Structure and Change in Economic History

North argues that the state is an organization with a comparative advantage in violence, extending over a geographic area whose boundaries are determined by its power to tax constituents. It specifies and enforces property rights in exchange for revenue. This rejects the assumption that institutions emerge as efficient solutions to collective problems. Instead, rulers design property rights to maximize their own revenue, constrained by the opportunity cost of their subjects—their ability to flee or revolt. The resulting rights may be efficient or inefficient for growth, depending on the ruler's calculus.

The 1981 book introduced North's state theory and property rights framework but retained a fairly rational-actor model of institutional change. By 1990, North moved away from the 'neoclassical theory of the state' because it struggled to explain modern democracies with pluralistic interests. He increasingly emphasized ideology, shared mental models, and path dependence as sources of institutional persistence. The 1981 work is thus the pivotal transition between North's earlier efficiency-oriented economic history and his later cognitive-institutionalist approach.

Because rulers maximize revenue, not social efficiency. North shows that when transaction costs of tax collection are high, a ruler may find it more profitable to grant monopolies or restrict competition—arrangements that generate fiscal income but impede growth. Additionally, powerful constituents may use their influence to protect rights that benefit them at the expense of broader productivity. There is no guarantee that the property rights that emerge will be the most growth-promoting, because the state's incentive structure rewards revenue extraction, not efficiency.

North argues that changes in military technology alter the distribution of coercive power, which in turn reshapes property rights and political institutions. The heavily armored knight and fortified castle favored feudalism; the development of the pike, longbow, and gunpowder shifted power away from mounted warriors and contributed to the decline of manorial institutions and the rise of representative assemblies. This connects technological change to bargaining power, making military innovation a driver of institutional transformation rather than a purely exogenous shock.

The 1973 book explained institutional change primarily through relative price changes that made new arrangements more efficient. Structure and Change (1981) is a more radical break: North now argued that inefficient institutions are common and that the state's revenue-maximizing behavior can produce property rights that actively hinder growth. He introduced ideology and the state as autonomous theoretical components, moving beyond the efficiency-oriented framework of the earlier work. This 1981 book initiated North's sustained theoretical project of building a genuine theory of institutions.

North treats ideology as a set of shared beliefs that legitimizes existing property rights and reduces the cost of enforcing them. When people believe the rules are just, they comply voluntarily, lowering the transaction costs of governance. Conversely, ideological shifts can erode legitimacy and precipitate institutional change. This concept allows North to explain why free-riding does not always destroy collective action and why institutional frameworks can persist even when they are not optimally efficient. Ideology bridges the gap between formal rules and actual behavior.