Forging ahead, falling behind and fighting back: British economic growth from the industrial revolution to the financial crisis

Nick Crafts can be viewed as the doyen of British economic history. His major publications date back to the 1970s – a favorite of mine is this piece from 1977 on the role played by chance in determining whether the Industrial Revolution would occur in England or France.  He is also the joint author of the Crafts-Harley interpretation of the Industrial Revolution.  But, perhaps because the majority of his research focuses on British economic history, he remains highly underrated outside of the UK.  His new book Forging ahead, falling behind and fighting back: British economic growth from the industrial revolution to the financial crisis summarizes much of his research.

I’ve reviewed it for the Economic History Review. But given the whims of academic publishing, it may be a long time until my review appears in print so I’ve decided to post a preview of my draft below.


Why was Britain the first industrial nation and the workshop of the world? Why was it eventually caught up and overtaken? Why once it had fallen behind the United States, did it fall further behind its European rivals in the Post-War period? And how did it recover its relative position in the 1980s and 1990s? All these questions are addressed in Nicholas Crafts’s slim new book.

In Forging ahead, falling behind and fighting back, Crafts provides a macroeconomic perspective on the British economy from 1750 to today. The word macro is advisory. Crafts surveys the British economy from 1000 feet, through the lens of growth theory and growth accounting. The upside of this approach is that he delivers a lot of insight in a small number of pages. Readers looking for discussions of individual inventors, innovations, politicians, or discussion of specific policy decisions can look elsewhere.

The first part of the book provides an overview of the Crafts-Harley view of the British Industrial Revolution. This view emphasizes the limited scope of economic change in the early 19th century. On the eve of the Industrial Revolution, the British economy already had a comparatively modern structure, with many individuals working outside agriculture. Growth between 1770 and 1850 was highly reliant on a few key sectors and TFP growth was modest (0.4% a year). Most workers remained employed in traditional sectors of the economy. It took until the second half of the 19th century for the benefits of steam, the general purpose technology of the age, to fully diffuse through the economy. Nonetheless, from a long-run perspective, the achievements of this period, a small but sustained increases in per capita GDP despite rapid population growth, were indeed revolutionary.

An important theme of the book is institutional path dependency. Characteristics of Britain’s early position as an industrial leader continued to shape its political economy down to the end of the 20th century. Crafts mentions two interesting instances of this. First, Britain’s precocious reliance on food imports from the early 19th century onwards left a legacy that was favorable of free trade. Elsewhere in the world democratization in the late 19th century often led to protectionism, but in Britain, it solidified support for free trade because, after the expansion of the franchise, the median voter was an urban worker dependent on cheap imported bread. Second, industrial relationships were shaped the nature of the economy in the 19th century. Britain thus inherited a strong tradition of craft unions that would have consequences in conflicts between labor and capital in the 20th century.

The second part of the book considers the late Victorian, Edwardian, and inter-war periods. It was in the late 19th century that the United States overtook Britain. A venerable scholarship has identified this period as one of economic failure. Crafts, however, largely follows McCloskey in exonerating Edwardian Britain from the charge of economic failure. The presence of fierce competition limited managerial inefficiencies in most areas of the economy; though there were notable failures in sectors where competition was limited such as the railways. The main policies errors in this area were thus ones of omission rather than commission: more could have been done to invest in R&D and support basic science – an area where the US certainly invested in more than the UK.

The seeds of failure, for Crafts, were sown in the interwar period. Traditionally these years have been viewed relatively favorably by economic historians, as the 1930s saw a shift away from Industrial Revolution patterns of economic activity and investment in new sectors. However, in a comparative light, TFP growth in the interwar period was significantly slower than in the US. The new industries did not establish a strong export position. This period also saw the establishment of a managed economy, in which policymakers acceded to a marked decline in market competition. Protectionism and cartelization kept profits high but at a cost of long-run productivity growth that would only be fully revealed in the post-war period.

Most economic historians view the postwar period through the lens of Les Trente Glorieuses. But in Britain, it has long been recognized that this was an era of missed opportunities. Simple growth accounting suggests that Britain underperformed relative to its European peers. Thus though the British economy grew faster in these years than in any other period; it is in this period that Britain’s relative failure should be located.

Crafts examines this failure using insights from the literature on “varieties of capitalism” which contrasts coordinated market economies like West Germany with liberal market economies like the United States or Britain. In the favorable conditions of postwar recovery and growth, coordinated market economies saw labor cooperate with capital enabling both high investment and wage restraint. Britain, however, lacked the corporatist trade unions of France or West Germany. As a legacy of the Industrial Revolution, it inherited a diverse set of overlapping craft unions which could not internalize the benefits of wage restraint and often opposed new technologies or managerial techniques. Britain functioned as a dysfunctional liberal market economy, one that became increasingly sclerotic as the 1960s passed into the 1970s.

