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Government and the Cost of Exchange in History

Published online by Cambridge University Press:  03 March 2009

Douglass C. North
Douglass C. North
Affiliation:
Professor of Law and Liberty in the Departments of Economics and History at Washington University, St. Louis, Missouri 63130
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Abstract

A general transaction cost framework is developed to analyze the costs of exchange and the role of government in the costs of exchange. Three general types of exchange are specified: personal exchange, exchange without third-party enforcement, and exchange with third-party enforcement. The framework is then employed to analyze government and the costs of exchange in history.

Type
Papers Presented at the Forty-Third Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 44 , Issue 2 , June 1984 , pp. 255 - 264
Copyright
Copyright © The Economic History Association 1984

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References

1 Barzel, Yoram, “Measurement Costs and the Organization of Markets,” Journal of Law and Economics, 25 (04 1982), 27–48;CrossRefGoogle Scholar and North, Douglass C., Structure and Change in Economic History (New York, 1981).Google Scholar

2 Geertz, Clifford, Geertz, Hilda, and Rosen, Lawrence, “Suq: The Bazaar Economy in Sefrou.” Meaning and Order in Moroccan Society (Cambridge, 1979), pp. 123–313.Google Scholar

3 It should be carefully noted that, because of the high costs of measurement and enforcement, the stronger party still must take into account the actions of the weaker party; hence the usefulness of this approach even with coerced agreements.Google Scholar

4 North, Structure and Change, pp. 143–86.Google Scholar

5 Williamson, Oliver, “The Modern Corporation: Origins, Evolution, Attributes,” The Journal of Economic Literature, 19 (12. 1981), 1537–68.Google Scholar

6 Fama, Eugene and Jensen, Michael, “Separation of Ownership and Control,” The Journal of Law and Economics, 26 (06 1983), 327–49.CrossRefGoogle Scholar

7 North, Douglass C., “Entrepreneurial Policy and Internal Organization in the Large Life Insurance Companies at the Time of the Armstrong Investigation of 1905–6,” Explorations in Entrepreneurial History, 5 (Spring 1953), 139–61.Google Scholar

8 North, Douglass C. and Wallis, John Joseph, “American Government Expenditures: A Historical Perspective,” American Economic Review (05 1982), 336–40.Google Scholar

9 Simon Kuznets, many years ago, was concerned that government was treated as a final product rather than as an intermediate good, and engaged in a lengthy discussion in the journals with Hicks and others over this issue. It is worth quoting him at some length, since he catches the flavor of the point made here. “The flow of services to individuals from the economy is a flow of economic goods produced and secured under conditions of internal peace, external safety, and legal protection of specific rights, and cannot include these very conditions as services. To include the latter implies feasibility of national income and of the flow of services to individuals outside the basic social fabric within which economic activity takes place. There is little sense in talking to individuals—it is a precondition of such services, not a service in itself… It is difficult to understand why the net product of the economy should include not only the flow of goods to ultimate consumers but also the increased cost of government activity necessary to maintain the social fabric within which the flow is realized.” (Simon Kuznets as quoted in Studenski, Paul, The Income of Nations: Theory, Measurements, and Analysis: Past and Present [New York, 1958], p. 198.)Google ScholarWhile Kuznets's quotation refers to the role of government in underpinning economic activity, there is no logical reason why this should not extend to other transaction services that are associated with capturing the gains from trade.Google Scholar

10 U.S. Department of Commerce, Historical Statistics of the United States (Washington, D.C., 1975), p. 139.Google Scholar

11 A substantial part of technological change has had this objective in the past century.Google Scholar