Why Nations Fail: The Origins of Power, Prosperity and Poverty

Highlights

Page 18

Throughout the Spanish colonial world in the Americas, similar institutions and social structures emerged. After an initial phase of looting, and gold and silver lust, the Spanish created a web of institutions designed to exploit the indigenous peoples. The full gamut of encomienda, mita, repartimiento, and trajin was designed to force indigenous people’s living standards down to a subsistence level and thus extract all income in excess of this for Spaniards. This was achieved by expropriating their land, forcing them to work, offering low wages for labor services, imposing high taxes, and charging high prices for goods that were not even voluntarily bought. Though these institutions generated a lot of wealth for the Spanish Crown and made the conquistadors and their descendants very rich, they also turned Latin America into the most unequal continent in the world and sapped much of its economic potential.

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It took the Virginia Company some time to recognize that its initial model of colonization did not work in Virginia, and it took a while, too, for the failure of the “Lawes Divine, Morall and Martiall” to sink in. Starting in 1618, a dramatically new strategy was adopted. Since it was possible to coerce neither the locals nor the settlers, the only alternative was to give the settlers incentives. In 1618 the company began the “headright system,” which gave each male settler fifty acres of land and fifty more acres for each member of his family and for all servants that a family could bring to Virginia. Settlers were given their houses and freed from their contracts, and in 1619 a General Assembly was introduced that effectively gave all adult men a say in the laws and institutions governing the colony. It was the start of democracy in the United States. It took the Virginia Company twelve years to learn its first lesson that what had worked for the Spanish in Mexico and in Central and South America would not work in the north. The rest of the seventeenth century saw a long series of struggles over the second lesson: that the only option for an economically viable colony was to create institutions that gave the colonists incentives to invest and to work hard.

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The consequence of this unprecedented political instability for economic institutions and incentives should be obvious. Such instability led to highly insecure property rights. It also led to a severe weakening of the Mexican state, which now had little authority and little ability to raise taxes or provide public services. Indeed, even though Santa Ana was president in Mexico, large parts of the country were not under his control, which enabled the annexation of Texas by the United States. In addition, as we just saw, the motivation behind the Mexican declaration of independence was to protect the set of economic institutions developed during the colonial period, which had made Mexico, in the words of the great German explorer and geographer of Latin America Alexander von Humbolt, “the country of inequality.” These institutions, by basing the society on the exploitation of indigenous people and the creation of monopolies, blocked the economic incentives and initiatives of the great mass of the population. As the United States began to experience the Industrial Revolution in the first half of the nineteenth century, Mexico got poorer.

Page 39

In Mexico, Carlos Slim did not make his money by innovation. Initially he excelled in stock market deals, and in buying and revamping unprofitable firms. His major coup was the acquisition of Telmex, the Mexican telecommunications monopoly that was privatized by President Carlos Salinas in 1990. The government announced its intention to sell 51 percent of the voting stock (20.4 percent of total stock) in the company in September 1989 and received bids in November 1990. Even though Slim did not put in the highest bid, a consortium led by his Grupo Corso won the auction. Instead of paying for the shares right away, Slim managed to delay payment, using the dividends of Telmex itself to pay for the stock. What was once a public monopoly now became Slim’s monopoly, and it was hugely profitable.

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There have been challenges to Slim’s Telmex monopoly. But they have not been successful. In 1996 Avantel, a long-distance phone provider, petitioned the Mexican Competition Commission to check whether Telmex had a dominant position in the telecommunications market. In 1997 the commission declared that Telmex had substantial monopoly power with respect to local telephony, national longdistance calls, and international long-distance calls, among other things. But attempts by the regulatory authorities in Mexico to limit these monopolies have come to nothing. One reason is that Slim and Telmex can use what is known as a recurso de amparo, literally an “appeal for protection.” An amparo is in effect a petition to argue that a particular law does not apply to you. The idea of the amparo dates back to the Mexican constitution of 1857 and was originally intended as a safeguard of individual rights and freedoms. In the hands of Telmex and other Mexican monopolies, however, it has become a formidable tool for cementing monopoly power. Rather than protecting people’s rights, the amparo provides a loophole in equality before the law.

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There are no amparos in Dallas, so Slim lost, and was fined $454 million. The lawyer for COC, Mark Werner, noted afterward that “the message of this verdict is that in this global economy, firms have to respect the rules of the United States if they want to come here.” When Slim was subject to the institutions of the United States, his usual tactics for making money didn’t work.

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This book will show that while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.

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This persistence and the forces that create it also explain why it is so difficult to remove world inequality and to make poor countries prosperous. Though institutions are the key to the differences between the two Nogaleses and between Mexico and the United States, that doesn’t mean there will be a consensus in Mexico to change institutions. There is no necessity for a society to develop or adopt the institutions that are best for economic growth or the welfare of its citizens, because other institutions may be even better for those who control politics and political institutions. The powerful and the rest of society will often disagree about which set of institutions should remain in place and which ones should be changed. Carlos Slim would not have been happy to see his political connections disappear and the entry barriers protecting his businesses fizzle—no matter that the entry of new businesses would enrich millions of Mexicans. Because there is no such consensus, what rules society ends up with is determined by politics: who has power and how this power can be exercised. Carlos Slim has the power to get what he wants. Bill Gates’s power is far more limited. That’s why our theory is about not just economics but also politics. It is about the effects of institutions on the success and failure of nations—thus the economics of poverty and prosperity; it is also about how institutions are determined and change over time, and how they fail to change even when they create poverty and misery for millions—thus the politics of poverty and prosperity.

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If the geography hypothesis cannot explain differences between the north and south of Nogales, or North and South Korea, or those between East and West Germany before the fall of the Berlin Wall, could it still be a useful theory for explaining differences between North and South America? Between Europe and Africa? Simply, no.

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The ignorance hypothesis differs from the geography and culture hypotheses in that it comes readily with a suggestion about how to “solve” the problem of poverty: if ignorance got us here, enlightened and informed rulers and policymakers can get us out and we should be able to “engineer” prosperity around the world by providing the right advice and by convincing politicians of what is good economics. Yet Busia’s experience underscores the fact that the main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians but the incentives and constraints they face from the political and economic institutions in their societies.

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WE WILL ARGUE that to understand world inequality we have to understand why some societies are organized in very inefficient and socially undesirable ways. Nations sometimes do manage to adopt efficient institutions and achieve prosperity, but alas, these are the rare cases. Most economists and policymakers have focused on “getting it right,” while what is really needed is an explanation for why poor nations “get it wrong.” Getting it wrong is mostly not about ignorance or culture. As we will show, poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose. To understand this, you have to go beyond economics and expert advice on the best thing to do and, instead, study how decisions actually get made, who gets to make them, and why those people decide to do what they do. This is the study of politics and political processes. Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality. As the economist Abba Lerner noted in the 1970s, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”

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Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.

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Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

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Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations. But such rights must exist for the majority of people in society.

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Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society.

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The economic institutions of North Korea or of colonial Latin America—the mita, encomienda, or repartimiento described earlier—do not have these properties. Private property is nonexistent in North Korea. In colonial Latin America there was private property for Spaniards, but the property of the indigenous peoples was highly insecure. In neither type of society was the vast mass of people able to make the economic decisions they wanted to; they were subject to mass coercion. In neither type of society was the power of the state used to provide key public services that promoted prosperity. In North Korea, the state built an education system to inculcate propaganda, but was unable to prevent famine. In colonial Latin America, the state focused on coercing indigenous peoples. In neither type of society was there a level playing field or an unbiased legal system. In North Korea, the legal system is an arm of the ruling Communist Party, and in Latin America it was a tool of discrimination against the mass of people. We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

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Intimately linked to technology are the education, skills, competencies, and know-how of the workforce, acquired in schools, at home, and on the job. We are so much more productive than a century ago not just because of better technology embodied in machines but also because of the greater know-how that workers possess. All the technology in the world would be of little use without workers who knew how to operate it. But there is more to skills and competencies than just the ability to run machines. It is the education and skills of the workforce that generate the scientific knowledge upon which our progress is built and that enable the adaptation and adoption of these technologies in diverse lines of business.

Note: I wonder if this will be true in future. In 2024 it seems hard to say.

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Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive. When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics—who can get more support, obtain additional resources, and form more effective alliances. In short, who wins depends on the distribution of political power in society.

Note: I like this definition of politics.

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The political institutions of a society are a key determinant of the outcome of this game. They are the rules that govern incentives in politics. They determine how the government is chosen and which part of the government has the right to do what. Political institutions determine who has power in society and to what ends that power can be used. If the distribution of power is narrow and unconstrained, then the political institutions are absolutist, as exemplified by the absolutist monarchies reigning throughout the world during much of history. Under absolutist political institutions such as those in North Korea and colonial Latin America, those who can wield this power will be able to set up economic institutions to enrich themselves and augment their power at the expense of society. In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. Instead of being vested in a single individual or a narrow group, political power rests with a broad coalition or a plurality of groups.

Note: This is the closest intersection with the Dictator’s Handbook - minimise the keys to power.

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Max Weber, who we met in the previous chapter, provided the most famous and widely accepted definition of the state, identifying it with the “monopoly of legitimate violence” in society. Without such a monopoly and the degree of centralization that it entails, the state cannot play its role as enforcer of law and order, let alone provide public services and encourage and regulate economic activity. When the state fails to achieve almost any political centralization, society sooner or later descends into chaos, as did Somalia.

