Why Nations Fail Illustrated

Lecture 3

How inclusive institutions

led to prosperity in England

October 23, 2018

Masayuki Kudamatsu

Chapter 7 & pp. 102-104

Weeks 2-4: How institutions affect prosperity

October 9

Chapter 3

October 16

Chapter 7

October 23

Chapter 8

North/South Korea

the Congo

How institutions matter for prosperity

Why did

Industrial Revolution

take place

in England?

History of England

from 13c to 19c

Extractive institutions cause poverty

Inclusive institutions lead to prosperity

Ottoman Empire

Austria-Hungary

Russian Empire

Ming/Qing dynasties

Ethiopia

Somalia 

Today's Road Map

England until 16th century

Extractive institutions with inclusive elements

17th-century England

Conflict over economic & political institutions

After the Glorious Revolution of 1688

Emergence of inclusive institutions

Industrial Revolution as a consequence

Feedback from economic to political institutions

Today's Road Map

England until 16th century

Extractive institutions with inclusive elements

17th-century England

Conflict over economic & political institutions

After the Glorious Revolution of 1688

Emergence of inclusive institutions

Industrial Revolution as a consequence

Feedback from economic to political institutions

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

Review 1: Political institutions

Magna Carta of 1215

Image source: Wikipedia Commons

King had to consult with Parliament to raise taxes

Secure property rights

Parliament represents a broad set of interests

Not only the allies of the king

But also 

Minor aristocrats in commerce and industry

Commercial and upwardly mobile farmers ("gentry")

Secure property rights for a large number of people

Political centralization

Henry VII (1485-1509)

Disarming aristocrats

Henry VIII (1509-1547)

Introducing bureaucracy

Expropriating all the Church lands

cf. State = Monopoly of legitimate violence

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

16th-century England had a limited range

of inclusive political institutions

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

majority of people

Occupational choice

Free

Forced labor

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

Review 2: Economic institutions

Incentive to invest & innovate

Monopolies

Many goods in daily life were produced by monopolies

Clothes

Lace, Linen, Leather, Threads, Belts, Buttons, Pins, Dye, Starch (for laundry), Spectacles

Foods

Butter, Currants, Red herrings, Salmon, Lobsters, Salt, Pepper, Vinegar

Housing

Bricks, Glass, Iron, Candles, Coal & Timber for heating, Soap for washing

Reading & Writing

Books, Pens, Paper

William Lee invented

stocking frame knitting machine

in 1589

Image source: Wikimedia Commons

Queen Elizabeth I refused to give a patent

"Consider ... what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment"

An example of the ruler's fear of creative destruction

No property rights for innovators

Economic Growth

Winners

&

Losers

Creative destruction

Losers = Powerful

Review 3: Extractive institutions resist innovation

Extractive Econ Instit.

to prevent creative destruction

If

Popular revolts by losers would threaten the powerful 

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

majority of people

Occupational choice

Free

Forced labor

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

16th-century England

had extractive economic institutions

Today's Road Map

England until 16th century

Extractive institutions with inclusive elements

17th-century England

Conflict over economic & political institutions

After the Glorious Revolution of 1688

Emergence of inclusive institutions

Industrial Revolution as a consequence

Feedback from economic to political institutions

Statute of Monopoly (1623)

King can no longer grant a new monopoly in domestic markets

Existing monopolies are untouched

Does not apply to monopolies in overseas trade

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

majority of people

Occupational choice

Free

Forced labor

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

A move towards inclusive economic institutions

Absolutist policies by Charles I (1625-1649)

Refuse to call Parliament, to raise taxes

Forced loans (i.e. taxation)

Grant monopolies in overseas trade

Intervene the judiciary

Ship money (tax to finance the Royal Navy)

Portrait by Anthony van Dyke circa 1635

(Wikimedia Commons)

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

majority of people

Occupational choice

Free

Forced labor

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

A move towards extractive economic institutions

1651-60: Oliver Cromwell's dictatorship

1688: Glorious Revolution

1660-85: Charles II

1685-88: James II

Conflict between Charles I and Parliament led to

English Civil Wars (1642-51)

