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In this landmark work, a Nobel Prize-winning economist develops a new way of understanding the process by which economies change. Douglass North inspired a revolution in economic history a generation ago by demonstrating that economic performance is determined largely by the kind and quality of institutions that support markets. As he showed in two now classic books that inspired the New Institutional Economics (today a subfield of economics), property rights and transaction costs are fundamental determinants. Here, North explains how different societies arrive at the institutional infrastruc

Editor's Introduction Originally published in Volume 36, Number 1, Spring 1992, pages 3-6. Omicron Delta Epsilon presented Douglass North (1920-2015) with the John R. Commons award in 1992 for his contributions to the economics profession. The following year he shared the Nobel Memorial Prize in Economic Sciences with Robert Fogel. The Nobel honored their work in applying economic theory and quantitative methods to the study of economic history and institutional change. As a pioneer in what has become known as cliometrics (named for the classical muse of history, Clio), Professor North's scholarship focused on how human institutions and their organizational structures influence economic and societal outcomes. He is widely recognized as one of the founders of the New Institutional Economics school of thought. In this paper, his Commons Award lecture, Professor North describes and discusses his views on the limitations of neoclassical economics that are rooted in the assumption of instrumental rationality. His discourse on culturally influenced mental models and the limitations of our ability to process complex information presages the ongoing revolution in behavioral economics. This paper remains as timely today as it did when it first appeared in The American Economist.

Abstract
Ken Binmore has written an exciting book and I am in complete agreement with his objectives and conclusions. But his approach is flawed because of his reliance on tools of analysis to understand the way the mind and brain have developed that are not up to explaining our evolving understanding of the human environment.

Focuses on institutions & time to provide the foundation for an institutional/cognitive analytical framework for the development of a theory of economic dynamics. This modification of neoclassical theory retains the assumption of scarcity while modifying the rationality assumption & adding the dimension of time, maintaining that the institutional evolution of an economy is determined by interaction between institutions & organizations. The nature of institutions & how they affect economic performance is described, along with the cognitive approach to human learning. It is argued that the rationality assumption must be replaced by the understanding that the mental models of organizational actors are formed by classifications that have evolved from a society's cultural heritage. Shared beliefs, expressed in religions, myths, & dogmas, are transformed in societal & economic structures by institutions that evolve through time & determine economic performance, which may or may not produce economic growth. Implications for current development policies are discussed. 23 References. J. Lindroth

A rational choice model of institutional change is considered, outlining five propositions. (1) It is argued that institutional change is determined by the continuous interaction between organizations & institutions in an economic environment characterized by limited resources &, thereby, competition. (2) Survival in this highly competitive environment demands investment in skills & knowledge, & the kinds of knowledge sought by individuals & organizations will influence their perceptions of future opportunities & choices. (3) Although these opportunities & choices may alter institutions, institutions create the incentives & beliefs that glorify certain forms of skills & knowledge, & thereby certain types of choices & opportunities. (4) However, various divergent outcomes are possible since individuals' perceptions are determined by a pluralistic blend of cultural heritage & social dictates. (5) Institutional change will be incremental so that the broader institutional framework is not damaged & path dependent so that singular institutions do not undermine the broader flows of institutional change. These propositions suggest a number of directions for future research: (A) exploration of the impact of institutional structure on the human mind; (B) analysis of the cultural, social, & institutional influences on individual choice; & (C) the precise nature of incremental & path-dependent change. T. Sevier