“Institutions have a first-order effect whereas policies only have a second-order effect” says Peter Boettke in reply to Ha-Joon Chang (pdf) and in defence of Douglass North.
One piece of evidence for this is that, give or take a standard error or two, economic growth has been pretty much the same across many liberal democracies - consistent with the theory that policy variation within similarish institutions has little effect on long-run growth.
Another piece of evidence - albeit not perhaps one that Boettke or North will like - is a new paper (pdf) by Steven Pincus and James Robinson, who argue that the Glorious Revolution of 1688 laid the foundations for the industrial revolution.
However, this was not because it created secure property rights; these pre-dated the revolution. Instead, they say:
The Glorious Revolution was not significant because it was a change in the de jure rules, but it was important in helping to cement a change in the distribution of de facto power in the country.
That change was from landed property towards finance and manufacturing. This led to several policy changes that promoted economic growth. Turnpike Acts helped build new roads which facilitated trade; the abolition of the hearth tax enriched the middle classes; and the establishment of the Bank of England boosted the availability of credit for manufacturing.
But, say Pincus and Robinson, there was another effect. In empowering parliament, the revolution allowed the Whigs to tax land in order to pay for the expensive Nine Years’ War - a war which boosted demand for English manufactures. In this way, the revolution helped accelerate a shift in economic power from land to commerce and manufacturing.
There are, I suspect, three broad lessons here:
1. Institutional change is not exogenous. It is the product of incentives and interests - the growing power of commerce, in this case. It is for this reason that, as Boettke says, attempts to impose institutions from outside often fail.
2. Institutions are not neutral. They favour some interests over others. As luck would have it, the interests favoured by the Glorious Revolution happened to be interests that promoted economic growth generally.
3. Institutional change has long-run, unforeseeable effects. Neither William III nor his supporters thought they were laying the foundations for one of the greatest transformations in human history.
On the other hand the example does not solve the chicken and egg problem of which came first. That most Glorious Revolution could not have happened unless commercial society was already powerful with a capitalist ideology. Just in the same way the mps who started the civil war against Charles the first said the king was turning England in to a lawless tyranny overthrowing Magna Charta; but they seemed to have no difficulty overthrowing the King so he cannot have been too successful in his tyranny. And the feudal Barons thought the King was above himself so they rebelled and so Parliament arose. Without the rebellion the Institution would not exist. The institution is created to express certain political and moral ideas the people involved believe in. The Institution may perpetuate the ideas but cannot be the origin of them.
Posted by: Keith | July 17, 2011 at 01:59 AM
Keith is right.
Obviously economic conditions influence institutional change and vice versa. It's evolution.
Ha-Joon Chang is complaining that the discussion is dominated by free-market fundamentalists, who believe that private property and free markets maximise economic growth in all circumstances.
It's amazing how right-wing economists can watch China growing at 10% annually and the USA growing at 1% and conclude that the solution for the US is to further reduce the role of government in the economy.
Posted by: BT | July 17, 2011 at 09:09 AM
BT's dichotomy between the US and China is totally misplaced: China grows so fast because it's catching up with the US, skipping all of the innovation that had to take place in current rich countries. It is still small compared to the US, and particularly when compared by population and resources.
Furthermore, the only reason China is growing so rapidly is because of its liberalisation of the economy. I see no good explanation as to why the reverse could be true.
Re the Bank of England, there is very little evidence that it provided so-called "crucial" loans to manufacturing. As late as 1873 the amount of capital going through the BoE (and thus to the London stock market) that went to the private sector was still only 41% of the City's total, the majority of which was to both domestic and colonial railways. Banks and discounting houses accounted for just 5%, utilities, canals and waterworks just 1%, and another 1% went to commercial and industrial manufacturing ends. (Michie 1999, The London Stock Exchange: A History, p.88)
The BoE continued to be a way for the government to raise debt to finance wars and imperial endeavours.
The vast majority of manufacturing investment was actually routed through family and community credit ties, provincial banks, and provincial stock exchanges. It was only through the BoE's growing and increasingly effective enforcement of its monopoly on currency issuance, along with the access to government debt markets that caused a concentration of finance in London. Yes, it may have given useful loans, but there is no evidence to suggest that it was the only institution that could have provided the capital crucial to industrial development. If anything, the reverse is true.
Posted by: Anton Howes | July 23, 2011 at 06:45 PM