Methodological Individualism

The new institutional economics 277larger than the costs’ (p. 350). This happens when new technology and newmarkets create a change in economic values. New property rights, then, seem tobe the result of rational choice. But actually Demsetz takes an agnostic attitude:I do not mean to assert or to deny that the adjustments in property rightswhich take place need be the result of a conscious endeavour to cope withexternality problems. These adjustments in property have arisen in Westernsocieties largely as a result of gradual changes in social mores and incommon law precedents. At each step of this adjustment process, it isunlikely that externalities per se were consciously related to the issue beingresolved.(Demsetz, 1967: 350)Another attempt to explain the emergence of property rights was made bySteven N. S. Cheung (1969). His particular example was the choice of contractualarrangement between tenants and landowners in Asian agriculture and,especially in pre-communist China. His main thesis was that the particular formof these contracts is a function of two variables: transaction costs and risks.Parties to such contracts choose arrangements that minimise transaction costsand disperse risks between them. Cheung, admits, however, that ‘some level oflaw enforcement by legal authorities is taken for granted’ (p. 41). This is institutionalindividualism, once again. 27A third attempt to provide an economic explanation of the emergence ofproperty rights was made by Douglass C. North and Robert Paul Thomas. Theirproject was an ambitious one; amounting to nothing less than trying to explainThe Rise of the Western World (1973; see also 1970; 1971). The analytical tools theyused were those developed by the new institutional economics, and especially bySteven Cheung. Their main argument was that efficient property rights, ratherthan new technology, was the main factor behind the rise of the West. Theirstory, although fairly simple, is nevertheless too complex to be told here. Onepart of it is the change in the relative prices of land and labour, which resulted inthe development of private property in land and free labour. Another part is theinvention of new institutions, such as the joint-stock company, forms of insuranceand international financial markets, which made it possible to economiseon transaction costs. This, latter, part was a necessary condition for the emergenceof market society.The explanations suggested by Demsetz, Cheung, and North and Thomasmay be interpreted as neoclassical attempts to endogenise property rights(Pejovich, 1972: 310), as suggested by Milton Friedman above. As such, they mayalso be interpreted as manifestations of methodological individualism. I haveshown, in the cases of Demsetz and Cheung, that things are not quite thatsimple. But what about North and Thomas?In their general model of institutional change, North and Thomas make useof a distinction between two types, or levels, of institutions: