Traditional economic theory relies on the assumption that transactions have zero-cost, so exchange can naturally arise between rational actors. In reality, transactions often have high costs due to uncertainty. Both parties to an exchange hope to gain products or services with particular attributes, but it is costly to measure whether these attributes are actually present, and to enforce honesty when humans are naturally incentivized to lie, cheat, and steal.

Institutions, both formal [ex: law, government] and informal [ex: custom, social stigma] serve to lower the cost of exchange by amortizing the cost of measurement and enforcement of exchanges. With this framing, North explores how institutions form and evolve, and argues that they are the most predictive factor of a societies economic success.

An incredible, well-written, and perspective changing book that uniquely clarifies the fundamental role of much of politics, governance, law, accounting, etc. in society. North later won the Nobel Prize for it.