An important insight I got from this book is that government failure and market failure are not independent.  Examples of government failure from the postwar period are plentiful. Industrial policy was meant to “pick winners.” But “it was losers like Ross Royce, British Leyland ad Alfred Herbert who picked Minsters” (p. 91). Market power became increasingly concentrated. Approximately 1/3 of the British economy in the 1950s was cartelized and 3/4 saw some level of price fixing. Britain’s exclusion from the EEC until the 1970s meant that protective barriers were high, enabling inefficient firms and managerial practices to survive. High marginal rates of taxation and weak corporate governance encouraged managers to take their salary in the form of in-kind benefits, and deterred innovation. Labor relations became increasingly hostile as the external economic environment worsened following the end of Bretton Woods.

Britain recovered its relative economic position after 1979 through radical economic reforms and a dramatic shift in policy objectives. Though of course, the Thatcher period saw numerous missteps and policy blunders, what Crafts argues was most important was that there was an increase in product market competition, a reduction in market distortions, and a reduction of trade union power, factors provided the space that enabled the British economy to benefit from the ICT revolution in the 1990s.

Rarely does one wish a book to be longer. But this is the case with Forging Ahead, Falling Behind, and Fighting Back. In particular, while a short and sharp overview of the Industrial Revolution is entirely appropriate, given the number of pages written on this topic in recent years, the last part of the book does need extra pages; the argument here is too brief and requires more evidence and substantive argumentation. One wishes, for instance, that the theme of institutional path dependency was developed in more detail. Despite this, Forging Ahead, Falling Behind, and Fighting Back is a notable achievement. It provides a masterly survey of British economy history tied together by insights from economic theory.

Conservative Parties and the Birth of Democracy

Understanding how political parties function is an area where recent research in political science has contributed major insights. Political parties are a fairly recent phenomenon. Prior to the 19th century, there were factions and loose groupings – the Optimates and Populares in Republican Rome, Tories and Whigs in late 17th century England, and Girondins and Jacobins in the French Revolution – but not organized parties. They were looser groupings that centered around dominant individuals – a Marius or Sulla, a Lord Shaftsbury, or a Brissot or Robespierre; but not parties with structured platforms and a deep well of local support.

I recently reviewed Daniel Ziblatt‘s recent book Conservative Parties and the Birth of Democracy for the Journal of Economic History (gated and ungated). Ziblatt provides new insights into the key role played by conservative parties in the formation and stabilization of democracy in Western Europe. Ziblatt’s thesis is that where conservative parties were able to become entrenched and organized political forces, the prospects for liberal democracy were fairly good. But where conservative parties remained weak, democracy was likely to remain poorly institutionalized. Under these circumstances, elites simply had too much to lose from acquiescing in universal suffrage.

Ziblatt contrasts the fate of England where a popular conservative party did take on solid roots in the late 19th century with that of Germany. As I write in my review:

“The central insight Ziblatt emphasizes throughout is game theoretic: the absence of a party to organize around meant that economic elites lacked the ability to strategically defend their interests and hence became willing to ally with any forces that might help them protect their property. While in Britain, the well-institutionalized Parliamentary Conservative party moderated and sidelined the more reactionary and xenophobic elements in British life, the absence of such a strong party meant that in Germany, the right tended towards antisemitism and other forms of extremism . . . “

“. .  . Stable and lasting democratization required “buy-in” from old regime elites and this buy-in can only occur if there are institutional mechanisms in place that are capable of assuaging their fears and moderating the influence of extremists. In late 19th and early 20th century Europe, strong professional conservative parties served this purpose. In the absence of such a party the transition to democracy will likely be temporary and unstable.”

Do read the full review.

The Enlightenment and the Birth of Racism

I have a new essay up at Liberal Currents in which I respond to the charge that the Enlightenment saw the birth of modern racial theorizing. Thanks go to Adam Gurri for getting me to write it and for him and others at Liberal Currents for giving plenty of comments along the way.

The piece was inspired by Jamel Bouie who on Twitter and in a longer piece claimed that

“Race as we understand it—a biological taxonomy that turns physical difference into relations of domination—is a product of the Enlightenment.

In the piece, I take issue with this claim and provide evidence both of racial theorizing predating the Enlightenment and that modern scientific racism did not fully emerge until the 19th century, when it drew less on Enlightenment ideas than on Counter-Enlightenment thought.

In their eagerness to damn the Enlightenment, modern progressives neglect the contribution to racial theorizing of numerous Counter-Enlightenment thinkers from Joseph de Maistre to Thomas Carlyle.

Of course, other pieces have responded to Bouie. Including Ben Domenech at the Federalist and Katie Kelaidis at Quillette (both excellent). Hopefully, my essay adds to this conversation.

Revisiting Epstein’s Freedom and Growth

I was fortunate to be invited give the Epstein Lecture at LSE this March. The series is named after the great LSE economic historian Larry (Stephen) Epstein. Here I’ll summarize why it was such an honor to give the lectures. The content of the lecture will be another post.

Epstein was a historian whose origin field of expertise was medieval Italy. I encountered him through Freedom and Growth. Published in 2000, I first read it a couple of years later, perhaps in 2002 or 2003. At the time I was devoted to a story of economic growth shaped by Douglass North, particularly Structure and Change in Economic History (1981).

