Part XI. The Institution of Douglass North

Chapter 28:
And So the Chronology of Property and Incentives Has Been Mismeasured

That is to say, to return to the theme of North and Weingast’s work, the innovations of the Financial Revolution in late seventeenth- and early eighteenth-century Britain have no important connection to secure contracting — not even, as North and Weingast somewhat desperately aver, as indirect “evidence that such a necessary condition has been fulfilled.”62 Frederick Pollock and F. M. Maitland’s great book of 1895 was The History of English Law before the Time of Edward the First. By the year 1272, they (principally Maitland) showed, English common law was firmly in place — though of course the endogenous elaborations, such as statutes against perpetuities and a wider law merchant and the extension of the King’s common law to all free-born Englishmen when they became in fact free-born, remained to be accomplished. Avner Greif begins his long-awaited book on the subject by reporting that “On March 28, 1210, Rubeus de Campo of Genoa agreed to pay a debt of 100 marks sterling in London on behalf of Vivianus Jordanus of Lucca. There was nothing unusual about this agreement. . . . Impersonal lending among traders from remote corners of Europe prevailed and property rights were sufficiently secure that merchants could travel.”63 Exactly, and so also in China and the Middle East and South Asia. The Glorious Revolution brought no unprecedented rule of property law. It was a constitutional, not a common-law or statute-law, revolution. The earlier James of England (the first Stuart and the grandfather of the James deposed in 1688 for his proposal that Catholics might be tolerated), had reigned over one of the most law-depending countries in Europe — though violent in duels and other affrays, and certainly not so peaceful as the Bourgeois Era would make it. English people went habitually to law, with all its delays, because it worked, and had for centuries.

North also praises patents. Many economists have been intrigued by the simple logic entailed: make innovation into property and, voilà, innovation will be pursued as routinely as is plowing or building. It is another attempt by economists to bring the most unusual event in human history under a routine of marginal benefit and marginal cost. Joel Mokyr has written a devastating essay surveying the historical evidence on the matter. He asks, “what could be wrong with this picture [painted by North and, from North, by Acemoglou and other economists]? The answer is basically ‘almost everything’.”64 British patents were very expensive, a minimum of £100 (a respectable lower-middle class annual income at the time) and requiring many months of attendance on law courts in London. Therefore they were taken out as only one of many alternative ways of establishing ones credibility as an ingenious person — someone to be admired, and to be paid to do all sorts of engineering work, or to be given a governmental sinecure. Patents were considered undignified by many inventors, and were often treated with suspicion by judges, as constituting monopolies (as they do). Getting a head start in producing according to ones idea was then, as usually also today, better assurance of fame and fortune. Patents sound neat, but were not.

And North admires, too, “laws permitting a wide latitude of organizational structures,” such as incorporation laws. But general incorporation laws were passed only in the middle of the nineteenth century (the first in 1844), and were taken up unevenly — many companies were mere shells, or dissolved quickly. Businesspeople, it appears, were not much constrained by the earlier lack of permission to incorporate. As late as 1893 Gilbert and Sullivan were spoofing general incorporation, as a foolish flower of progress:

Some seven men form an Association

(If possible all Peers and Baronets),
They start out with a public declaration

To what extent they mean to pay their debts.
That’s called their Capital. . . .

When it’s left to you to say

What amount you mean to pay,
Why, the lower you can put it at, the better.65

The anglophile king of Utopia, eager to adopt all the elements that “have tended to make England the powerful, happy, and blameless country which the consensus of European civilization has declared it to be,” inquires further: “And do I understand you that Great Britain / Upon this Joint Stock principle is governed?” To which Mr. Goldbury of the stock exchange replies: “We haven’t come to that exactly — but / We’re tending rapidly in that direction.”

