Markets, institutions and the Polanyian challenge : a theoretical study of the new institutionalist economic history of Douglass C. North

In this study, I examine the New Institutionalist Economic History (NIEH) of Douglass C. North from a historiographical and philosophical perspective. As a point of departure for this purpose I take North’s critical engagement with the primitivism-modernism debate in premodern economic history, as represented in his early work by the ‘challenge of Karl Polanyi’. This challenge, I argue, has given shape to the development of the NIEH in its various stages of theoretical elaboration. Therefore, understanding its contextual significance is indispensable for making sense of North’s oeuvre as a whole. On my reading, North interpreted the challenge of Polanyi to mean combining two methodological conceptions previously not united in one work. On the one hand, North’s NIEH extends the scope of economic theory to the study of the longue durée of economic history; while on the other hand North seeks to theorize the importance of historical variation in sociocultural institutions for understanding why there are rarely complete or well-functioning markets in most of economic history. North considers neoclassical economics suitable for neither of these purposes. Yet his critique of Polanyi’s substantivist-primitivist approach is primarily based on the absence of an integration of his project with the tools of economic theory. For this purpose, North therefore adopted the theory of transaction cost economics, also called New Institutional Economics (NIE), to this new ambitious end. More than perhaps any other author North has been responsible for extending the scope and sophistication of this economics based approach in the study of economic history. In the present work, I discuss to what extent this approach has been successful in its own aims, internally consistent, and to what extent it is plausible as a historiographical approach from an ‘external’ point of view. I do this by combining a close reading and interpretation of a variety of North’s writings, focusing in particular on the most contemporary version of his work - which has not been much studied - with a methodological and theoretical discussion of various major themes in or aspects of his work from the viewpoints of historiography, anthropology, and philosophy of social science. These themes include (among others) North’s understanding of the functioning of markets in politics and economics, his approach to choice theory, rationality, and game theory, his use or neglect of evolutionary concepts, the meaning of embeddedness in his work, and North’s contractarian anthropology. As this work shows, North’s NIEH is situated in a difficult intermediate position within larger debates in economic thought: between primitivism and modernism, between substantivism and formalism (in the anthropological sense), and most significantly, between the ‘new mainstream’ of economic theory and the quest for successive endogenisation of the institutional context of economic behavior. This certainly speaks for the ambition and sophistication of North’s historiographical approach, something which has only increased with the further development of his theory. But in his quest to unite the best insights of choice theory with New Institutionalist economics as well as incorporating the ‘anthropological’ level of fully socialized beliefs, preferences, and how they give rise to institutional variation in history, North frequently seeks to have his cake and eat it. The persistent methodological ambiguities in his work give rise to problems of internal consistency and external plausibility, which are present from the very inauguration of his NIEH research programme. The subsequent development of his work has not, I argue, been able to overcome this fundamental problem. For this reason, while much of North’s toolset and his overarching ambitions are valuable developments in economic historical theory, he does not achieve his aim of overcoming the challenge of Karl Polanyi. Without a more decisive break with his original economic microfoundations, North’s NIEH project cannot ultimately live up to its grand ambitions.