Today's Road Map

England until 16th century

Extractive institutions with inclusive elements

17th-century England

Conflict over economic & political institutions

After the Glorious Revolution of 1688

Emergence of inclusive institutions

Industrial Revolution as a consequence

Feedback from economic to political institutions

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Review 4: Inclusive institutions lead to prosperity

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Interpret post-1688 England with the theory

1

Bill of Rights in 1689

Decision-making power

transferred from the Crown to Parliament

Many Members of Parliament

invest in trade & industry

to strengthen the navy

for protecting international traders

Image source: UK Parliament

Parliament decides whether to tax people

e.g.

Petitioning

Image source: The Abolition Project

A petition in 1783

for abolishing

the slave trade

Allows anyone in England to participate in politics

Parliament did listen to them

Political centralization

Government expenditure = 10% of GDP

More than many of today's poor countries

Colombia reached this size in the 1980s

Excise tax on domestically produced commodities

Excise tax bureau expanded

Recruitment based on talent, not by political appointment

Tax inspectors stationed throughout England

Text

Headquarters of Excise Office

in London, 1810 (Wikimedia Commons)

1690: 1,211 employees

1780: 4,800

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Interpret post-1688 England with the theory

2

Reorganising property ownerships

Until 1688

Landowners could not mortgage, lease, or sell the land

After 1688

People allowed to petition Parliament

to simplify property rights

& embed them in acts of Parliament

Common land could be used only for traditional use

All the land ultimately owned by the Crown

Many cross-cutting claims to land

Abolishing monopolies

Case 1: Royal African Company

Monopoly of African slave trade, granted by Charles II in 1660

1689: sued by interloper for illegal seizure of goods

Chief Justice Holt ruled that seizure was illegal

Monopoly privileges could be created only by Parliament

135 petitions

8000 signatures

in support of interlopers

8 petitions

2500 signatures

in support of Company

1698: Monopoly abolished

Both sides petition Parliament

Abolishing monopolies (cont.)

Case 2: East India Company

Monopoly of textile imports from India & China

Thanks to heavy bribes to James II

After 1688

Monopoly abolished as a result of petitions

Parliament didn't accept the offer of bribes from Company

Wool industry

Attempted to ban

the wearing

of fustian clothes

Fustian (linen + cotton) producers

in Manchester, Lancaster, & Liverpool

Fustian producers won (Manchester Act of 1736)

Late 18c: Innovation in cotton cloth manufacturing

Failed attempt to monopolize the market

Both sides petition Parliament

Managed to ban the import

of Asian silk & calicoes (in 1721)

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

3

Interpret post-1688 England with the theory

Transportation Revolution

Since 1688: Investments in canals & roads 

Canals

Link most important manufacturing areas by 1810

Reduce cost of moving around:

cotton textiles

raw cottons

coal for steam engines

Source: Mike Stevens

Transportation Revolution (cont.)

Thanks to secure property rights

River Salwerpe

Timothy Baldwyn invested 6,000 pounds 

to make the river navigable

A bill was introduced to Parliament

to transfer rights to charge for navigation

to Earl of Shrewsbury & Lord Coventry

Baldwyn petitioned against the bill

The bill failed to pass Parliament

e.g.

Image soucre: Wikipedia

Innovators had no prior experience with transportation

James Brindley (millwright: corn mill maker)

Thomas Telford (stonemason)

John Smeaton (instrument maker)

Transportation Revolution (cont.)