And so an embarrassing North Gap in the explanation of an economic revolution opens up, fully 528 years in length calculated from 1800, 1800 minus 1272. Or else it is 100 negative years, 1800 minus 1844. Legal developments in England that happened many centuries before or man decades after cannot explain the exceptional applied innovations of northwestern Europe 1700-1848. Security of property was a very old story in the England of 1600, as it was in the Chinese or Ottoman Empires at the same time. The depredations by the Stuarts were minor, if infuriating to the wealthier Londoners of a non-Conformist disposition. The merely prudential incentives to innovate were just as great in the thirteenth century as in the eighteenth. Property rights, that is, were pretty full at both dates. Money was to be made. (The fact is contrary to the Romantic and then Marxist-influenced tale that the feudal era knew not the use of money or property or wages or trade or capital.) As Alan Macfarlane declared in 1978, “England was as ‘capitalist’ in 1250 as it was in 1550 or 1750.”66

What actually changed between the thirteenth and the eighteenth centuries was, as Joel Mokyr puts it, “the mental world of the British economic and technological elite.”67 Indeed, the very idea that a mere inventor or merchant or manufacturer could be part of an “elite” was entirely novel in England in 1700, following the Dutch example of the Golden (and Gold-Earning) Age. What was new after 1688 in England was a new honor for trade. Hume had this right in 1741: “commerce, therefore, in my opinion, is apt to decay in absolute governments, not because it is there less secure, but because it is less honorable. A subordination of ranks is absolutely necessary to the support of monarchy. Birth, titles, and place must be honored above industry and riches.”68 (France was his instance of “absolute” government; he should have seen Russia.)

And even then the so-called “incentive” to innovate was plainly not only the making of money. Robert Allen asserts that “technology was invented by people in order to make money,” and therefore that “invention was an economic activity.”69 No, it wasn’t, not by any means entirely. Allen adopts a reductionism that has lately become a standard rhetorical move in Samuelsonian and Beckerian economics. In 1725 Bishop Butler complained about “the strange affection of many people of explaining away all particular affections and representing the whole of life as nothing but one continued exercise of self-love.”70 “It is the great fallacy of Dr. Mandeville’s book,” wrote Adam Smith in 1759, “to represent every passion as wholly vicious [that is, a mere matter of profit-making prudence and self-interest] which is so in any degree and any direction.”71 Money mattered. But so did other motives. Joel Mokyr emphasizes the glory of the game. Allen himself admits that patents for invention, though available in England from 1624 on, were in fact as I’ve noted little used, which would be odd if making money were all that was involved. And he argued long ago and persuasively, as also noted, that “collective invention” was often the ticket, which “divided the costs and pooled the gains,” open source technology.72 Ben Franklin gave away his inventions, such as the lightning rod and the Franklin stove. So did Michael Faraday. Such examples argue against the reduction of innovation to cost and benefit. Thomas Carlyle, the scourge of the classical economists, remarked in 1829 that “with men: that they have never been roused into deep, thorough, all-pervading efforts by any computable prospect of Profit and Loss, for any visible, finite object; but always for some invisible and infinite one.”73

An economist who is thinking like an economist, instead of like a fourth-rate applied mathematician who knows only the use of Max U and Max’s marginal balances, does not in fact find it so strange. Computable prospects would already have been discovered. Routine balances of profit and loss cannot have motivated the sudden, unique, and gigantic lurch forward 1700-1900. Or so the economist would argue if he believed classical or neo-classical or even Samuelsonian economics after equilibrium. The margin of cultivation did not move out by just a little bit — it leapt forward. Illa humanitatis fecerunt saltum. Human affairs made a jump.

A recent calculation by the ever-useful economist William Nordhaus reveals that nowadays an inventor gets a mere 2.2 percent of the economic gain from an invention: “only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”74 The inventor had better get such a low share, or else economic growth would be a grim story of the Walt Disney Corporation getting richer and richer on its novelties, with no gain at all to we who do not own Walt Disney stock. The argument is another way of seeing that the Modern Jump cannot have been the result of the mere seizing of computable prospects of profit. Two percent of the entire social gain from the high-pressure steam engine is of course immense. But most inventions were, Mokyr note, “micro,” that is, little improvements of existing inventions, not revolutions in the way of doing business. As Mokyr then says, “the standard pecuniary incentive system [which does not in any case explain what it is meant to explain] was supplemented by a more complex one that included peer recognition and the sheer satisfaction of being able to do what one desires.” “When one loves science,” the chemist Claude Louis Berthollet wrote to James Watt, “one has little need for fortune which would risk ones happiness,” though as George Grantham observes Berthollet was in fact paid well as a high civil servant.75 Horace could not have put it better, or Adam Smith, the supposed prophet of profit, who declared the poor man sunning himself by the side of the road more happy than a prince. Weak incentives that were fully present in the thirteenth century cannot explain frenetic innovation in the eighteenth and nineteenth centuries.

