Adaptive efficiency

I was reminded of the importance of Douglass North's insight in listening to Mike Munger's always excellent comments last month on EconTalk and reading Tim Harford's blog.

Munger observed that institutions evolve, but not necessarily in a wealth enhancing manner - a lesson he learned from North. In his two most recent books, Understanding the Process of Economic Change and Violence and the Social Orders, North makes the point that institutional change is path dependent and very slow to change.


The review of the latter:

North argues that economic change depends largely on "adaptive efficiency," a society's effectiveness in creating institutions that are productive, stable, fair, and broadly accepted--and, importantly, flexible enough to be changed or replaced in response to political and economic feedback. While adhering to his earlier definition of institutions as the formal and informal rules that constrain human economic behavior, he extends his analysis to explore the deeper determinants of how these rules evolve and how economies change. Drawing on recent work by psychologists, he identifies intentionality as the crucial variable and proceeds to demonstrate how intentionality emerges as the product of social learning and how it then shapes the economy's institutional foundations and thus its capacity to adapt to changing circumstances.

The review of the former

Although I think that Violence has a lot going for it, that is not to say it is a successful book overall. It is useful, in my opinion, to contrast NWW with another work of “big think,” Daron Acemoglu and James Robinson’s Economic Origins of Dictatorship and Democracy. This is fair because NWW do so themselves in their book. Imagine that yours truly is to teach a graduate class on “Institutions and Economic Performance.” My goal is to train students to do independent research. Which of these two works would better serve as a text? For me the answer is easy -- Acemoglu and Robinson.


Although I do not think NWW is particular useful as a practical blueprint for research beyond taxonomy I emphasize that many of the ideas in the book have merit and are worthy of further exploration, particularly in a policy setting where formal theory (as opposed to ideas) may be counterproductive. Above all, the notion that one cannot simply “get rid” of the superficial exterior of natural states and thereby uncover the beating heart of an open access order yearning to be free is the book’s most important idea, and profound.


So, if institutions move down a path of predation and power concentration this self reinforcing process make will continue toward a stable state that may be slow to change direction.


Harford wrote:

Experimenting, learning, and adapting is inescapable in a complex world.

Harford was referencing military special ops in the above posting. I was motivated to think about this application in terms of adaptive efficiency that might well be destructive rather than productive. Time will tell the story about the long term, unintended consequences of the bin Laden assassination. That is, while the operation may have exemplified the process of adaptive efficiency in mechanics the consequence in terms of path and outcome way well be wealth destoying.

I often conflate military emergence and adaptation and suicide. While methods and mechanics for both may well emerge that reflect adaptive efficiency, the outcome, while stable, may not be wealth creating.