Note: I’ve often said “monopoly of violence” without knowing the origin. TIL.

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We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions.

Note: Makes sense. I like a simple definition.

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In fact, combinations of extractive and inclusive institutions are generally unstable. Extractive economic institutions under inclusive political institutions are unlikely to survive for long, as our discussion of Barbados suggests. Similarly, inclusive economic institutions will neither support nor be supported by extractive political ones. Either they will be transformed into extractive economic institutions to the benefit of the narrow interests that hold power, or the economic dynamism they create will destabilize the extractive political institutions, opening the way for the emergence of inclusive political institutions. Inclusive economic institutions also tend to reduce the benefits the elites can enjoy by ruling over extractive political institutions, since those institutions face competition in the marketplace and are constrained by the contracts and property rights of the rest of society.

Page 84

Wouldn’t it have been better for Mobutu to set up economic institutions that increased the wealth of the Congolese rather than deepening their poverty? If Mobutu had managed to increase the prosperity of his nation, would he not have been able to appropriate even more money, buy a Concord instead of renting one, have more castles and mansions, possibly a bigger and more powerful army? Unfortunately for the citizens of many countries in the world, the answer is no. Economic institutions that create incentives for economic progress may simultaneously redistribute income and power in such a way that a predatory dictator and others with political power may become worse off.

Note: Put better by the Dictators handbook. Same idea, simpler language.

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The fundamental problem is that there will necessarily be disputes and conflict over economic institutions. Different institutions have different consequences for the prosperity of a nation, how that prosperity is distributed, and who has power. The economic growth which can be induced by institutions creates both winners and losers. This was clear during the Industrial Revolution in England, which laid the foundations of the prosperity we see in the rich countries of the world today. It centered on a series of pathbreaking technological changes in steam power, transportation, and textile production. Even though mechanization led to enormous increases in total incomes and ultimately became the foundation of modern industrial society, it was bitterly opposed by many. Not because of ignorance or shortsightedness; quite the opposite. Rather, such opposition to economic growth has its own, unfortunately coherent, logic. Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

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In reality, the artisans were much less effective than the landowners and elites in opposing industrialization. The Luddites did not possess the political power—the ability to affect political outcomes against the wishes of other groups—of the landed aristocracy. In England, industrialization marched on, despite the Luddites’ opposition, because aristocratic opposition, though real, was muted. In the Austro-Hungarian and the Russian empires, where the absolutist monarchs and aristocrats had far more to lose, industrialization was blocked. In consequence, the economies of Austria-Hungary and Russia stalled. They fell behind other European nations, where economic growth took off during the nineteenth century. The success and failure of specific groups notwithstanding, one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.

Note: So one thing I like about this book compared to Dictators Handbook is that I feel it talks a bit more about what other people around society do. In that book it felt like the prime mover was the guy in charge.

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The modern Democratic Republic of Congo remains poor because its citizens still lack the economic institutions that create the basic incentives that make a society prosperous. It is not geography, culture, or the ignorance of its citizens or politicians that keep the Congo poor, but its extractive economic institutions. These are still in place after all these centuries because political power continues to be narrowly concentrated in the hands of an elite who have little incentive to enforce secure property rights for the people, to provide the basic public services that would improve the quality of life, or to encourage economic progress. Rather, their interests are to extract income and sustain their power. They have not used this power to build a centralized state, for to do so would create the same problems of opposition and political challenges that promoting economic growth would. Moreover, as in much of the rest of sub-Saharan Africa, infighting triggered by rival groups attempting to take control of extractive institutions destroyed any tendency for state centralization that might have existed.

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The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. But this implies neither that extractive institutions can never generate growth nor that all extractive institutions are created equal. There are two distinct but complementary ways in which growth under extractive political institutions can emerge. First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control. A prominent example of this type of growth under extractive institutions was the Caribbean Islands between the sixteenth and eighteenth centuries. Most people were slaves, working under gruesome conditions in plantations, living barely above subsistence level. Many died from malnutrition and exhaustion. In Barbados, Cuba, Haiti, and Jamaica in the seventeenth and eighteenth centuries, a small minority, the planter elite, controlled all political power and owned all the assets, including all the slaves. While the majority had no rights, the planter elite’s property and assets were well protected. Despite the extractive economic institutions that savagely exploited the majority of the population, these islands were among the richest places in the world, because they could produce sugar and sell it in world markets. The economy of the islands stagnated only when there was a need to shift to new economic activities, which threatened both the incomes and the political power of the planter elite. Another example is the economic growth and industrialization of the Soviet Union from the first Five-Year Plan in 1928 until the 1970s. Political and economic institutions were highly extractive, and markets were heavily constrained. Nevertheless, the Soviet Union was able to achieve rapid economic growth because it could use the power of the state to move resources from agriculture, where they were very inefficiently used, into industry. The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions. Many societies with extractive political institutions will shy away from inclusive economic institutions because of fear of creative destruction. But the degree to which the elite manage to monopolize power varies across societies. In some, the position of the elite could be sufficiently secure that they may permit some moves toward inclusive economic institutions when they are fairly certain that this will not threaten their political power. Alternatively, the historical situation could be such as to endow an extractive political regime with rather inclusive economic institutions, which they decide not to block. These provide the second way in which growth can take place under extractive political institutions.…

Note: Love that they’ve stated the central thesis clearly. Also love the discussion of counter examples of their thesis. They’re saying it’s not impossible, but it is an unstable equilibrium.

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Even though extractive institutions can generate some growth, they will usually not generate sustained economic growth, and certainly not the type of growth that is accompanied by creative destruction. When both political and economic institutions are extractive, the incentives will not be there for creative destruction and technological change. For a while the state may be able to create rapid economic growth by allocating resources and people by fiat, but this process is intrinsically limited. When the limits are hit, growth stops, as it did in the Soviet Union in the 1970s. Even when the Soviets achieved rapid economic growth, there was little technological change in most of the economy, though by pouring massive resources into the military they were able to develop military technologies and even pull ahead of the United States in the space and nuclear race for a short while. But this growth without creative destruction and without broad-based technological innovation was not sustainable and came to an abrupt end. In addition, the arrangements that support economic growth under extractive political institutions are, by their nature, fragile—they can collapse or can be easily destroyed by the infighting that the extractive institutions themselves generate. In fact, extractive political and economic institutions create a general tendency for infighting, because they lead to the concentration of wealth and power in the hands of a narrow elite. If another group can overwhelm and outmaneuver this elite and take control of the state, they will be the ones enjoying this wealth and power. Consequently, as our discussion of the collapse of the later Roman Empire and the Maya cities will illustrate (pages 166–172 and 143–149), fighting to control the all-powerful state is always latent, and it will periodically intensify and bring the undoing of these regimes, as it turns into civil war and sometimes into total breakdown and collapse of the state. One implication of this is that even if a society under extractive institutions initially achieves some degree of state centralization, it will not last. In fact, the infighting to take control of extractive institutions often leads to civil wars and widespread lawlessness, enshrining a persistent absence of state centralization as in many nations in sub-Saharan Africa and some in Latin America and South Asia. Finally, when growth comes under extractive political institutions but where economic institutions have inclusive aspects, as they did in South Korea, there is always the danger that economic institutions become more extractive and growth stops. Those controlling political power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress. The distribution and ability to exercise power will ultimately undermine the very foundations of economic prosperity, unless political…

Note: Growth under extractive political institutions may not last because

• no creative destruction, hence growth isn’t as high as it could be. May plateau.
• infighting
• political elites alter the deal. Pray they do not alter it further.

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‘So. What should I do?’ I heard myself ask. He set down his work, drank off his brandy, and then refilled his cup. He looked about his room. ‘You ask me, of course, because you have noted my rare success at providing myself with a fond wife and many children?’

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What happened at Eynsham happened everywhere. Peasants started to free themselves from compulsory labor services and many obligations to their lords. Wages started to rise. The government tried to put a stop to this and, in 1351, passed the Statute of Laborers, which commenced: Because a great part of the people and especially of the workmen and servants has now died in that pestilence, some, seeing the straights of the masters and the scarcity of servants, are not willing to serve unless they receive excessive wages … We, considering the grave inconveniences which might come from the lack especially of ploughmen and such labourers, have … seen fit to ordain: that every man and woman of our kingdom of England … shall be bound to serve him who has seen fit so to seek after him; and he shall take only the wages liveries, meed or salary which, in the places where he sought to serve, were accustomed to be paid in the twentieth year of our reign of England [King Edward III came to the throne on January 25, 1327, so the reference here is to 1347] or the five or six common years next preceding. The statute in effect tried to fix wages at the levels paid before the Black Death. Particularly concerning for the English elite was “enticement,” the attempt by one lord to attract the scarce peasants of another. The solution was to make prison the punishment for leaving employment without permission of the employer: And if a reaper or mower, or other workman or servant, of whatever standing or condition he be, who is retained in the service of any one, do depart from the said service before the end of the term agreed, without permission or reasonable cause, he shall undergo the penalty of imprisonment, and let no one … moreover, pay or permit to be paid to any one more wages, livery, meed or salary than was customary as has been said.

Note: This brazen attempt at price fixing would be hilarious if it hadn’t almost succeeded.