* * * *

One way of getting around the North Gap and the feeble economistic “incentives” in North’s argument and the strange assertion that the financial revolution after 1689 was just the same as the introduction of secure property rights is to emphasize the modern state as a source of growth. North would then join with the political scientist Liah Greenfeld in elevating nationalism to a cause of modern economic growth.76 The Greenfeld hypothesis has the merit of not depending entirely on monetary incentives. People can innovate for the honor of Britain. Some few probably did. Rule Britannia.

But it is a different proposition to say, as North does, that “the state was a major player in the whole process.”77 Thank the Lord, I would say, it was not. State-guided growth was once highly thought of by economists and economic historians, and has always been popular among statesmen. In 1975, for the example, the eminent economic historian Marcello de Cecco wrote in praise of the “national economy” of Friedrich List (1789-1846), which sought a place in the sun for Germany outside the shade of the then-dominate British: “By adding dynamism and history to classical [i.e. Ricardo's] analysis, List obtains a strategy for fast economic growth that is perfectly suitable to the socio-economic conditions of countries which want to undergo a process of modernization.”78 So thought many in 1975, or in 1841 (Das Nationale System der Politischen Ökonomie). But in the meantime Listian policies such as protection for “infant industries” (such wailing infants as General Motors in 2009) and “import substitution” (in Latin America under the influence of the the Listian analysis of Raúl Prebisch [1959]) have proven unhappy in results. De Cecco goes on: “We can clearly see . . . [List's realization] of the impossibility of founding a modernization on a bourgeois revolution, i.e. on the English model, and of the ensuing need to find a different ‘national way,’ based on collective action.” I say on the contrary that without something like a bourgeois revolution at least at the level of rhetoric no lasting modernization can happen. You can lead by “collective action” the Russian people into gigantic auto factories, but you can’t make them think. The Chinese and the Indians are embourgeoisfying. That’s the way forward.

My model on the contrary is of technological causation, the technology being caused by the coming of bourgeois dignity and liberty. Many who advocate industrial policy and other economic planning by experts would disagree. I would claim that such intervention by the state typically reduces what could be achieved by bourgeois dignity and liberty. It doesn’t have to. It’s a matter of fact, not pure theory. In some worlds it would not. On a blackboard one can prove, indeed, that state intervention to deal with externalities will improve the performance of an economy. But in the actual world, the actual interventions by actual states have usually not improved performance. Running an economy by the dictates of political pressure and the force of anti-bourgeois ideology has not normally led to decisions that were best for economic growth and for the future of the poor. Thus the Soviet Union after World War II kept its people anti-bourgeois, and poor.

North and Weingast’s article of 1989 praises the ability of the English and then British state to finance wars after 1694. They take it to be a Good Thing (except presumably from the French and Indian point of view). But financing wars is not the same thing — in fact, it is rather the opposite — of “the secure contracting over time and space” that North and Weingast anachronistically attach to the Financial Revolution.79 Ask the British investors incommoded by the unanticipated starting and stopping of Britain’s long eighteenth-century struggle with France, 1692 to 1815, whether they felt secure in contracting. Interest rates bounced up and down, as did insurance rates for shipping, and demand for naval stores. Some security.

True, as I have repeatedly noted, contracting with the British state became more secure over time and space. But the state thus enabled can turn in a moment into a Frankenstein’s monster, and often has. North well understands the point, when he is not trying to connect the Glorious Revolution to the Industrial Revolution. Greenfeld sometimes appears not to emphasize it quite as much as a native Russian might. The change in rhetoric that up-valued bourgeois virtues, fortunately, kept the British state from becoming an anti-bourgeois monster like the Russian state in 1649 or the French state in 1700 or the German state in 1871, or the Japanese state when it, too, in the late nineteenth century went on the gold standard and was suddenly able to finance wars of aggression. The Russian state after 1917, by contrast, was at least for a while confined by its inability to borrow massively abroad to merely domestic violence — until Hitler’s imprudent invasion brought American credits for the Soviets, and the West’s salvation, and Eastern Europe’s woe.

