Douglass North on Formal and Informal Institutions

Summary

In this thought-provoking conversation, Timur Kuran and Douglass North explore the complexities of technology transfer and institutional frameworks. Kuran discusses the challenge of transferring not just technology but the accompanying culture and norms required for success. North emphasizes that both formal institutions (laws and regulations) and informal norms (cultural behaviors and trust) are essential for sustainable economic growth. Their discussion highlights how even well-crafted legal frameworks fail without complementary social mechanisms, drawing lessons from the historical divergence of Latin American and North American economic outcomes.

Takeaways

• 😀 Technology can be imported from developed societies to less developed ones, but transferring the culture, norms, and trust is much more challenging and slow.
• 😀 Institutions are not just formal rules (e.g., court systems, laws) but also informal norms and behaviors, which are equally important for economic development.
• 😀 Having formal rules without informal norms to support them often leads to poor enforcement, rendering the formal rules ineffective.
• 😀 A proper institutional framework must balance both formal rules and complementary informal norms for it to work effectively and promote growth.
• 😀 The existence of formal rules alone does not guarantee success in creating an environment conducive to economic growth or productivity.
• 😀 Latin American countries in the 19th century adopted constitutions similar to the U.S., but due to different informal norms and enforcement mechanisms, their results were radically different.
• 😀 The enforcement of formal laws can fail if informal norms don't align with or support the formal rules.
• 😀 The evolution of informal norms is crucial to ensuring that formal institutions function as intended and contribute to economic growth.
• 😀 Building effective informal norms that complement formal laws is a slow process that may take generations to evolve.
• 😀 The comparison between Latin American and North American economic growth highlights how the absence of complementary informal norms can undermine the effectiveness of similar formal laws.

Q & A

What challenge does Timur Kuran highlight regarding technology transfer?

Timur Kuran emphasizes that while technology can be transferred from developed societies to less developed ones, the cultural and societal norms that support such technology are much harder to transfer. This process of adapting the accompanying culture, trust, and shared understanding is slow and requires generations.

What role do informal norms play according to Douglass North?

Douglass North argues that informal norms of behavior are just as important as formal rules (such as laws and regulations). Formal rules alone cannot work effectively without complementary informal norms that reinforce and back up those rules. Without these norms, the enforcement of formal rules becomes difficult or ineffective.

How does North describe the relationship between formal and informal institutions?

North describes the relationship between formal and informal institutions as interdependent. While formal rules set the structure, informal norms help enforce them and ensure their practical functioning. The two must complement each other for a system to work effectively.

What does North suggest about the adoption of constitutions in Latin American countries?

North suggests that when Latin American countries adopted constitutions similar to that of the United States after gaining independence, they assumed this would lead to growth. However, despite adopting similar formal rules, the outcomes were very different due to the lack of complementary informal norms that supported those rules.

Why does North believe that having formal laws is not enough for economic growth?

North believes that formal laws alone are insufficient for fostering economic growth because, without the backing of informal norms and proper enforcement, these laws cannot function as intended. The effectiveness of rules depends on the societal norms that support them.

What is the key to creating an environment conducive to economic growth, according to North?

According to North, the key to creating an environment conducive to economic growth is having both strong formal rules (laws, regulations) and complementary informal norms that support and reinforce these rules.

How does North contrast the outcomes of Latin American and North American economic growth?

North contrasts the outcomes by pointing out that while both regions adopted similar formal rules (e.g., constitutions), the outcomes in Latin America were vastly different from those in North America. This difference arose because the informal norms in Latin America did not align with the formal rules, leading to ineffective enforcement and poor economic outcomes.

What does North mean by the term 'institutional framework'?

North uses the term 'institutional framework' to refer to the combination of both formal and informal institutions that shape the environment for economic activities. A well-designed institutional framework is necessary for fostering growth and productivity.

What is the primary challenge when transferring technology to less developed societies?

The primary challenge is not just transferring the technology itself, but also transferring the accompanying cultural norms, trust, and shared understandings that make that technology work effectively. This cultural transfer is a slow and generational process.

Why does North believe the study of informal norms is important?

North believes that the study of informal norms is crucial because these norms play a significant role in the effectiveness of formal laws. Understanding how informal norms evolve and how they can complement formal rules is essential for creating institutions that drive economic growth.