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Lords increased the taxes they levied on their tenants’ own plots and took half of the gross output. In Korczyn, Poland, all work for the lord in 1533 was paid. But by 1600 nearly half was unpaid forced labor. In 1500, workers in Mecklenberg, in eastern Germany, owed only a few days’ unpaid labor services a year. By 1550 it was one day a week, and by 1600, three days per week. Workers’ children had to work for the lord for free for several years. In Hungary, landlords took complete control of the land in 1514, legislating one day a week of unpaid labor services for each worker. In 1550 this was raised to two days per week. By the end of the century, it was three days. Serfs subject to these rules made up 90 percent of the rural population by this time. Though in 1346 there were few differences between Western and Eastern Europe in terms of political and economic institutions, by 1600 they were worlds apart. In the West, workers were free of feudal dues, fines, and regulations and were becoming a key part of a booming market economy. In the East, they were also involved in such an economy, but as coerced serfs growing the food and agricultural goods demanded in the West.

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The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions. As a consequence, economic institutions also started becoming more inclusive. Neither slavery nor the severe economic restrictions of the feudal medieval period, such as serfdom, existed in England at the beginning of the seventeenth century. Nevertheless, there were many restrictions on economic activities people could engage in. Both the domestic and international economy were choked by monopolies. The state engaged in arbitrary taxation and manipulated the legal system. Most land was caught in archaic forms of property rights that made it impossible to sell and risky to invest in. This changed after the Glorious Revolution. The government adopted a set of economic institutions that provided incentives for investment, trade, and innovation. It steadfastly enforced property rights, including patents granting property rights for ideas, thereby providing a major stimulus to innovation. It protected law and order. Historically unprecedented was the application of English law to all citizens. Arbitrary taxation ceased, and monopolies were abolished almost completely. The English state aggressively promoted mercantile activities and worked to promote domestic industry, not only by removing barriers to the expansion of industrial activity but also by lending the full power of the English navy to defend mercantile interests. By rationalizing property rights, it facilitated the construction of infrastructure, particularly roads, canals, and later railways, that would prove to be crucial for industrial growth. These foundations decisively changed incentives for people and impelled the engines of prosperity, paving the way for the Industrial Revolution. First and foremost, the Industrial Revolution depended on major technological advances exploiting the knowledge base that had accumulated in Europe during the past centuries. It was a radical break from the past, made possible by scientific inquiry and the talents of a number of unique individuals. The full force of this revolution came from the market that created profitable opportunities for technologies to be developed and applied. It was the inclusive nature of markets that allowed people to allocate their talents to the right lines of business. It also relied on education and skills, for it was the relatively high levels of education, at least by the standards of the time, that enabled the emergence of entrepreneurs with the vision to employ new technologies for their…

Note: Compelling case linking the Industrial Revolution with property rights

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Such critical junctures are important because there are formidable barriers against gradual improvements, resulting from the synergy between extractive political and economic institutions and the support they give each other. The persistence of this feedback loop creates a vicious circle. Those who benefit from the status quo are wealthy and well organized, and can effectively fight major changes that will take away their economic privileges and political power. Once a critical juncture happens, the small differences that matter are the initial institutional differences that put in motion very different responses. This is the reason why the relatively small institutional differences in England, France, and Spain led to fundamentally different development paths. The paths resulted from the critical juncture created by the economic opportunities presented to Europeans by Atlantic trade.

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There should be no presumption that any critical juncture will lead to a successful political revolution or to change for the better. History is full of examples of revolutions and radical movements replacing one tyranny with another, in a pattern that the German sociologist Robert Michels dubbed the iron law of oligarchy, a particularly pernicious form of the vicious circle. The end of colonialism in the decades following the Second World War created critical junctures for many former colonies. However, in most cases in sub-Saharan Africa and many in Asia, the postindependence governments simply took a page out of Robert Michels’s book and repeated and intensified the abuses of their predecessors, often severely narrowing the distribution of political power, dismantling constraints, and undermining the already meager incentives that economic institutions provided for investment and economic progress. It was only in a few cases, societies such as Botswana (see pages 404–414), that critical junctures were used to launch a process of political and economic change that paved the way for economic growth.

Note: Shoutout to Nehru

Page 115

Africa was the part of the world with the institutions least able to take advantage of the opportunities made available by the Industrial Revolution. For at least the last one thousand years, outside of small pockets and during limited periods of time, Africa has lagged behind the rest of the world in terms of technology, political development, and prosperity. It is the part of the world where centralized states formed very late and very tenuously. Where they did form, they were likely as highly absolutist as the Kongo and often short lived, usually collapsing. Africa shares this trajectory of lack of state centralization with countries such as Afghanistan, Haiti, and Nepal, which have also failed to impose order over their territories and create anything resembling stability to achieve even a modicum of economic progress. Though located in very different parts of the world, Afghanistan, Haiti, and Nepal have much in common institutionally with most nations in sub-Saharan Africa, and are thus some of the poorest countries in the world today.

Note: Basic tenet - state must have a monopoly on violence.

Page 116

Even worse, the structures of colonial rule left Africa with a more complex and pernicious institutional legacy in the 1960s than at the start of the colonial period. The development of the political and economic institutions in many African colonies meant that rather than creating a critical juncture for improvements in their institutions, independence created an opening for unscrupulous leaders to take over and intensify the extraction that European colonialists presided over. The political incentives these structures created led to a style of politics that reproduced the historical patterns of insecure and inefficient property rights under states with strong absolutist tendencies but nonetheless lacking any centralized authority over their territories.

Note: The most lasting colonial legacy.

Page 119

While Tokugawa rule in Japan was absolutist and extractive, it had only a tenuous hold on the leaders of the other major feudal domains and was susceptible to challenge. Even though there were peasant rebellions and civil strife, absolutism in China was stronger, and the opposition less organized and autonomous. There were no equivalents of the leaders of the other domains in China who could challenge the absolutist rule of the emperor and trace an alternative institutional path. This institutional difference, in many ways small relative to the differences separating China and Japan from Western Europe, had decisive consequences during the critical juncture created by the forceful arrival of the English and Americans. China continued in its absolutist path after the Opium Wars, while the U.S. threat cemented the opposition to Tokugawa rule in Japan and led to a political revolution, the Meiji Restoration, as we will see in chapter 10. This Japanese political revolution enabled more inclusive political institutions and much more inclusive economic institutions to develop, and laid the foundations for subsequent rapid Japanese growth, while China languished under absolutism.

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But growth under extractive institutions differs in nature from growth brought forth by inclusive institutions. Most important, it will be not sustained growth that requires technological change, but rather growth based on existing technologies. The economic trajectory of the Soviet Union provides a vivid illustration of how the authority and incentives provided by the state can spearhead rapid economic growth under extractive institutions and how this type of growth ultimately comes to an end and collapses.

Note: So I’m really interested to see how the characterise the growth in China. Maybe they will say extractive political institutions while having inclusive economic institutions, like South Korea and that eventually both will align.

Here they say new tech won’t be developed, but that clearly did happen in China.

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Stalin understood that in the Soviet economy, people had few incentives to work hard. A natural response would have been to introduce such incentives, and sometimes he did—for example, by directing food supplies to areas where productivity had fallen—to reward improvements. Moreover, as early as 1931 he gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It is instructive to understand how this worked. Typically a firm under central planning had to meet an output target set under the plan, though such plans were often renegotiated and changed. From the 1930s, workers were paid bonuses if the output levels were attained. These could be quite high—for instance, as much as 37 percent of the wage for management or senior engineers. But paying such bonuses created all sorts of disincentives to technological change. For one thing, innovation, which took resources away from current production, risked the output targets not being met and the bonuses not being paid. For another, output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be “ratcheted up.” Underachievement was always the best way to meet targets and get the bonus. The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow. Even when bonuses and incentives were effective in changing behavior, they often created other problems. Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the “invisible hand” of the market. When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from ceilings. By the 1940s, the leaders of the Soviet Union, even if not their admirers in the West, were well aware of these perverse incentives. The Soviet leaders acted as if they were due to technical problems, which could be fixed. For example, they moved away from paying bonuses based on output targets to allowing firms to set aside portions of profits to pay bonuses. But a “profit motive” was no more encouraging to innovation than one based on output targets. The system of prices used to calculate profits was almost completely unconnected to the value of new innovations or technology. Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value. To more specifically create incentives for innovation, the Soviet Union introduced explicit innovation…

Note: This is the best thing passage I’ve seen about trying and failing to set the right incentives.

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Though inherently limited, growth under extractive institutions may nonetheless appear spectacular when it’s in motion. Many in the Soviet Union and many more in the Western world were awestruck by Soviet growth in the 1920s, ’30s, ’40s, ’50s, ’60s, and even as late as the ’70s, in the same way that they are mesmerized by the breakneck pace of economic growth in China today. But as we will discuss in greater detail in chapter 15, China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.