North nonetheless stresses “the extent [to which] the state was bound by commitments that it would not confiscate assets.”80 We have seen the quantitative flaws in the North and Weingast claim that the Stuart kings of England were masters at confiscating their subjects’ wealth. It was a good thing, not a bad thing, that the Stuarts were in fact such tyros in expropriation, suffering the indignity of frequent breakdowns of their credit with bankers, and in 1672 actual bankruptcy. James I and II and Charles I and II were in fact stumbling amateurs by the standards of the modern bureaucratic state. Capitalists in the law-abiding, innovating United States were haunted in the 1930s, as the economic historian Robert Higgs has shown, by Roosevelt’s repeated gestures towards expropriating the economic royalists — which gained force by being promised at a time in which communist and especially fascist states had actually just done so.81 And in 1946-51 the very home since the year of Our Lord 1272 and before of credible commitments to secure property rights, England itself, proceeded to nationalize in succession the Bank of England, coal, inland transport, gas, steel, health services, and much else. Even under the Conservatives, who reassumed power in 1951, the nationalization was only partly overturned, and the wartime (and anti-capitalist) controls on prices persisted. After a failed attempt to lift controls on sweets in 1949, rationing of them was dropped at last in February 5, 1953, as every British person born between, say, 1941 and 1949 well remembers. And yet afterwards for a while in the land of original free enterprise the sugar itself continued to be rationed.

In his 1991 essay North has a canny section describing the different fates of the lands “north and south of the Rio Grande.82 “The gradual country-by-country reversion to centralized bureaucratic control characterized Latin America in the nineteenth century.”83 Yes, and then, thus enabled, in the twentieth century the Latin American states carried out disastrously Listian policies. In other words, the nation state has by no means always been good news for economic growth, and it is doubtful that Greenfeld is correct to credit the Good Nation States (namely, Britain and the United States) with modern economic growth. The Japanese and German nation states would have been much better off economically in 1945 without having had their defeated nationalisms. We all agree that abstaining from violating property rights through seizing or taxing all the gains from trade is a necessary condition for any economic growth. Witness Zimbabwean agriculture in recent times. But refraining from catastrophic intervention in the economy is not the same as being in an admirable sense “a major player in the whole process.”

It does not seem, in short, that changes in “institutions” have much to do with the Industrial Revolution. On the contrary, institutional change appears to be still another attempt to reduce a great historical surprise to a materialist routine. As Tocqueville wrote in 1834, “all the efforts in political economy seem today to be in the direction of materialism,” and so they were 1890-1980. “I would like,” he continued, “to try to introduce ideas and moral feelings as elements of prosperity and happiness.”84 Just so.

One thought on “Part XI. The Institution of Douglass North

  1. don’t mistake a free and frank ehgaxnce of ideas and information with anger It is possible to disagree vehemently without malice intended. For example, consider our to-do from a week or two back where we ended was what’s the difference between reporters, journalists, and presenters?! Then this week you tee off on Glen Milne ’nuff said. At least he’s a lot more subtle than say, Greg Sheridan. But where do you draw the line and why do they all get to hide behind journalistic privilege’?@Deirdra says: it’s hardly just British shows that get ignored by Boxcutters Josh has said on numerous epidodes he’s not as interested in reviewing comedies as compared to drama, for example.(though anyone who’s read the *ahem* official GAT list could confirm that). Likewise sci fi get short shrift vs cop-shows, interview shows get reviewed not-at-all, and sitcoms get an automatic 3-star penalty. Australian shows get an automatic four-star bonus.Meh it’s their podcast, and they can do as they like with it. If we weren’t prepared to put up with their eccentricities, we wouldn’t listen. nd likewise, if we could deal with criticism, we wouldn’t actively post on the board

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