Understanding the Process of Economic Change. By Douglass C. North. Princeton: Princeton University Press, 2005. xi + 187 pp. Index, references, figures. Cloth, $29.95. ISBN: 0-691-11805-1 (original) (raw)

2005, Business History Review

Reviewed by Stanley L. Engerman Adam Smith's concept of the division of labor is most frequently applied to the production of goods. Yet it can also be applied to the intellectual world, indicating the differing roles played by scholars in contributing to the production of knowledge. In this regard, Douglass C. North, corecipient of the 1993 Nobel Prize in Economic Sciences, has played a unique role in the fields of economic history and institutional economics. North has specialized in broadening the types of questions to be asked in studying economic development, opening up new perspectives for others to deal with. North wrote extensively on the role of institutions in influencing economic growth, extending the analysis of economic factors beyond the traditional three or four productive factors to include the evolution of the rules of economic society that direct or constrain economic behavior. The recognition of the importance of privateproperty rights, and of creditable commitment, for example, emerged from the work of North and those following the lines he discussed. In Understanding the Process of Economic Change, North extends further the range of questions he sees as essential to the study of economic change. The questions now include the thought processes of individuals: how people learn to define the institutions that influence behavior, and how they deal with change and the need to adapt to changing conditions. The analysis of such questions draws upon disciplines not usually considered central to economists, cognitive science and psychology, disciplines concerned with how people think, learn, and change views. It is the discussion of the significance of cognitive science for the study of economic policy and for the understanding of how to help generate economic growth in the present-day world that North regards as the central contribution of the volume. The present volume, one in the series entitled the Princeton Economic History of the Western World, comprises thirteen chapters in two parts. The first, "The Issues Involved in Understanding Economic Change," deals with human thought processes and belief systems. The basic starting point is that "the key to improving economic performance, is the deliberate effort of human beings to control their environment" (p. 1). The chapters in this part deal with problems of accurate understanding, including risk, imperfect perceptions, the nature of culture and religion, and the existing political structure. The limits of neoclas