Note: Can’t wait for the China chapter

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But there was a tension in all this. Economic growth supported by the inclusive Venetian institutions was accompanied by creative destruction. Each new wave of enterprising young men who became rich via the commenda or other similar economic institutions tended to reduce the profits and economic success of established elites. And they did not just reduce their profits; they also challenged their political power. Thus there was always a temptation, if they could get away with it, for the existing elites sitting in the Great Council to close down the system to these new people. At the Great Council’s inception, membership was determined each year. As we saw, at the end of the year, four electors were randomly chosen to nominate a hundred members for the next year, who were automatically selected. On October 3, 1286, a proposal was made to the Great Council that the rules be amended so that nominations had to be confirmed by a majority in the Council of Forty, which was tightly controlled by elite families. This would have given this elite veto power over new nominations to the council, something they previously had not had. The proposal was defeated. On October 5, 1286, another proposal was put forth; this time it passed. From then on there was to be automatic confirmation of a person if his fathers and grandfathers had served on the council. Otherwise, confirmation was required by the Ducal Council. On October 17 another change in the rules was passed stipulating that an appointment to the Great Council must be approved by the Council of Forty, the doge, and the Ducal Council. The debates and constitutional amendments of 1286 presaged La Serrata (“The Closure”) of Venice. In February 1297, it was decided that if you had been a member of the Great Council in the previous four years, you received automatic nomination and approval. New nominations now had to be approved by the Council of Forty, but with only twelve votes. After September 11, 1298, current members and their families no longer needed confirmation. The Great Council was now effectively sealed to outsiders, and the initial incumbents had become a hereditary aristocracy. The seal on this came in 1315, with the Libro d’Oro, or “Gold Book,” which was an official registry of the Venetian nobility. Those outside this nascent nobility did not let their powers erode without a struggle. Political tensions mounted steadily in Venice between 1297 and 1315. The Great Council partially responded by making itself bigger. In an attempt to co-opt its most vocal opponents, it grew from 450 to 1,500. This expansion was complemented by repression. A police force was introduced for the first time in 1310, and there was a steady growth in domestic coercion, undoubtedly as a way of solidifying the new political order. Having implemented a political Serrata, the Great Council then moved to adopt an economic Serrata. The switch toward extractive political institutions was now being followed by a move toward…

Note: What a sad story. But it must be said, the case put forth is compelling. The time gap between closing and the fall is close enough to suspect causality. And the economic closing mirroring the political closing does bear out for, their theory.

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BY THE EARLY fifth century, the barbarians were literally at the gate. Some historians argue that it was a consequence of the more formidable opponents the Romans faced during the late Empire. But the success of the Goths, Huns, and Vandals against Rome was a symptom, not the cause, of Rome’s decline. During the Republic, Rome had dealt with much more organized and threatening opponents, such as the Carthaginians. The decline of Rome had causes very similar to those of the Maya city-states. Rome’s increasingly extractive political and economic institutions generated its demise because they caused infighting and civil war.

Note: Somehow I saw that last line coming.

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Just as we can use shipwrecks and the Greenland ice cores to track the economic expansion of Rome during earlier periods, we can use them also to trace its decline. By AD 500 the peak of 180 ships was reduced to 20. As Rome declined, Mediterranean trade collapsed, and some scholars have even argued that it did not return to its Roman height until the nineteenth century. The Greenland ice tells a similar story. The Romans used silver for coins, and lead had many uses, including for pipes and tableware. After peaking in the first century AD, the deposits of lead, silver, and copper in the ice cores declined. The experience of economic growth during the Roman Republic was impressive, as were other examples of growth under extractive institutions, such as the Soviet Union. But that growth was limited and was not sustained, even when it is taken into account that it occurred under partially inclusive institutions. Growth was based on relatively high agricultural productivity, significant tribute from the provinces, and long-distance trade, but it was not underpinned by technological progress or creative destruction. The Romans inherited some basic technologies, iron tools and weapons, literacy, plow agriculture, and building techniques. Early on in the Republic, they created others: cement masonry, pumps, and the water wheel. But thereafter, technology was stagnant throughout the period of the Roman Empire. In shipping, for instance, there was little change in ship design or rigging, and the Romans never developed the stern rudder, instead steering ships with oars. Water wheels spread very slowly, so that water power never revolutionized the Roman economy. Even such great achievements as aqueducts and city sewers used existing technology, though the Romans perfected it. There could be some economic growth without innovation, relying on existing technology, but it was growth without creative destruction. And it did not last. As property rights became more insecure and the economic rights of citizens followed the decline of their political rights, economic growth likewise declined.

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A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—an all-too-common occurrence due to the fear of creative destruction. The great Roman writer Pliny the Elder relates the following story. During the reign of the emperor Tiberius, a man invented unbreakable glass and went to the emperor anticipating that he would get a great reward. He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed, “lest gold be reduced to the value of mud.” There are two interesting things about this story. First, the man went to Tiberius in the first place for a reward, rather than setting himself up in business and making a profit by selling the glass. This shows the role of the Roman government in controlling technology. Second, Tiberius was happy to destroy the innovation because of the adverse economic effects it would have had. This is the fear of the economic effects of creative destruction. There is also direct evidence from the period of the Empire of the fear of the political consequences of creative destruction. Suetonius tells how the emperor Vespasian, who ruled between AD 69 and 79, was approached by a man who had invented a device for transporting columns to the Capitol, the citadel of Rome, at a relatively small cost. Columns were large, heavy, and very difficult to transport. Moving them to Rome from the mines where they were made involved the labor of thousands of people, at great expense to the government. Vespasian did not kill the man, but he also refused to use the innovation, declaring, “How will it be possible for me to feed the populace?” Again an inventor came to the government. Perhaps this was more natural than with the unbreakable glass, as the Roman government was most heavily involved with column mining and transportation. Again the innovation was turned down because of the threat of creative destruction, not so much because of its economic impact, but because of fear of political creative destruction. Vespasian was concerned that unless he kept the people happy and under control it would be politically destabilizing. The Roman plebeians had to be kept busy and pliant, so it was good to have jobs to give them, such as moving columns about. This complemented the bread and circuses, which were also dispensed for free to keep the population content. It is perhaps telling that both of these examples came soon after the collapse of the Republic. The Roman emperors had far more power to block change than the Roman rulers during the Republic.

Note: If these two anecdotes are correct they are pretty damming

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Roman England collapsed with a bang. This was less true in Italy, or Roman Gaul (modern France), or even North Africa, where many of the old institutions lived on in some form. Yet there is no doubt that the change from the dominance of a single Roman state to a plethora of states run by Franks, Visigoths, Ostrogoths, Vandals, and Burgundians was significant. The power of these states was far weaker, and they were buffeted by a long series of incursions from their peripheries. From the north came the Vikings and Danes in their longboats. From the east came the Hunnic horsemen. Finally, the emergence of Islam as a religion and political force in the century after the death of Mohammed in AD 632 led to the creation of new Islamic states in most of the Byzantine Empire, North Africa, and Spain. These common processes rocked Europe, and in their wake a particular type of society, commonly referred to as feudal, emerged. Feudal society was decentralized because strong central states had atrophied, even if some rulers such as Charlemagne attempted to reconstruct them. Feudal institutions, which relied on unfree, coerced labor (the serfs), were obviously extractive, and they formed the basis for a long period of extractive and slow growth in Europe during the Middle Ages. But they also were consequential for later developments. For instance, during the reduction of the rural population to the status of serfs, slavery disappeared from Europe. At a time when it was possible for elites to reduce the entire rural population to serfdom, it did not seem necessary to have a separate class of slaves as every previous society had had. Feudalism also created a power vacuum in which independent cities specializing in production and trade could flourish. But when the balance of power changed after the Black Death, and serfdom began to crumble in Western Europe, the stage was set for a much more pluralistic society without the presence of any slaves.

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But Ethiopia was not representative of Africa. Elsewhere, slavery was not replaced by serfdom; African slavery and the institutions that supported it were to continue for many more centuries. Even Ethiopia’s ultimate path would be very different. After the seventh century, Ethiopia remained isolated in the mountains of East Africa from the processes that subsequently influenced the institutional path of Europe, such as the emergence of independent cities, the nascent constraints on monarchs and the expansion of Atlantic trade after the discovery of the Americas. In consequence, its version of absolutist institutions remained largely unchallenged. The African continent would later interact in a very different capacity with Europe and Asia. East Africa became a major supplier of slaves to the Arab world, and West and Central Africa would be drawn into the world economy during the European expansion associated with the Atlantic trade as suppliers of slaves. How the Atlantic trade led to sharply divergent paths between Western Europe and Africa is yet another example of institutional divergence resulting from the interaction between critical junctures and existing institutional differences. While in England the profits of the slave trade helped to enrich those who opposed absolutism, in Africa they helped to create and strengthen absolutism.

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Finally, in 1589, his “stocking frame” knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. He rented a building to set the machine up and, with the help of his local member of Parliament Richard Parkyns, met Henry Carey, Lord Hundson, a member of the Queen’s Privy Council. Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing, “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” Crushed, Lee moved to France to try his luck there; when he failed there, too, he returned to England, where he asked James I (1603–1625), Elizabeth’s successor, for a patent. James I also refused, on the same grounds as Elizabeth. Both feared that the mechanization of stocking production would be politically destabilizing. It would throw people out of work, create unemployment and political instability, and threaten royal power. The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction. THE REACTION TO LEE’S brilliant invention illustrates a key idea of this book. The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people. For sustained economic growth we need new technologies, new ways of doing things, and more often than not they will come from newcomers such as Lee. It may make society prosperous, but the process of creative destruction that it initiates threatens the livelihood of those who work with old technologies, such as the hand-knitters who would have found themselves unemployed by Lee’s technology. More important, major innovations such as Lee’s stocking frame machine also threaten to reshape political power. Ultimately it was not concern about the fate of those who might become unemployed as a result of Lee’s machine that led Elizabeth I and James I to oppose his patent; it was their fear that they would become political losers—their concern that those displaced by the invention would create political instability and threaten their own power. As we saw with the Luddites (pages 85–86), it is often possible to bypass the resistance of workers such as hand-knitters. But the elite, especially when their political power is threatened, form a more formidable barrier to innovation. The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing…

Note: Feels like smoking gun evidence to block innovation. I can’t think of a counter or rebuttal.

