reverse, but on balance, over the past 200 years, the U.S. has "operated within an institutional framework that has promoted growth and prosperity," says North.
Over the years, North has been known for his willingness to tackle difficult theoretical questions. Recent research focuses on the use of cognitive theory to understand the role of ideology and fairness in the success of political and economic institutions. He contends that those institutions eventually fail if people lack a sense of fair play and equitable treatment.
North's considerable body of knowledge about how economies have developed in the past has brought him many requests for assistance from developing countries, especially from former socialist and communist countries of eastern Europe to help guide the transition to free markets there. North has taught a course on market economics at the U.S. Business School in Prague, which provides American- style business courses to managers from eastern Europe.