ECONOMY

douglass c. north 1005
political and economic theories are wrong, but that they cover a subset of the problem
of the evolution of societies over time. We must recognize that the non-ergodic nature
of the world implies that it cannot be modeled completely in the standard way.
The non-ergodic nature of the world causes problems for humans. The brain
consolidates information from the past based on pattern-based reasoning. 2 In novel
situations, individuals look for patterns from their experience to apply to the new
situations. In truly novel situations, individuals are likely to misunderstand what
they are seeing—e.g. apply a pattern from the past that turns out, ex post, tobe
inappropriate to the new situation.
The emergence of open access orders in a few countries over the last few centuries
is a prime example of the non-ergodic nature of social change. Individuals in open
access societies assume that competitive forces will produce market prices that can
be relied on and governments that they can trust (at least in relative terms). One of
the main results of the growing cross-country growth literature in both economics
and political science is that citizens “trust” their governments and social institutions
much more in the developed world (e.g. Knack and Keefer 1995).
How are we to account for the change from a social equilibrium in which individuals
rationally trust neither the economic nor the political institutions they live under
to one where open access institutions enable individuals to trust in viable and fair
social outcomes?
The main implication is that solving novel problems requires that economic and
political actors must be self-aware of what is happening to them. In truly novel situations,
where past patterns and solutions cannot work, the only path to a solution is a
dynamic one involving trial and error and feedback in an attempt to find something
that works; in a word, fumbling. There is no alternative. This is why Hayek’s adaptive
efficiency is so important.
2 The Centrality of Beliefs
and Learning
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The dynamic nature of history implies that the centrality of beliefs—how humans
form their beliefs and how they learn (North 2005)—is fundamental to a new social
science. This in turn leads us to two enquiries: first, how the mind and brain work
to understand the environment; second, how humans learn from one another, for
example though culture.
We also need to understand that studying the mind is not like studying the physical
sciences—“it’s all in your head” as they say. This makes all knowledge, at least at the
first step, subjective. But lest you think we’re going in the direction of postmodernism,
we’re not. Social scientists try to test their theories. But even the tests have subjective
² North2005 elaborates on this theme.