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
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
| 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
Source: Wikimedia Commons
hand
mule
1733: Flying shuttle by John Kay
1785: Power loom by Edmund Cartwright
Industrial Revolution #4: Weaving machines
Source: Wikimedia Commons
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