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Even without specific constitutional rules or laws, William simply gave up on many of the practices of previous kings. He stopped interfering in legal decisions and gave up previous “rights,” such as getting the customs revenues for life. Taken together, these changes in political institutions represented the triumph of Parliament over the king, and thus the end of absolutism in England and subsequently Great Britain—as England and Scotland were united by the Act of Union in 1707. From then on Parliament was firmly in control of state policy. This made a huge difference, because the interests of Parliament were very different from those of the Stuart kings. Since many of those in Parliament had important investments in trade and industry, they had a strong stake in enforcing property rights. The Stuarts had frequently infringed on property rights; now they would be upheld. Moreover, when the Stuarts controlled how the government spent money, Parliament opposed greater taxes and balked at strengthening the power of the state. Now that Parliament itself controlled spending, it was happy to raise taxes and spend the money on activities that it deemed valuable. Chief among them was the strengthening of the navy, which would protect the overseas mercantile interests of many of the members of Parliament. Even more important than the interest of parliamentarians was the emerging pluralistic nature of political institutions. The English people now had access to Parliament, and the policy and economic institutions made in Parliament, in a way they never had when policy was driven by the king.

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The case of monopolies best illustrates this. We saw above how monopolies were at the heart of extractive economic institutions in the seventeenth century. They came under attack in 1623 with the Statute of Monopolies, and were a serious bone of contention during the English Civil War. The Long Parliament abolished all the domestic monopolies that so impinged on people’s lives. Though Charles II and James II could not bring these back, they managed to maintain the ability to grant overseas monopolies. One was the Royal African Company, whose monopoly charter was issued by Charles II in 1660. This company held a monopoly on the lucrative African slave trade, and its governor and major shareholder was Charles’s brother James, soon to become James II. After 1688 the Company lost not just its governor, but its main supporter. James had assiduously protected the monopoly of the company against “interlopers,” the independent traders who tried to buy slaves in West Africa and sell them in the Americas. This was a very profitable trade, and the Royal African Company faced a lot of challenges, since all other English trade in the Atlantic was free. In 1689 the Company seized the cargo of an interloper, one Nightingale. Nightingale sued the Company for illegal seizure of goods, and Chief Justice Holt ruled that the Company’s seizure was unlawful because it was exercising a monopoly right created by royal prerogative. Holt reasoned that monopoly privileges could be created only by statute, and this had to be done by Parliament. So Holt pushed all future monopolies, not just of the Royal Africa Company, into the hands of Parliament. Before 1688 James II would quickly have removed any judge who made such a ruling. After 1688 things were different.

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After 1688, though domestically a level playing field emerged, internationally Parliament strove to tilt it. This was evident not only from the Calicoe Acts but also from the Navigation Acts, the first of which was passed in 1651, and they remained in force with alternations for the next two hundred years. The aim of these acts was to facilitate England’s monopolization of international trade—though crucially this was monopolization not by the state but by the private sector. The basic principle was that English trade should be carried in English ships. The acts made it illegal for foreign ships to transport goods from outside Europe to England or its colonies, and it was similarly illegal for third-party countries’ ships to ship goods from a country elsewhere in Europe to England. This advantage for English traders and manufacturers naturally increased their profits and may have further encouraged innovation in these new and highly profitable activities. By 1760 the combination of all these factors—improved and new property rights, improved infrastructure, a changed fiscal regime, greater access to finance, and aggressive protection of traders and manufacturers—was beginning to have an effect. After this date, there was a jump in the number of patented inventions, and the great flowering of technological change that was to be at the heart of the Industrial Revolution began to be evident. Innovations took place on many fronts, reflecting the improved institutional environment. One crucial area was power, most famously the transformations in the use of the steam engine that were a result of James Watt’s ideas in the 1760s.

Note: Notably none of this is mentioned in the Anarchy. I’ll compare this with Bret Devereaux’s essay on why there was no Roman Industrial Revolution

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The story of Papin’s invention is another example of how, under extractive institutions, the threat of creative destruction impeded technological change. Papin developed a design for a “steam digester” in 1679, and in 1690 he extended this into a piston engine. In 1705 he used this rudimentary engine to build the world’s first steamboat. Papin was by this time a professor of mathematics at the University of Marburg, in the German state of Kassel. He decided to steam the boat down the river Fulda to the river Weser. Any boat making this trip was forced to stop at the city of Münden. At that time, river traffic on the Fulda and Weser was the monopoly of a guild of boatmen. Papin must have sensed that there might be trouble. His friend and mentor, the famous German physicist Gottfried Leibniz, wrote to the Elector of Kassel, the head of state, petitioning that Papin should be allowed to “… pass unmolested …” through Kassel. Yet Leibniz’s petition was rebuffed and he received the curt answer that “the Electoral Councillors have found serious obstacles in the way of granting the above petition, and, without giving their reasons, have directed me to inform you of their decision, and that in consequence the request is not granted by his Electoral Highness.” Undeterred, Papin decided to make the journey anyway. When his steamer arrived at Münden, the boatmen’s guild first tried to get a local judge to impound the ship, but was unsuccessful. The boatmen then set upon Papin’s boat and smashed it and the steam engine to pieces. Papin died a pauper and was buried in an unmarked grave. In Tudor or Stuart England, Papin might have received similar hostile treatment, but this all changed after 1688. Indeed, Papin was intending to sail his boat to London before it was destroyed.

Note: I suspect the authors are oversimplifying but this seems like a really good example of their theory.

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In metallurgy, key contributions were made in the 1780s by Henry Cort, who introduced new techniques for dealing with impurities in iron, allowing for a much better quality wrought iron to be produced. This was critical for the manufacture of machine parts, nails, and tools. The production of vast quantities of wrought iron using Cort’s techniques was facilitated by the innovations of Abraham Darby and his sons, who pioneered the use of coal to smelt iron beginning in 1709. This process was enhanced in 1762 by the adaptation, by John Smeaton, of water power to operate blowing cylinders in making coke. After this, charcoal vanished from the production of iron, to be replaced by coal, which was much cheaper and more readily available.

Note: Really good example of standing on the shoulders of giants theory of development.

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Even though innovation is obviously cumulative, there was a distinct acceleration in the middle of the eighteenth century. In no place was this more visible than in textile production. The most basic operation in the production of textiles is spinning, which involves taking plant or animal fibers, such as cotton or wool, and twisting them together to form yarn. This yarn is then woven to make up textiles. One of the great technological innovations of the medieval period was the spinning wheel, which replaced hand spinning. This invention appeared around 1280 in Europe, probably disseminating from the Middle East. The methods of spinning did not change until the eighteenth century. Significant innovations began in 1738, when Lewis Paul patented a new method of spinning using rollers to replace human hands to draw out the fibers being spun. The machine did not work well, however, and it was the innovations of Richard Arkwright and James Hargreaves that truly revolutionized spinning. In 1769 Arkwright, one of the dominant figures of the Industrial Revolution, patented his “water frame,” which was a huge improvement over Lewis’s machine. He formed a partnership with Jedediah Strutt and Samuel Need, who were hosiery manufacturers. In 1771 they built one of the world’s first factories, at Cromford. The new machines were powered by water, but Arkwright later made the crucial transition to steam power. By 1774 his firm employed six hundred workers, and he expanded aggressively, eventually setting up factories in Manchester, Matlock, Bath, and New Lanark in Scotland. Arkwright’s innovations were complemented by Hargreaves’s invention in 1764 of the spinning jenny, which was further developed by Samuel Crompton in 1779 into the “mule,” and later by Richard Roberts into the “self-acting mule.” The effects of these innovations were truly revolutionary: earlier in the century, it took 50,000 hours for hand spinners to spin one hundred pounds of cotton. Arkwright’s water frame could do it in 300 hours, and the self-acting mule in 135. Along with the mechanization of spinning came the mechanization of weaving. An important first step was the invention of the flying shuttle by John Kay in 1733. Though it initially simply increased the productivity of hand weavers, its most enduring impact would be in opening the way to mechanized weaving. Building on the flying…

Note: This really puts that narrative of “poor Indian weavers” in perspective. Yes, they lost their jobs, but was cheaper cloth now available to more people?

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In 1832 the government passed the First Reform Act. It enfranchised Birmingham, Leeds, Manchester, and Sheffield, and broadened the base of voting so that manufacturers could be represented in Parliament. The consequent shift in political power moved policy in the direction favored by these newly represented interests; in 1846 they managed to get the hated Corn Laws repealed, demonstrating again that creative destruction meant a redistribution not just of income, but also of political power. And naturally, changes in the distribution of political power in time would lead to a further redistribution of income. It was the inclusive nature of English institutions that allowed this process to take place. Those who suffered from and feared creative destruction were no longer able to stop it.

Note: Economist!

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Why did this unique process start in England and why in the seventeenth century? Why did England develop pluralistic political institutions and break away from extractive institutions? As we have seen, the political developments leading up to the Glorious Revolution were shaped by several interlinked processes. Central was the political conflict between absolutism and its opponents. The outcome of this conflict not only put a stop to the attempts to create a renewed and stronger absolutism in England, but also empowered those wishing to fundamentally change the institutions of society. The opponents of absolutism did not simply attempt to build a different type of absolutism. This was not simply the House of Lancaster defeating the House of York in the War of the Roses. Instead, the Glorious Revolution involved the emergence of a new regime based on constitutional rule and pluralism.

