12 October 1993

THIS YEAR’s PRIZEWINNERS ARE LEADING FIGURES WITHIN THE FIELD OF “NEW ECONOMIC HISTORY”

The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 1993 jointly to

Professor Robert W. Fogel, University of Chicago, USA,
and
Professor Douglass C. North, Washington University, St. Louis, USA,

“for having renewed research in economic history by applying economic theory and quantiative methods in order to explain economic and institutional change.”

Modern economic historians have contributed to the development of economic sciences in at least two ways: by combining theory with quantitative methods, and by constructing and reconstructing databases or creating new ones. This has made it possible to question and to reassess earlier results, which has not only increased our knowledge of the past, but has also contributed to the elimination of irrelevant theories. It has shown that traditional theories must be supplemented or modified to enable us to understand economic growth and change. Economic historians often consider far reaching problems, the estimation of which demand an integration of economics, sociology, statistics and history. Robert Fogel and Douglass North are the economic historians that have come furthest in such a scientific integration. They were pioneers in the branch of economic history that has been called the “new economic history”, or cliometrics, i. e. research that combines economic theory, quantitative methods, hypothesis testing, counterfactual alternatives and traditional techniques of economic history, to explain economic growth and decline. Their work has deepened our knowledge and understanding within fundamental areas of research, as to how, why and when economic change occurs.

Robert Fogel’s foremost work concerns the role of the railways in the economic development of the United States, the importance of slavery as an institution and its economic role in the USA, and studies in historical demography.

Douglass North has studied the long term development of Europe and the United States, and has in recent work analysed the role institutions play in economic growth.

Robert W. Fogel’s scientific breakthrough was his book (1964) on the role of the railways in the American economy. Joseph Schumpeter and Walt W. Rostow had earlier, with general agreement, asserted that modern economic growth was due to certain important discoveries having played a vital role in development. Fogel tested this hypothesis with extraordinary exactitude, and rejected it. The sum of many specific technical changes, rather than a few great innovations, determined the economic development. We find it intuitively plausible that the great transport systems play a decisive role in development. Fogel constructed a hypothetical alternative, a so called counterfactual historiography; that is he compared the actual course of events with the hypothetical to allow a judgement of the importance of the railways. He found that they were not absolutely necessary in explaining economic development and that their effect on the growth of GNP was less than three per cent. Few books on the subject of economic history have made such an impression as Fogel’s. His use of counterfactual arguments and cost-benefit analysis made him an innovator of economic historical methodology.

Fogel’s painstaking criticism of his sources, and his use of the most varying kinds of historical material, made it difficult for his critics to argue against him on purely empirical grounds. As Fogel has stressed, it is the lack of relevant data rather than the lack of relevant theory that is often the greater problem for research workers. Fogel’s use of counterfactual analysis of the course of events and his masterful treatment of quantitative techniques in combination with economic theory, have had a substantial influence on the understanding of economic change.

Fogel’s second work of importance (1974), which aroused great attention and bitter controversies, treated slavery as an institution and its role in the economic development of the United States. Fogel showed that the established opinion that slavery was an ineffective, unprofitable and pre-capitalist organisation was incorrect. The institution did not fall to pieces due to its economic weakness but collapsed because of political decisions. He showed that the system, in spite of its inhumanity, had been economically efficient.

His exceedingly careful testing of all possible sources and his pioneering methodological approach have allowed Fogel to both increase our knowledge of an institution’s operation and disintegration and to renew our methods of research. Both his book on the railways and that on slavery have forced researchers to reconsider earlier generally accepted results, and few books in economic history have been scrutinised in such detail by critical colleagues.

Fogel’s third area of research has been economic demography, and in particular the changing rate of mortality over long periods of time and its relation to changes in the standard of living during recent centuries. This project is less controversial than the other two, and is both interdisciplinary and international, with fellow workers from many countries. His conclusion is that less than half of the decrease in mortality can be explained by better standards of nourishment, before the breakthroughs of modern medicine. This leaves the greater part of the decline unexplained. According to Fogel, a systematic analysis demands an integrated study of mortality rates, morbidity rates, food intake and individual body weights and statures. A combination of biomedical and economic techniques is required to achieve this, something that he has at present set about accomplishing. It is already apparent that his analyses will affect research in economic history at many levels.

