Douglas North - we need to think more deeply about institutions

 

I have been focused on the older work of Douglas North, the Nobel prize winner, as part of a longer piece of work on economic growth and competitiveness in the EU. There can only be a significant increase in growth if there is a change in the institutional structures within Europe. The rules of the game matter, so the study of these rules and how they form an economy are critical. The rules both formal and informal place constraints on behavior and what can be achieved. You cannot generate growth if the institutions and organization is not in place. 

North was part of a school of thinking that institutions and organization are developed to cope with the problem of transaction costs through information gathering, monitoring, and behavioral constraints. How do we form institutions that can improve market efficiency through reducing transaction costs and enhancing production? How will firms and agents organize in response to these institutions? 

Given that institutions and organization change slowly, growth will be path dependent. Our growth is impacted by the choices made decades ago, so we have to be careful on changing the rules of the game and we cannot expect an immediate response to new rules and institutions.

While I have been thinking about macro growth, institutions and organization impacts quant investing. There is the belief that knowing the institutions does not matter; however, we need know how trading occurs and how transaction costs impact performance and behavior. The institutional context for price behavior does impact trend and momentum and the response to new information.