Distributional coalitions, the industrial revolution, and the origins of economic growth in Britain.

• Author: Mokyr, Joel
• Position: Symposium - Author abstract - Report

1. Introduction

   Structure and Change (1981), the recent work of Douglass North and his students, has made the study of institutions fashionable again in economic history. Mancur Olson's Rise and Decline (1982), which appeared only a year after North's Structure and Change, showed that he too was quite persuaded that institutions held the key to understanding why Britain took the leadership in the 18th century to become the first industrial nation. North focused on securing property rights from the threat of the monarchy. Olson regarded rent-seeking through distributional coalitions as critical to economic development and especially decline. He saw society as a constant struggle between creative and productive agents, whose hard work would help an economy enrich itself, and organized groups of lobbyists, special interests, brigands, and tax collectors, whose rent-seeking activity reduced the overall size of the pie and could well turn economic growth into stagnation and even regression. The difference between the two is important: For North, security and constraints on the executive were paramount. For Olson, the nature and origins of property rights were just as important. Almost a decade before North and Weingast's (1989) influential paper, which squarely identified the institutional breakthroughs in Britain with the Glorious Revolution of 1688 and its aftermath, Olson (1982, pp. 78-83, 128) already pointed to the Glorious Revolution as a watershed. These events of 1688-1689 and the preceding Civil Wars, Olson argued, created a stable and strong nationwide government that made Britain into an integrated and large jurisdictional unit, thus weakening most distributional coalitions.

   In light of the growing interests in institutions as a central element in explaining economic growth (Greif 2006; North 2006), the question of how institutions help account for the British Industrial Revolution must be re-examined. Olson (1982, p. 78) thought that the British practically "invented modern economic growth" during their Industrial Revolution. Although the actual spurt in per capita income occurred after and not during the Industrial Revolution, many of the critical changes that laid the foundations for the Great Divergence took place in the years of the classical period that T. S. Ashton associated with it (1760-1830). The difficult question is to what extent institutional changes were necessary for this transformation to occur. The main impetus, surely, came from technology. Along a broad frontier, technological changes transformed the way production took place in textiles, power technology, materials, and transport. Although the "modern sector" still composed a relatively modest part of the economy in 1830, it was growing rapidly and was soon to subsume the bulk of the economy.

   Traditionally, the role that institutions have played in this event has figured heavily in the literature on the topic. Much of their effect has been through their direct encouragement of technological progress (through the British patent system, for instance) or through the importance of secure property rights, enforceable contracts, and constraints on the powers of the executive. Recent work has suggested that the importance of intellectual property rights or other kinds of incentive systems in encouraging innovation has been overrated, however, and secure property rights in and of themselves will not necessarily encourage innovation (Boldrin and Levine 2005). Rather, as Olson pointed out quite correctly, the security of property rights could have ambiguous effects. A bad property right, such as a privilege or sinecure that entitled a successful pressure group to some form of government subsidy or protection or encroached on the incentives of another group, could be damaging to economic development even if it was perfectly secure and well-defined. In what follows, we will present what is essentially an Olsonian model and will place the Industrial Revolution in the context of the slow decline of rent-seeking distributional coalitions. However, it will turn out to be a more complex story than the simple good-institutions-lead-to-growth story.

   It is possible to disagree with some of the details in Olson's analysis, but not with his overall vision. The answers to the questions "why Britain?" and "why the 18th century?" must have two separate, if interrelated, components. First, there is a technological component that explains the advantages that British inventors had over others and that British entrepreneurs had in implementing inventions made elsewhere (Mokyr 2002). Second, there was an institutional advantage that ensured that incentives for talented and resourceful individuals, able to take advantage of the opportunities that technology provided, were properly set up. In other words, there had to be an environment in which opportunistic behavior by Olsonian "bandits" would not create obstacles and hindrances high enough to suppress the technological potential that 18th century Britain developed. The British created a powerful and stable state that simultaneously saw an expansion in the power, wealth, and stability of the central government while encouraging an economic transformation that gradually allowed both industrial technology and liberal commerce to flourish and break out of their mercantilist straitjacket.

   What was behind institutional change? Was ideology an autonomous factor in these changes, or were the basic economic realities on the ground decisive here? Following Keynes' famous argument in The General Theory that ideas were infinitely more important than vested interests in affecting economic outcomes, we may well ask to what extent the institutional changes in 18th century Britain were driven by ideological rather than "real" factors. Economists typically feel that economic realities on the ground determine ideology and beliefs, not the other way around. Adam Smith claimed that the self-interest of merchants in an enlarged national and international commerce tore down the old, local feudal restrictions and in doing so brought prosperity to town and country both, and "commerce and manufactures gradually introduced order and good government and with them the liberty and security of individuals" (1776, Book 3, ch. IV; p. 433 in the Cannan edition). (1) For them, then, the causality ran from economic developments to changes in institutions. But, we shall argue, things were more complex than that.

2. Political Power and Rent-Seeking in 18th Century Britain

   What were the details of the transition whereby further expansion of the British state contributed to improved order and commerce without using the power of the State to deform or even to crush free exchange? In this regard, the paper by North and Weingast (1989), emphasizing how important it was that the Crown and Parliament accept complementary roles that saw each check the power of the other while building the foundation of a stable and nonarbitrary state, has served as a benchmark for all economic interpretations of 18th century political economy. But the details of how this compromise managed to produce the conditions for an economic revolution without disenfranchising the stakeholders in the traditionalist economy have never been made clear.

   At the end of the day, the problem for 18th century Britain, as it is for today's developing economies, was that there was much to be gained by many incumbents from maintaining "obsolete" economic arrangements. Because rent-seeking and efforts to create exclusions and other privileges exploiting existing inefficiencies and creating new ones were so pervasive and so longstanding, blocking coalitions existed that stood to lose much from any set of reforms, no matter how productive. Investments that exploited existing inefficiencies were not easily abandoned if it was not possible to persuade the vested interests that they could benefit from large-scale transformative changes. Though the total gains to the winners--society as a whole might well overwhelm the costs to the losers, the losers will choose to stand in the way of changes if they are not properly compensated. Mancur Olson argued in The Rise and Decline of Nations (1982) that the most successful reforms have often come in moments of crisis when organized vested interests are broken or destabilized or when outside forces can impose new rules without excessive concern for the losses of the entrenched powers. Often the critical factors that allowed the overthrow of existing power coalitions blocking reform were exogenous shocks that led to the breakdown of existing power coalitions and a reordering of priorities. We will show that British institutional developments in the age of the Industrial Revolution demonstrate that such shocks were neither necessary nor sufficient conditions for successful change.

   For the Industrial Revolution to be successful, Britain had to overcome the problem of incumbent landed powers that drew their political, social, and economic strength from the existing blend of feudal customs and traditional arrangements. For example, improving landlords and entrepreneurial farmers had opportunities to innovate in agriculture and to rearrange property rights through enclosures. These opportunities implied, in turn, that those who where least successful in making such experiments should abandon agriculture at considerable cost. Yet the losers in the process were unable to stop it using either legal or extralegal means. After 1750, the state had chosen sides. Although property rights remained one of the central mantras of Parliamentary rules, many of the activities of the 18th century British State "removed, reallocated, and in short, invaded property" (Langford 1991, p. 146). Property required regulation and enforcement, and in the 18th century, decisions were made increasingly on the basis of national interests.

   Outside farming, regulation and transport...