Canals

Roads

John McAdam (son of minor aristocrat) invented tarmac in 1816

Railways

Richard Trevithick (miner)

invented steam trains in 1804

George Stephenson (son of illiterate father)

invented The Rocket in 1804

i.e. free entry of new businesses

After 1760, # of patented inventions jumped up

Industrial Revolution

1780-1800: English exports (mainly cotton textiles) doubled

Steam engines

Iron manufacturing

Cotton spinning

Cotton weaving

Invented by James Watt in 1760s

Built on invention by Dionysius Papin in German state of Kassel

Papin built world's first steamboat in 1705

But river traffic was the monopoly of a guild of boatmen

Kassel govt didn't allow him to make a boat trip

Industrial Revolution #1: Steam Engine

A steam engine built to James Watt's patent in 1848

(Source: Wikimedia Commons)

"I have ... got an Act of Parliament vesting the property of my new Fire engines in me ... for twenty five years to come, which ... will be very beneficial to me" (p. 104)

Iron purification by Henry Cort in the 1780s

Use of coal to smelt iron by Abraham Darby in 1709

Coke-making by John Smeaton in 1792

Machine parts, nails, and tools became easier to make

Industrial Revolution #2: Iron manufacturing

1769: Water frame by Richard Arkwright

# of hours to spin

100 pounds (45.4kg) of cotton

50,000

135

1764: Spinning jenny by James Hargreaves

1770: Spinning mule by Samuel Crompton

Industrial Revolution #3: Spinning machines

hand

mule

1733: Flying shuttle by John Kay

1785: Power loom by Edmund Cartwright

Industrial Revolution #4: Weaving machines

Industrial Revolution (cont.)

4/5 of cotton textile factory owners:

no previous experience of manufacturing

i.e. free entry of new businesses

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

4

cf. Lecture 2

Interpret post-1688 England with the theory

First Reform Act of 1832

Lifted the ban on importing all grains (mostly wheat)

when their price is too low

Large landowners

enjoy high profits

thanks to the laws

Manufacturers

lose profits

by paying high wages

Enfranchised factory owners & middle class

in Birmingham, Leeds, Manchester, & Sheffield

1846: Corn Laws repealed

Manufacturers now represented by Parliament

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Summary: Inclusive institutions led to prosperity

Bill of Rights

Petitioning

Monopolies abolished

Property ownership reorganized

Attempt to ban cotton

failed

Innovation in

transportation

steam engine

iron manufacturing

cotton manufacturing

First Reform Act

Class Discussion Time

Class discussion time

Does Why Nations Fail's theory explains

post-WWII Japan's economic performance?

What do we need to know

to answer this question?

Japan's real GDP per capita over 1960-2017

source: World Bank

Yen

(2010)

Mistakes

do not count

In this course...

I want you to 

Fail gracefully

Because...

Pick a country

And discuss whether 

Theory of Why Nations Fail can

explain economic performances

of the country of your choice

Term Paper

Pick a country

And discuss whether 

Theory of Why Nations Fail can

explain economic performances

of the country of your choice

Term Paper

Pick a country

You cannot choose a country of another student's choice

First come, first served

Post which country you've chosen on Prulu discussion board

The following countries cannot be chosen

as discussed in detail by Why Nations Fail 

Argentina

Australia

Botswana

Brazil

China (except since 1979)

Colombia

DR Congo 

Ethiopia (except since the 1990s)

France

Guatemala

Japan

North Korea

Mexico

Russia (except since the 1990s)

Sierra Leone

Somalia

South Africa

Spain

United Kingdom

United States

Uzbekistan

Zimbabwe

Pick a country (cont.)

Weeks 2-4: How institutions affect prosperity

October 9

Chapter 3

October 16

Chapter 7

October 23

Chapter 8

North/South Korea

the Congo

How institutions matter for prosperity

Why did

Industrial Revolution

take place

in England?

History of England

from 13c to 19c

Extractive institutions cause poverty

Inclusive institutions lead to prosperity

Ottoman Empire

Austria-Hungary

Russian Empire

Ming/Qing dynasties

Ethiopia

Somalia 

Next Week

Your to-do list until next class

Pick a country for your term paper

and post it on Prulu (if you haven't)

Read Chapter 8 & pp. 120-121 on Ottoman Empire

and post questions on Prulu

1

2

3

Think about whether Why Nations Fail explains

Japan's growth slowdown since the 1990s

Politics through the Lens of Economics (2018): Lecture 3

By Masayuki Kudamatsu

Politics through the Lens of Economics (2018): Lecture 3

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