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The Glorious Revolution was a momentous event precisely because it was led by an emboldened broad coalition and further empowered this coalition, which managed to forge a constitutional regime with constraints on the power of both the executive and, equally crucially, any one of its members. It was, for example, these constraints that prevented the wool manufacturers from being able to crush the potential competition from the cotton and fustian manufacturers. Thus this broad coalition was essential in the lead-up to a strong Parliament after 1688, but it also meant that there were checks within Parliament against any single group becoming too powerful and abusing its power. It was the critical factor in the emergence of pluralistic political institutions. The empowerment of such a broad coalition also played an important role in the persistence and strengthening of these inclusive economic and political institutions, as we will see in chapter 11.

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In Western Europe, the importance of the printing press was quickly recognized. In 1460 there was already a printing press across the border, in Strasbourg, France. By the late 1460s the technology had spread throughout Italy, with presses in Rome and Venice, soon followed by Florence, Milan, and Turin. By 1476 William Caxton had set up a printing press in London, and two years later there was one in Oxford. During the same period, printing spread throughout the Low Countries, into Spain, and even into Eastern Europe, with a press opening in Budapest in 1473 and in Cracow a year later. Not everyone saw printing as a desirable innovation. As early as 1485 the Ottoman sultan Bayezid II issued an edict that Muslims were expressly forbidden from printing in Arabic. This rule was further reinforced by Sultan Selim I in 1515. It was not until 1727 that the first printing press was allowed in the Ottoman lands. Then Sultan Ahmed III issued a decree granting İbrahim Müteferrika permission to set up a press. Even this belated step was hedged with restraints.

Note: Don’t want to make it sound like it was inevitable, but it was this move by the Turks that condemned the entire Middle East to be a technological backwater.

But it also explains how the Ottomans were able to hold onto power for so long. They were able to identify any threats to their power and snuff them out.

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Until well into the second half of the nineteenth century, book production in the Ottoman Empire was still primarily undertaken by scribes hand-copying existing books. In the early eighteenth century, there were reputed to be eighty thousand such scribes active in Istanbul.

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Absolutism and a lack of, or weak, political centralization are two different barriers to the spread of industry. But they are also connected; both are kept in place by fear of creative destruction and because the process of political centralization often creates a tendency toward absolutism. Resistance to political centralization is motivated by reasons similar to resistance to inclusive political institutions: fear of losing political power, this time to the newly centralizing state and those who control it. We saw in the previous chapter how the process of political centralization under the Tudor monarchy in England increased demands for voice and representation by different local elites in national political institutions as a way of staving off this loss of political power. A stronger Parliament was created, ultimately enabling the emergence of inclusive political institutions. But in many other cases, just the opposite takes place, and the process of political centralization also ushers in an era of greater absolutism. This is illustrated by the origins of Russian absolutism, which was forged by Peter the Great between 1682 and his death in 1725. Peter built a new capital at Saint Petersburg, stripping away power from the old aristocracy, the Boyars, in order to create a modern bureaucratic state and modern army. He even abolished the Boyar Duma that had made him tsar. Peter introduced the Table of Ranks, a completely new social hierarchy whose essence was service to the tsar. He also took control over the Church, just as Henry VIII did when centralizing the state in England. With this process of political centralization, Peter was taking power away from others and redirecting it toward himself. His military reforms led the traditional royal guards, the Streltsy, to rebel. Their revolt was followed by others, such as the Bashkirs in Central Asia and the Bulavin Rebellion. None succeeded. Though Peter the Great’s project of political centralization was a success and the opposition was overcome, the type of forces that opposed state centralization, such as the Streltsy, who saw their power being challenged, won out in many parts of the world, and the resulting lack of state centralization meant the persistence of a different type of extractive political institutions. In this chapter, we will see how during the critical juncture created by the Industrial Revolution, many nations missed the boat and failed to take advantage of the spread of industry. Either they had absolutist political and extractive economic institutions, as in the Ottoman Empire, or they lacked political centralization, as in Somalia.

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At the time of the merger of Castile and Aragon, Spain was among the most economically successful parts of Europe. After its absolutist political system solidified, it went into relative and then, after 1600, absolute economic decline. Almost the first acts of Isabella and Ferdinand after the Reconquest was the expropriation of the Jews. The approximately two hundred thousand Jews in Spain were given four months to leave. They had to sell off all their land and assets at very low prices and were not allowed to take any gold or silver out of the country. A similar human tragedy was played out just over one hundred years later. Between 1609 and 1614, Philip III expelled the Moriscos, the descendants of the citizens of the former Arab states in the south of Spain. Just as with the Jews, the Moriscos had to leave with only what they could carry and were not allowed to take with them any gold, silver, or other precious metals. Property rights were insecure in other dimensions under Habsburg rule in Spain. Philip II, who succeeded his father, Charles V, in 1556, defaulted on his debts in 1557 and again in 1560, ruining the Fugger and Welser banking families. The role of the German banking families was then assumed by Genoese banking families, who were in turn ruined by subsequent Spanish defaults during the reign of the Habsburgs in 1575, 1596, 1607, 1627, 1647, 1652, 1660, and 1662.

Note: A theme of history is that people who stiff the bankers don’t prosper long term.

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In England the defeat of absolutism in 1688 led not only to pluralistic political institutions but also to the further development of a much more effective centralized state. In Spain the opposite happened as absolutism triumphed. Though the monarchy emasculated the Cortes and removed any potential constraints on its behavior, it became increasingly difficult to raise taxes, even when attempted by direct negotiations with individual cities. While the English state was creating a modern, efficient tax bureaucracy, the Spanish state was again moving in the opposite direction. The monarchy was not only failing to create secure property rights for entrepreneurs and monopolizing trade, but it was also selling offices, often making them hereditary, indulging in tax farming, and even selling immunity from justice. The consequences of these extractive political and economic institutions in Spain were predictable. During the seventeenth century, while England was moving toward commercial growth and then rapid industrialization, Spain was tailspinning toward widespread economic decline. At the start of the century, one in five people in Spain was living in urban areas. By the end, this figure had halved to one in ten, in a process that corresponded to increasing impoverishment of the Spanish population. Spanish incomes fell, while England grew rich. The persistence and the strengthening of absolutism in Spain, while it was being uprooted in England, is another example of small differences mattering during critical junctures. The small differences were in the strengths and nature of representative institutions; the critical juncture was the discovery of the Americas. The interaction of these sent Spain off on a very different institutional path from England. The relatively inclusive economic institutions that resulted in England created unprecedented economic dynamism, culminating in the Industrial Revolution, while industrialization did not stand a chance in Spain. By the time industrial technology was spreading in many parts of the world, the Spanish economy had declined so much that there was not even a need for the Crown or the land-owning elites in Spain to block industrialization.

Note: Did they realise they were declining economically?

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The Habsburgs, unlike the Stuarts, were successful in sustaining strongly absolutist rule. Francis I, who ruled as the last emperor of the Holy Roman Empire, between 1792 and 1806, and then emperor of Austria-Hungary until his death in 1835, was a consummate absolutist. He did not recognize any limitations on his power and, above all, he wished to preserve the political status quo. His basic strategy was opposing change, any sort of change. In 1821 he made this clear in a speech, characteristic of Habsburg rulers, he gave to the teachers at a school in Laibach, asserting, “I do not need savants, but good, honest citizens. Your task is to bring young men up to be this. He who serves me must teach what I order him. If anyone can’t do this, or comes with new ideas, he can go, or I will remove him.” The empress Maria Theresa, who reigned between 1740 and 1780, frequently responded to suggestions about how to improve or change institutions by remarking. “Leave everything as it is.” Nevertheless, she and her son Joseph II, who was emperor between 1780 and 1790, were responsible for an attempt to construct a more powerful central state and more effective administrative system. Yet they did this in the context of a political system with no real constraints on their actions and with few elements of pluralism. There was no national parliament that would exert even a modicum of control on the monarch, only a system of regional estates and diets, which historically had some powers with respect to taxation and military recruitment. There were even fewer controls on what the Austro-Hungarian Habsburgs could do than there were on Spanish monarchs, and political power was narrowly concentrated. As Habsburg absolutism strengthened in the eighteenth century, the power of all non-monarchical institutions weakened further. When a deputation of citizens from the Austrian province of the Tyrol petitioned Francis for a constitution, he responded, “So, you want a constitution! … Now look, I don’t care for it, I will give you a constitution but you must know that the soldiers obey me, and I will not ask you twice if I need money … In any case I advise you to be careful what you are going to say.” Given this response, the Tyrolese leaders replied, “If thou thinkest thus, it is better to have no constitution,” to which Francis answered, “That is also my opinion.” Francis dissolved the State Council that Maria Theresa had used as a forum for consultation with her ministers. From then on there would be no consultation or public discussion of the Crown’s decisions. Francis created a police state and ruthlessly censored anything that could be regarded as mildly radical. His philosophy of rule was characterized by Count Hartig, a long-standing aide, as the “unabated maintenance of the sovereign’s authority, and a denial of all claims on the part of the people to a participation in that authority.”

Note: I don’t think anyone at the time could have known this was a bad strategy. Especially because what is seen as pluralism could easily be construed as a reverse of centralisation. No ruler would accede to a reverse of centralisation because it would damage their own power and wealth and also impoverish the places without centralisation.

