I recently participated in a book conference at Stanford on the latest book that Doug North, John Wallis, and Barry Weingast are writing. The current title is A Conceptual Framework for Interpreting Recorded 
Human History. It is a very interesting work that builds upon North’s views of institutions, Wallis’s deep knowledge of economic history, and Weingast’s theories on political competition. The authors are trying to develop a unified theory of economics and politics to explain the rise of the West, or what they call the “open-access order”—as opposed to the “natural state,” which is how most human societies have existed for almost 10,000 years.
As many of us know, Doug North’s current focus aims at incorporating the formation of beliefs in his work and how a better knowledge of cognitive processes could explain what people do and think. Moreover, as he explained yesterday at a presentation of the manuscript at the World Bank, it is time to get ride of neoclassical economics, which doesn’t explain much as it assumes institutions, property rights, and rules as given. This has been his crusade for a little while now.
While I find myself in agreement with many of Doug North’s ideas (but not all, far from it), I cannot subscribe to his desire to remove neoclassical economics from the scene. Indeed, what Doug North is really saying is that neoclassical market theory is unsatisfying because it doesn’t explain change. Yes this is true, and this is perhaps the only reason why every economist should have some level of familiarity with Austrian market process theory. Market process theory was born out of the same frustration. In the 1960s Murray Rothbard and Israel Kirzner, following Mises, were expressing their dissatisfaction with the then dominant general equilibrium theory. They were right, neoclassical market theory at the time didn’t explain much, and the “Austrians” worked to provide an alternative stemming from the works of Mises and Hayek in the 1930s and 1940s.
However, neoclassical market theory was never invented to explain how social orders emerge, but rather to explain how prices come to regulate human activity. It was assumed from the start that institutions (and preferences) are given and cannot be explained by the framework itself. In order to explain institutions and their evolution, one must use something else than neoclassical market theory.
This being said, neoclassical market theory should be jettisoned because it doesn’t explain what it is supposed to explain (it assumes the coordination of plans). So if this is what North says, he is right. However, neoclassical economics (i.e. the foundations of economics) should not be discarded. It is a case of not throwing the baby out with the bath water. Neoclassical economics (to which Austrian economics belongs) is fundamental to our understanding of the world. Even if hardly any economist mentions it explicitly, the law of marginal diminishing utility is still at the core of economics. Upon it, one can build a whole theoretical edifice which explains a lot about the world. “Demand curves slope downwards.” This insight is one of the greatest insights mankind ever discovered.
So against Doug North, I take the defense of neoclassical economics. I urge North again (I told him this before) to read and become familiar with the works of Kirzner (and Hayek and Mises). While his work on belief formation and cognitive processes may be fruitful (I wish him the best in this endeavor), he won’t achieve his greater goal by discarding neoclassical economics (which he uses everywhere in his books including the latest one).