Douglass North presented in 1961 an explanatory model for American economic growth before 1860, that came to affect the direction of research not only in the USA. Starting from an export base model he had previously formulated himself, North analyses how one sector (the cotton plantations) stimulated development in other branches, and led to a specialisation and interregional trade.

In 1968 North presented an article on productivity in ocean shipping, which has become one of the most quoted research works in economic history. In this article he shows that organisational changes played a greater role than technical changes. North has more and more pointed out that economic, political and social factors must be taken into account if we are to understand the development of those institutions that have played a role for economic growth, and how these institutions have been affected by ideological and noneconomic factors. North maintains that if political economics is a theory of choice under certain specific assumptions and restrictions, then the purpose of economic history is to theorise about the development of these. North has pointed out that there is a risk that economic analyses may become ahistoric if the time factor and the conflicts in society are not taken into account. A systematic reintroduction of institutional explanations in the historic analysis is an attempt to correct this deficiency.

In a number of books (1971, 1973 and 1981), North demonstrated the role played by institutions, including property rights. He is one of the pioneers in “the new institutional economics”. Putting it simply, North maintains that new institutions arise, when groups in society see a possibility of availing themselves of profits that are impossible to realise under prevailing institutional conditions. If external factors make an increase in income possible, but institutional factors prevent this from happening, then the chances are good that new institutional arrangements will develop. North tested his hypotheses on development in the USA during the nineteenth century, and showed how agricultural policy, banking, transport, etc. could be explained by the institutional arrangements. In a following book, he considered the economic development of Western Europe from the middle ages to the eighteenth century, and showed that economic incentives, based upon individual property rights, were a prerequisite for economic growth. Changes in relative prices and fluctuations in population growth led to institutional changes. The speedier industrialisation in England and the Netherlands depended upon the fact that certain conservative institutions, such as the guilds, were weak. Private property rights were also guaranteed in these countries, as opposed to the case of Spain where the lack of institutional innovation led to a century long stagnation. Innovations, technical changes and other factors that are generally regarded as explanations, are not considered to be sufficient by North. They are themselves a part of the growth process and cannot explain it. Effective economic organisations are the key to economic change. “Institutions are sets or rules, compliance procedures, and moral and ethical behaviour of individuals in the interest of maximizing the wealth or utility of principals”.

In his latest book (1990), North poses the fundamental question of why some countries are rich and others poor. “Institutions provide the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange. Together with the technology employed, they determine transaction and transformation costs and hence the profitability and feasibility of engaging in economic activity.” Greater institutional changes occur slowly, since institutions are the result of historical change, which has moulded individual behaviour. The greater the institutional uncertainty, the greater become the transaction costs. The lack of opportunity of entering binding contracts and other institutional arrangements is a cause of economic stagnation, both in today’s developing countries and the former socialistic states. North has tried to explain the difficulties that meet these countries by focusing his analysis on the political and legal framework for economic growth. In his book he poses fundamental questions concerning the connection between economic change, technical development, and institutional conditions. He shows both the difficulties that neo-classical theory has had in explaining growth, and the strength of using this theory in combination with the approaches he has proposed, North has forced economists to rethink, to be conscious of when economic “laws” are sufficient as an explanation of a given problem, and of when other factors must be taken into account.

North has, like Fogel, inspired a large number of research workers. His persistent stressing of the importance of stringent theory, together with his emphasis on the role of institutions, has influenced not only economic historians, but also economists and political scientists. Fogel is an empiricist, who never leaves any sources unexplored. North can be compared to those prize winners who have previously received the prize for purely theoretical works. North is an inspirer, a producer of ideas, who identifies new problems and shows how economists can solve the old ones more effectively.

Fogel and North have thus in different ways renewed research in economic history, by making it more stringent and more theoretically conscious.