Distinguished economic historian Douglass North died today at the age of 95. This news comes only a few days after the death of Herbert Scarf. Kevin Bryan has written a crystal-clear post explaining the basic ideas behind North’s ccontribution to economics, in Bryan’s blog A Fine Theorem. They key paragraph is below, but I highly recommend reading the whole post.
That historical institutions develop largely to limit transactions costs is a major theme in North’s work, and this paper is a beautiful, highly formal, explication of that broad Coasean idea. Our motivating puzzle – why use formal institutions when reputation provides precisely the same potential for punishment? – can be answered simply by noting that reputation requires information, and the cost-minimizing incentive-compatible way to aggregate and share that information may require an institution. The Law Merchant arises not because we need a way to punish offenders, since in the absence of the nation-state the Law Merchant offers no method for involuntary punishment beyond those that exist in its absence; and yet, in its role reducing costs in the aggregation of information, the Law proves indispensable. What a beautiful example of how theory can clarify our observations!