North believes that the property right structure mainly promotes institutional changes in the following aspects:
The first is to create an effective market by relying on the property right structure. Neo-classical economics theory holds that the effectiveness of the market depends only on full competition. North research found that the effectiveness of the market means fully defining and exercising property rights, which means creating a set of constraint variables to promote productivity. Facing the market with incomplete information, the property right structure and its exercise and confirmation can reduce or completely eliminate the uncertainty. North believes that the fundamental reason of market inefficiency is the inefficiency of property right structure, so an important content of institutional innovation is the innovation of property right structure. On the other hand, technological changes and the expansion of more efficient markets will eventually lead to contradictions with the original property rights structure, thus forming a relatively inefficient property rights structure. In this case, it is necessary to adjust and innovate the property right structure.
Second, relying on the property right structure to promote technological progress. North believes that the improvement of technological progress rate is not only due to the expansion of market scale, but also because inventors may get a larger share of invention income. The profitability of investing in new knowledge and developing new technologies requires the establishment of a certain degree of property rights in knowledge and innovation. Without property rights, new technologies are readily available, and the motivation for invention will be lost. Although the social return rate of developing new technologies is always high, the pace of developing new technologies is slow in history. The problem is that "systematic property rights cannot be established in innovation". A set of incentive mechanism to encourage technological change and improve the private rate of return of innovation to make it close to the social rate of return is to clarify the property rights of innovation. Trademarks, copyrights, trade secrets and patent laws all aim to provide inventors with some degree of exclusive rights.
2. State theory in institutional change.
The existence of the state is the key to economic growth and the root of man-made economic recession, which makes the state the core of economic history research. Although North has not made much progress in the theory of institutional change, it is unique in combining property right theory with state theory. Because the state is not "neutral", the state determines the property right structure and is ultimately responsible for the efficiency of the property right structure that causes economic growth, recession or stagnation. In North's view, the state theory of institutional change should not only explain the internal activity tendency of political or economic organizations that cause inefficient property rights, but also explain the instability of the country itself in history, that is, the rise and fall of the country. To this end, he called his national theory "the national theory of defining and implementing property rights".
The state theory should first explain the nature of the state. There are various explanations about the nature of the country in politics and history, but there are two main ones: the theory of plunder (exploitation) and the theory of contract. Predatory theory holds that the state is the agent of a certain group or class, and its role is to squeeze income from members of other groups or classes on behalf of the interests of the group or class. That is, the country is the product of plunder or exploitation, and it is the tool for rulers to plunder and exploit the ruled. Some sociologists in the west, including Marxists, hold this view. According to contract theory, the state is the result of citizens' reaching a contract, and it should serve citizens, in which the state plays the role of maximizing social welfare. This theory has a long history and has been revived in recent years under the reinterpretation of neoclassical economists. Obviously, these two theories have some truth and can be proved in history and reality, but they can't cover all ethnic forms, so they are not comprehensive. From the theoretical deduction, the state has the duality of plunder and contract. Therefore, North advocates the distribution theory of "violent potential" of the country. He believes that the state can be regarded as an organization with a comparative advantage in violence. If the possibility of violence is evenly distributed among citizens, the contract state will appear; If the distribution is unequal, there will be a predatory (exploitative) country.
According to North, the state model with a ruler who maximizes welfare or utility has three basic characteristics: first, the state exchanges a group of services called "protection" or "justice" for income; Second, in order to maximize national income, it divides voters into groups and designs property rights for each group; Third, the country faces competition from potential internal competitors and other external countries.
North pointed out that the basic services provided by the state are the basic rules of the game. There are two purposes of the state: one is to define the basic rules of competition and cooperation that constitute the property right structure, so as to maximize the rent of the rulers; The second is to reduce transaction costs to maximize social output, so as to maximize national tax revenue. North research found that in many stages of history, "there is a lasting conflict between the property right structure that maximizes the rent of rulers and the efficient system that reduces transaction costs and promotes economic growth." This basic contradiction is the fundamental reason that hinders the society from achieving sustained economic growth. "In other words, the emergence of conflicts, contradictions and even antagonistic behaviors between the above two purposes of the country is the fundamental reason for the rise and fall of the country.
3. Ideological theory in institutional change.
Western orthodox economic theory has always ignored or excluded the role of ideology in economic growth and institutional change, while other sociologists, especially Marxist theorists, attach great importance to the role of ideology. On the basis of absorbing the essence of the two theories, North developed his own theory of institutional change with ideological elements. North pointed out that neoclassical theory cannot explain two kinds of behaviors: one is opportunistic behavior including "hitchhiking"; Second, caring for one's own interests does not constitute a motivational behavior, that is, altruistic behavior. North's theory of institutional change breaks through the utilitarian hypothesis that neoclassical theory is limited to strict individualism, and clearly points out that "change and stability need an ideological theory, which can explain these deviations caused by rational calculation of individualism in neoclassical theory".