Even if someone could see the future it’s not clear that anyone could convince a ruler that pluralism is different from reversing centralisation and is actually desirable.

And even if you could convince them of the difference, why would an aristocracy choose to stop being special? Better to be a big cheese in a small economy rather than slightly better off in a big one.

At that point we’ve reached the Dictators Handbook. Any money or power ceded by the autocrat weakens him and makes him more easily replaced by a more absolute ruler. England had the advantage of the Channel, so a weaker ruler didn’t immediately lose land to despotic neighbours.

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At the center of Habsburg economic institutions stood the feudal order and serfdom. As one moved east within the empire, feudalism became more intense, a reflection of the more general gradient in economic institutions we saw in chapter 4, as one moved from Western to Eastern Europe. Labor mobility was highly circumscribed, and emigration was illegal. When the English philanthropist Robert Owen tried to convince the Austrian government to adopt some social reforms in order to ameliorate the conditions of poor people, one of Metternich’s assistants, Friedrich von Gentz, replied, “We do not desire at all that the great masses shall become well off and independent … How could we otherwise rule over them?”

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In 1848 Europe was rocked by a series of revolutionary outbursts. In response, A. A. Zakrevskii, the military governor of Moscow, who was in charge of maintaining public order, wrote to Nicholas: “For the preservation of calm and prosperity, which at present time only Russia enjoys, the government must not permit the gathering of homeless and dissolute people, who will easily join every movement, destroying social or private peace.” His advice was brought before Nicholas’s ministers, and in 1849 a new law was enacted that put severe limits on the number of factories that could be opened in any part of Moscow. It specifically forbade the opening of any new cotton or woolen spinning mills and iron foundries. Other industries, such as weaving and dyeing, had to petition the military governor if they wanted to open new factories. Eventually cotton spinning was explicitly banned. The law was intended to stop any further concentration of potentially rebellious workers in the city. Opposition to railways accompanied opposition to industry, exactly as in Austria-Hungary. Before 1842 there was only one railway in Russia. This was the Tsarskoe Selo Railway, which ran seventeen miles from Saint Petersburg to the imperial residencies of Tsarskoe Selo and Pavlovsk. Just as Kankrin opposed industry, he saw no reason to promote railways, which he argued would bring a socially dangerous mobility, noting that “railways do not always result from natural necessity, but are more an object of artificial need or luxury. They encourage unnecessary travel from place to place, which is entirely typical of our time.” Kankrin turned down numerous bids to build railways, and it was only in 1851 that a line was built linking Moscow and Saint Petersburg. Kankrin’s policy was continued by Count Kleinmichel, who was made head of the main administration of Transport and Public Buildings. This institution became the main arbiter of railway construction, and Kleinmichel used it as a platform to discourage their construction. After 1849 he even used his power to censor discussion in the newspapers of railway development.

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The Dutch also took control of the Banda Islands, intending this time to monopolize mace and nutmeg. But the Banda Islands were organized very differently from Ambon. They were made up of many small autonomous city-states, and there was no hierarchical social or political structure. These small states, in reality no more than small towns, were run by village meetings of citizens. There was no central authority whom the Dutch could coerce into signing a monopoly treaty and no system of tribute that they could take over to capture the entire supply of nutmeg and mace. At first this meant that the Dutch had to compete with English, Portuguese, Indian, and Chinese merchants, losing the spices to their competitors when they did not pay high prices. Their initial plans of setting up a monopoly of mace and nutmeg dashed, the Dutch governor of Batavia, Jan Pieterszoon Coen, came up with an alternative plan. Coen founded Batavia, on the island of Java, as the Dutch East India Company’s new capital in 1618. In 1621 he sailed to Banda with a fleet and proceeded to massacre almost the entire population of the islands, probably about fifteen thousand people. All their leaders were executed along with the rest, and only a few were left alive, enough to preserve the know-how necessary for mace and nutmeg production. After this genocide was complete, Coen then proceeded to create the political and economic structure necessary for his plan: a plantation society. The islands were divided into sixty-eight parcels, which were given to sixty-eight Dutchmen, mostly former and current employees of the Dutch East India Company. These new plantation owners were taught how to produce the spices by the few surviving Bandanese and could buy slaves from the East India Company to populate the now-empty islands and to produce spices, which would have to be sold at fixed prices back to the company. The extractive institutions created by the Dutch in the Spice Islands had the desired effects, though, in Banda this was at the cost of fifteen thousand innocent lives and the establishment of a set of economic and political institutions that would condemn the islands to underdevelopment. By the end of the seventeenth century, the Dutch had reduced the world supply of these spices by about 60 percent and the price of nutmeg had doubled. The Dutch spread the strategy they perfected in the Moluccas to the entire region, with profound implications for the economic and political institutions of the rest of Southeast Asia. The long commercial expansion of several states in the area that had started in the fourteenth century went into reverse. Even the polities which were not directly colonized and crushed by the Dutch East India Company turned inward and abandoned trade. The nascent economic and political change in Southeast Asia was halted in its tracks. To avoid the threat of the Dutch East India Company, several states abandoned producing crops for export and ceased commercial…

Note: This is depressing af

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All this warfare and conflict not only caused major loss of life and human suffering but also put in motion a particular path of institutional development in Africa. Before the early modern era, African societies were less centralized politically than those of Eurasia. Most polities were small scale, with tribal chiefs and perhaps kings controlling land and resources. Many, as we showed with Somalia, had no structure of hierarchical political authority at all. The slave trade initiated two adverse political processes. First, many polities initially became more absolutist, organized around a single objective: to enslave and sell others to European slavers. Second, as a consequence but, paradoxically, in opposition to the first process, warring and slaving ultimately destroyed whatever order and legitimate state authority existed in sub-Saharan Africa. Apart from warfare, slaves were also kidnapped and captured by small-scale raiding. The law also became a tool of enslavement. No matter what crime you committed, the penalty was slavery.

Note: I don’t think I realised before reading this book how much damage participating in the slave trade did to Africans.

But I guess they were in a prisoners dilemma. The optimal move was to buy guns and pay with their neighbours.

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Even a modicum of inclusive institutions and the erosion of the powers of the chiefs and their restrictions were sufficient to start a vigorous African economic boom. Alas, it would be short lived. Between 1890 and 1913 it would come to an abrupt end and go into reverse. During this period two forces worked to destroy the rural prosperity and dynamism that Africans had created in the previous fifty years. The first was antagonism by European farmers who were competing with Africans. Successful African farmers drove down the price of crops that Europeans also produced. The response of Europeans was to drive the Africans out of business. The second force was even more sinister. The Europeans wanted a cheap labor force to employ in the burgeoning mining economy, and they could ensure this cheap supply only by impoverishing the Africans. This they went about methodically over the next several decades. The 1897 testimony of George Albu, the chairman of the Association of Mines, given to a Commission of Inquiry pithily describes the logic of impoverishing Africans so as to obtain cheap labor. He explained how he proposed to cheapen labor by “simply telling the boys that their wages are reduced.” His testimony goes as follows: Commission: Suppose the kaffirs [black Africans] retire back to their kraal [cattle pen]? Would you be in favor of asking the Government to enforce labour? Albu: Certainly … I would make it compulsory … Why should a nigger be allowed to do nothing? I think a kaffir should be compelled to work in order to earn his living. Commission: If a man can live without work, how can you force him to work? Albu: Tax him, then … Commission: Then you would not allow the kaffir to hold land in the country, but he must work for the white man to enrich him? Albu: He must do his part of the work of helping his neighbours. Both of the goals of removing competition with white farmers and developing a large low-wage labor force were simultaneously accomplished by the Natives Land Act of 1913. The act, anticipating Lewis’s notion of dual economy, divided South Africa into two parts, a modern prosperous part and a traditional poor part. Except that the prosperity and poverty were actually being created by the act itself. It stated that 87 percent of the land was to be given to the Europeans, who represented about 20 percent of the population. The remaining 13 percent was to go to the Africans. The Land Act had many predecessors, of course, because gradually Europeans had been confining Africans onto smaller and smaller reserves. But it was the act of 1913 that definitively institutionalized the situation and set the stage for the formation of the South African Apartheid regime, with the white minority having both the political and economic rights and the black majority being excluded from both. The act specified that several land reserves, including the Transkei and the Ciskei, were to become the African “Homelands.” Later these would…

Note: I can’t believe that testimony is real, but knowing South African apartheid, it does seem real.

