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Douglass C. North: Transaction Costs, Property Rights, and Economic Outcomes

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  • Gary D. Libecap

Abstract

Douglass North asked why some societies historically and contemporarily have rising per-capita incomes and individual welfare, whereas others do not? He argued that successful economies had property rights that encouraged markets, trade, and investment in new production and organizational methods. In other economies, transaction costs, especially those due to the political process, blocked more efficient property rights. Property rights grant decision making over valuable resources and are the basis for investment, and market exchange. They mold the economy and the distribution of wealth and political power. Politicians and coalitions of privileged elites with stakes in the status quo join to preserve it. Inefficiencies create their own constituencies. There is no clear remedy for general citizens in North’s cases. Despite the power of North’s argument, transaction costs are not clear in aggregate studies of economies. They are more apparent in US common-pool resource problems with large, continuing losses in resource rents. This evidence runs counter to the facile arguments in the welfare and environmental economics literatures for addressing externalities that are reminiscent of the simplistic recommendations in the growth and economic history literatures that North challenged. If the observed costly political response to open access losses is characteristic of regulation in general, then welfare losses permeate developed economies as well and are more pervasive than the dramatic examples of development failure examined by North and others. Mitigation requires competitive interest groups that benefit from more secure property rights and greater resource rents to offset powerful elites that align with politicians and capture bureaucratic agencies to achieve particularistic benefits that undermine general welfare.

Suggested Citation

  • Gary D. Libecap, 2018. "Douglass C. North: Transaction Costs, Property Rights, and Economic Outcomes," NBER Working Papers 24585, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24585
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    More about this item

    JEL classification:

    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • N4 - Economic History - - Government, War, Law, International Relations, and Regulation
    • N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-
    • N5 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries
    • N52 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - U.S.; Canada: 1913-
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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