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  Douglass North, Nobel Laureate

  By James Annable | Dec 7, 2018

  Douglass North died three years ago, at the age of 95. He received the Nobel Prize in Economics in 1993 for his pioneering work in cliometrics and the application of rigorous neoclassical theory to the analysis of institutions. The GEM Project is most indebted to the latter, which provided foundations for modern New Institutionalism. Also compatible with the Project, North carefully grounded his model-building in rational behavior, operating within a framework of agents who act intentionally within their culture and experience.

  North’s taught us that institutions are designed to constrain economic, social, and political interaction. Constraints are both formal (including laws, constitutions, and property rights) and informal (including customs, traditions, and codes of conduct). His idea that formal neoclassical theory could help us understand why institutions function the way they do was a fundamental, albeit incomplete, breakthrough. The GEM Project has extended North’s analysis, compatibly modeling complex, highly specialized workplaces as a nonmarket venue of rational price-mediated exchange. From North (1971): “What we need is a body of theory which encompasses the traditional models of the economist and both widens its scope and allows us to include an explanation of the formation, mutation and decay of organizational forms within which man cooperates or competes.” The Project argues, along similar lines, that what macro theory most needs is the intuitive generalization of rational price-mediated exchange from the marketplace to the information-challenged workplace.

  North straddled institutionalist and neoclassical schools, an uncomfortable middle ground.  The former distrusted his use of rigorous, often restrictive analytical tools while the latter disparaged “loose”, at times incoherent, literary analysis. Skepticism from both rigorous and institutional economists has also pestered the GEM Project. Despite GEM success in microfounding the suppression of wage recontracting, ratifying the existence of involuntary job loss, motivating causality from nominal demand disturbances to evidence-sized movement in employment, output, and income, and the derivation from axiomatic priors of powerful chronic, time-varying wage rents, mainstream macro theorists remain uninterested in modeling rational exchange...

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