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To the development economists who visited South Africa in the 1950s and ’60s, when the academic discipline was taking shape and the ideas of Arthur Lewis were spreading, the contrast between these Homelands and the prosperous modern white European economy seemed to be exactly what the dual economy theory was about. The European part of the economy was urban and educated, and used modern technology. The Homelands were poor, rural, and backward; labor there was very unproductive; people, uneducated. It seemed to be the essence of timeless, backward Africa. Except that the dual economy was not natural or inevitable. It had been created by European colonialism. Yes, the Homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out African economic growth and created the reservoir of cheap, uneducated African labor to be employed in European-controlled mines and lands. After 1913 vast numbers of Africans were evicted from their lands, which were taken over by whites, and crowded into the Homelands, which were too small for them to earn an independent living from. As intended, therefore, they would be forced to look for a living in the white economy, supplying their labor cheaply. As their economic incentives collapsed, the advances that had taken place in the preceding fifty years were all reversed. People gave up their plows and reverted to farming with hoes—that is, if they farmed at all. More often they were just available as cheap labor, which the Homelands had been structured to ensure. It was not only the economic incentives that were destroyed. The political changes that had started to take place also went into reverse. The power of chiefs and traditional rulers, which had previously been in decline, was strengthened, because part of the project of creating a cheap labor force was to remove private property in land. So the chiefs’ control over land was reaffirmed. These measures reached their apogee in 1951, when the government passed the Bantu Authorities Act. As early as 1940, G. Findlay put his finger right on the issue: Tribal tenure is a guarantee that the land will never properly be worked and will never really belong to the natives. Cheap labour must have a cheap breeding place, and so it is furnished to the Africans at their own expense. The dispossession of the African farmers led to their mass impoverishment. It created not only the institutional foundations of a backward economy, but the poor people to stock it.

Note: Horrifying. This entire section on the creation of Apartheid makes me sick.

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The initial circumstances in Sydney, New South Wales, were very similar to those in Jamestown, Virginia, 181 years earlier, though the settlers at Jamestown were mostly indentured laborers, rather than convicts. In both cases the initial circumstances did not allow for the creation of extractive colonial institutions. Neither colony had dense populations of indigenous peoples to exploit, ready access to precious metals such as gold or silver, or soil and crops that would make slave plantations economically viable. The slave trade was still vibrant in the 1780s, and New South Wales could have been filled up with slaves had it been profitable. It wasn’t. Both the Virginia Company and the soldiers and free settlers who ran New South Wales bowed to the pressures, gradually creating inclusive economic institutions that developed in tandem with inclusive political institutions. This happened with even less of a struggle in New South Wales than it had in Virginia, and subsequent attempts to put this trend into reverse failed.

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What was started by the French Revolutionary Armies was continued, in one form or another, by Napoleon. Napoleon was first and foremost interested in establishing firm control over the territories he conquered. This sometimes involved cutting deals with local elites or putting his family and associates in charge, as during his brief control of Spain and Poland. But Napoleon also had a genuine desire to continue and deepen the reforms of the revolution. Most important, he codified the Roman law and the ideas of equality before the law into a legal system that became known as the Code Napoleon. Napoleon saw this code as his greatest legacy and wished to impose it in every territory he controlled. Of course, the reforms imposed by the French Revolution and Napoleon were not irreversible. In some places, such as in Hanover, Germany, the old elites were reinstated shortly after Napoleon’s fall and much of what the French achieved was lost for good. But in many other places, feudalism, the guilds, and the nobility were permanently destroyed or weakened. For instance, even after the French left, in many cases the Code Napoleon remained in effect. All in all, French armies wrought much suffering in Europe, but they also radically changed the lay of the land. In much of Europe, gone were feudal relations; the power of the guilds; the absolutist control of monarchs and princes; the grip of the clergy on economic, social, and political power; and the foundation of ancien régime, which treated different people unequally based on their birth status. These changes created the type of inclusive economic institutions that would then allow industrialization to take root in these places. By the middle of the nineteenth century, industrialization was rapidly under way in almost all the places that the French controlled, whereas places such as Austria-Hungary and Russia, which the French did not conquer, or Poland and Spain, where French hold was temporary and limited, were still largely stagnant.

Note: Code Napoleon was his greatest legacy.

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The question of universal suffrage … is a knife and fork question, a bread and cheese question… by universal suffrage I mean to say that every working man in the land has a right to a good coat on his back, a good hat on his head, a good roof for the shelter of his household, a good dinner upon his table.

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Following the First World War, the Representation of the People Act of 1918 gave the vote to all adult males over the age of twenty-one, and to women over the age of thirty who were taxpayers or married to taxpayers. Ultimately, all women also received the vote on the same terms as men in 1928. The measures of 1918 were negotiated during the war and reflected a quid pro quo between the government and the working classes, who were needed to fight and produce munitions. The government may also have taken note of the radicalism of the Russian Revolution.

Note: I sometimes think how much of giving political power to the people, broadening education and job opportunities to all is because the interests of the elites and the masses were aligned, like they were in WWI. It’s not at all clear that the elites would continue that if the masses became more expendable because of say, automated factories.

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In fact, the British example, an illustration of the virtuous circle of inclusive institutions, provides an example of a “gradual virtuous circle.” The political changes were unmistakably toward more inclusive political institutions and were the result of demands from empowered masses. But they were also gradual. Every decade another step, sometimes smaller, sometimes larger, was taken toward democracy. There was conflict over each step, and the outcome of each was contingent. But the virtuous circle created forces that reduced the stakes involved in clinging to power. It also spurred the rule of law, making it harder to use force against those who were demanding what these elites had themselves demanded from Stuart monarchs. It became less likely that this conflict would turn into an all-out revolution and more likely that it would be resolved in favor of greater inclusiveness. There is great virtue in this sort of gradual change. It is less threatening to the elite than the wholesale overthrow of the system. Each step is small, and it makes sense to give in to a small demand rather than create a major showdown. This partly explains how the Corn Law was repealed without more serious conflict. By 1846 landowners could no longer control legislation in Parliament. This was an outcome of the First Reform Act. However, if in 1832 the expansion of the electorate, the reform of the rotten boroughs, and the repeal of the Corn Laws had all been on the table, landowners would have put up much more resistance. The fact that there were first limited political reforms and that repeal of the Corn Laws came on the agenda only later defused conflict.

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Gradual change also prevented ventures into uncharted territories. A violent overthrow of the system means that something entirely new has to be built in place of what has been removed. This was the case with the French Revolution, when the first experiment with democracy led to the Terror and then back to a monarchy twice before finally leading to the French Third Republic in 1870. It was the case in the Russian Revolution, where the desires of many for a more equal system than that of the Russian Empire led to a one-party dictatorship that was much more violent, bloody, and vicious than what it had replaced. Gradual reform was difficult in these societies precisely because they lacked pluralism and were highly extractive. It was the pluralism emerging from the Glorious Revolution, and the rule of law that it introduced, that made gradual change feasible, and desirable, in Britain. The conservative English commentator Edmund Burke, who steadfastly opposed the French Revolution, wrote in 1790, “It is with infinite caution that any man should venture upon pulling down an edifice, which has answered in any tolerable degree for ages the common purposes of society, or on building it up again without having models and patterns of approved utility before his eyes.” Burke was wrong on the big picture. The French Revolution had replaced a rotten edifice and opened the way for inclusive institutions not only in France, but throughout much of Western Europe. But Burke’s caution was not entirely off the mark. The gradual process of British political reform, which had started in 1688 and would pick up pace three decades after Burke’s death, would be more effective because its gradual nature made it more powerful, harder to resist, and ultimately more durable.

Note: Powerful endorsement for gradual change

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Though Roosevelt skillfully tried to win popular support for the measure, opinion polls suggested that only about 40 percent of the population was in favor of the plan. Louis Brandeis was now a Supreme Court justice. Though Brandeis sympathized with much of Roosevelt’s legislation, he spoke against the president’s attempts to erode the power of the Supreme Court and his allegations that the justices were overworked. Roosevelt’s Democratic Party had large majorities in both houses of Congress. But the House of Representatives more or less refused to deal with Roosevelt’s bill. Roosevelt then tried the Senate. The bill was sent to the Senate Judiciary Committee, which then held highly contentious meetings, soliciting various opinions on the bill. They ultimately sent it back to the Senate floor with a negative report, arguing that the bill was a “needless, futile and utterly dangerous abandonment of constitutional principle … without precedent or justification.” The Senate voted 70 to 20 to send it back to committee to be rewritten. All the “court packing” elements were stripped away. Roosevelt would be unable to remove the constraints placed on his power by the Supreme Court. Even though Roosevelt’s powers remained constrained, there were compromises, and the Social Security and the National Labor Relations Acts were both ruled constitutional by the Court. More important than the fate of these two acts was the general lesson from this episode. Inclusive political institutions not only check major deviations from inclusive economic institutions, but they also resist attempts to undermine their own continuation. It was in the immediate interests of the Democratic Congress and Senate to pack the court and ensure that all New Deal legislation survived. But in the same way that British political elites in the early eighteenth century understood that suspending the rule of law would endanger the gains they had wrested from the monarchy, congressmen and senators understood that if the president could undermine the independence of the judiciary, then this would undermine the balance of power in the system that protected them from the president and ensured the continuity of pluralistic political institutions. Perhaps Roosevelt would have decided next that obtaining legislative majorities took too much compromise and time and that he would instead rule by decree, totally undermining pluralism and the U.S. political system. Congress certainly would not have approved this, but then Roosevelt could have appealed to the nation, asserting that Congress was impeding the necessary measures to fight the Depression. He could have used the police to close Congress. Sound farfetched? This is exactly what happened in Peru and Venezuela in the 1990s. Presidents Fujimori and Chávez appealed to their popular mandate to close uncooperative congresses and subsequently rewrote their constitutions to massively strengthen the powers of the president. The fear of this…

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Bonaparte was convinced that any society needs a definite social hierarchy to be truly prosperous and disciplined and he deliberately set out to re-create one in France, but the means to preferment was ability, not birth or station. The coveted white-enamel crosses on their strips of red ribbon proved a useful means of binding men to his service, although the returned aristocracy disdained the new decoration, considering it no substitute for the ancient Orders of St. Louis or St. Esprit.

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