According to North's explanation, ideology is composed of interrelated and all-encompassing world views, including moral and ethical laws. An important condition for the effective operation of market mechanism is that people can abide by certain ideology. "Strong social morality and ethical laws are the elements that make the economic system feasible and social stability". In North's view, ideology is an institutional arrangement to reduce transaction costs. For example, when the cost of defining and implementing property rights is greater than the income, we can't use property rights to solve the problem of "hitchhiking", and we must rely on ideology to restrain people's behavior. For another example, the rules set by political organizations and economic organizations need a process of compliance. Compliance also comes at a cost. If there is a lack of certain restrictions on the individual's maximum behavior and the cost of obeying the rules is too high, it will make the arrangement of political or economic systems impossible, so it will take a lot of investment to convince people of the legitimacy of these systems. In this case, the arrangement of political or economic system needs to be combined with ideology. The reason why people can abide by social rules regardless of personal interests is that ideology is at work. He pointed out, "When members of society think that this system is fair, because individuals have not violated rules and property rights, then the cost of implementing rules and property rights will be greatly reduced."
North also used ideological theory to explain "hitchhiking" behavior. In economics, the so-called "hitchhiking" is the behavior of obtaining benefits and avoiding paying. This behavior hinders the automatic adjustment process of the market. Therefore, a successful ideology must be able to overcome the "hitchhiking" behavior, which is the central issue of various ideologies. In North's view, ideology is a way of behavior, which makes behavior decision-making more economical by providing people with a "world view". If every member of the group has the same ideology and hobbies, it is easy to organize to achieve the goals of the group; On the other hand, if the ideology is different, the interests and goals are different, and we don't know each other's behavior information, then in collective action, some people will enjoy the benefits of collective action without paying any price, and the phenomenon of "hitchhiking" is inevitable. The more group members, the more serious the "hitchhiking" behavior. Therefore, there are two conditions to solve the problem of "hitchhiking": first, the number of group members should be moderate; The second is to provide selective incentives for individuals. For members with different ideologies, groups should invest in human capital, form a unified ideology and "piety" to collective action through publicity and education, and save the organization cost and information cost of collective action. Or formulate accurate rules and implement them to supervise and punish members' "hitchhiking" behavior. Of course, people from different regions, different ages, different occupations and different experiences have different ideologies, but a successful ideology must be flexible, so as to solve the problem of "hitchhiking" better and more effectively.
4. "Path dependence" of institutional change.
Path dependence is similar to inertia in physics. Once you enter a certain road, whether it is good or bad, you may become dependent on it. In fact, the research on self-reinforcement mechanism and path dependence was first put forward by Arthur (W. BrianArthur, 1988) for the process of technological evolution. North extended the previous argument of self-reinforcement in the process of technological evolution to institutional change and put forward the path dependence theory of institutional change.
North interprets path dependence as "the powerful influence of the past on the present and the future" and points out that "history does play a role, and people's decisions and choices today are actually influenced by historical factors". North believes that the process of institutional change, like the process of technological change, has a mechanism of increasing returns and self-strengthening. This mechanism makes the institutional change once it takes a certain path, and its established direction will strengthen itself in the future development process. Therefore, the choices people made in the past determine their possible choices now. Along the established path, the changes of economic and political systems may enter a virtuous circle and be rapidly optimized; It may also slide down the wrong path, or even be "locked" in some inefficient state, leading to stagnation. Once locked, it's hard to get rid of it.
Theory of institutional change
North research found that the power that determines the path of institutional change comes from two aspects: incomplete market and increasing income. As far as the former is concerned, due to the complexity of the market and the incompleteness of information, institutional changes cannot always evolve in the direction originally designed, and often an accidental event may change the direction. As far as the latter is concerned, people's behavior is oriented to maximize interests, and the increasing reward brought by the system determines the direction of institutional change. North went on to point out that in a world without increasing returns and a completely competitive market, the system is irrelevant; However, if there is an increasing income and an incomplete market, the system is very important and the self-strengthening mechanism will play a role. The self-strengthening mechanism of institutional change has four manifestations: (1) Designing a system requires a lot of initial setup costs, and with the implementation of this system, unit costs and additional costs will be reduced. (2) learning effect. By learning and mastering the rules of the system, if it helps to reduce the cost of reform or improve the expected income, it will promote the emergence and acceptance of the new system. The speed of institutional change is a function of learning speed, but the direction of change depends on the expected rate of return of different knowledge. (3) Coordination effect. By adapting to the system, organizations will sign contracts with other organizations, as well as the emergence of mutually beneficial organizations and further investment in the system, thus achieving the coordination effect. (4) adaptive expectations. When the system brings great benefits to people, people have a strong and universal psychology of adapting to expectations or recognition, thus making the system further dominant. With the prevalence of contracts based on specific systems, the uncertainty of the permanence of such systems will be reduced.
In a word, path dependence has a strong restrictive effect on institutional change and is a key factor affecting economic growth. If the path is chosen correctly, the institutional change will advance rapidly along the predetermined direction, people's enthusiasm will be greatly mobilized, and the existing resources will be fully utilized to engage in activities to maximize income, promote market development and economic growth, and then become an important force to promote further institutional change, and both sides will show a virtuous circle of mutual cause and effect and mutual promotion. If the path choice is not correct, the institutional change will not bring people increasing income generally, but benefit a few privileged classes, then this institutional change will not only be unsupported, but also aggravate unfair competition, leading to market disorder and economic recession. Once this "lock-in" situation appears, it will be difficult to reverse, and many developing countries have learned profound lessons in this regard. Therefore, countries with institutional changes must constantly solve the problem of "path dependence".