The focus of Structure and Change was on transaction costs. High transaction costs limited market exchange and kept societies poor for most of history. Sustained economic growth could only occur once transaction costs fell to a level that allowed markets to expand and the division of labor to develop. On this view, market expansion or Smithian growth was itself a stimulus to technological innovation. But what kept transaction costs high?

One answer North gave was the state. To paraphrase: the state had the ability to both keep a society mired in poverty through predatory behavior and to provide the preconditions for growth by securing property rights. The origins of sustained economic growth for North lay in institutional changes that occurred secured property rights and lowered transaction costs. The most important such institutional change was the Glorious Revolution of 1688.

North’s account received many challenges, but the issue that Epstein honed in on was the assumption that there was such a state, able to either revoke or secure property rights. It was assumed that “rulers rule”. Epstein contested this arguing that New Institutional Economists

“project backwards in time a form of centralised sovereignty and jurisdictional integration that was first achieved in Continental Europe during the nineteenth century; they therefore fundamentally misrepresent the character of pre-modern states.”

North, Wallis, and Weingast would address this in their 2009 Violence and Social Orders. But Epstein’s criticism was spot on in 2000. Epstein argued that alongside the problem of predatory states, a central problem was the lack of integrated markets. He attributed market disintegration to coordination and prisoners’ dilemma problems between political authorities. In so doing, Epstein set the agenda for the subsequent “state capacity” research agenda.

Epstein made several points which continued to be expanded upon by current research (see here). First, he documented that the lower interest rates that the British state paid after 1688 were characteristic of city republics from the middle ages onwards. He argued that the English monarchy in the 17th century was characterized by an anomalously backwards financial system. Lower interest rates after 1688 partly represent a convergence to the Republican norm achieved by Italian city-states centuries earlier.

Second, he challenged the argument that monarchies “overtaxed” cities. There was “no evidence that townspeople paid higher taxes under monarchies than republics”. Per capita taxes were likely higher in Republican city-states.

Third, he disputed that Republican city-states like Florence brought economic freedom noting that “republican subjects faced several limitations to their economic and political freedoms that monarchical subjects did not”. All of this challenged generalizations made by historical sociologists like Charles Tilly and economic historians like North.

Epstein’s historical evidence came from medieval Italy. Late medieval Italy was highly urbanized and prosperous by pre-industrial standards. According to Broadberry’s estimates, per capita GDP in Italy in 1450 was not matched by England until 1750. Like growth elsewhere in the premodern world, it was Smithian growth, driven by trade, market integration, and the division of labor. But unlike in England, this Smithian growth did not continue and blossom into modern growth. Epstein’s explanation for why this did not take place was that late medieval Italy suffered an “integration crisis”.

He saw the late medieval period as characterized by new opportunities for growth and innovation. Urbanization increased. Capital markets expanded and deepened. Interregional trade developed. Proto-industrialization took place. But Epstein contended these opportunities were only seized in areas where political authority was centralization.

In reference to proto-industrialization, he observed that

“Crucially, the success of regional crafts was inversely proportional to the concentration of economic and institutional power in the hands of a dominant city.”

With respect to the establishment of permanent fairs, he noted that

In fifteenth-century Lombardy, new fairs proliferated only after the balance of power shifted decisively from the former city-states to the territorial prince with Francesco Sforza’s victory in 1447.

Market integration was complemented and perhaps driven by political integration. Integrated urban hierarchies were themselves the product of political centralization.

“Centralisation underlies all the major institutional changes to market structures previously described. It lowered domestic transport costs, made it easier to enforce contracts and to match demand and supply, intensified economic competition between towns and strengthened urban hierarchies, weakened urban monopolies over the countryside, and stimulated labour mobility and technological diffusion.”

The more centralized parts of Italy — notably Lombardy — were better able to benefit from these trends than was Tuscany. But in general, political fragmentation and regional diversity were “distinctive features of pre-modern Italy” in general and an impediment to its long-run growth prospects.

Unlike in his analysis of interest rates, Epstein brought little data to bear on these claims and I am unaware of subsequent research on late medieval Italy. As such, the thesis of a late medieval integration crisis laid out in Freedom and Growth remains speculative. Epstein would no doubt have fill in the details had he lived longer. Subsequent research has mostly focused on early modern rather than medieval Europe (see here).  But the larger message: the importance of the state for premodern economic development has been central to subsequent research, including my own work (e.g. here).

The Counterfactual and the Factual

Historians often appear skeptical of counterfactual arguments. E.H. Carr argued that “a historian should never deal in speculation about what did not happen” (Carr, 1961, 127). Michael Oakeshott described counterfactual reasoning as ‘a monstrous incursion of science into the world of history’ (quoted in Ferguson, 1999). More recently, Eric Foner is reported to have found “counterfactuals absurd. A historian’s job is not to speculate about alternative universes …It’s to figure out what happened and why” (cited in Parry, 2016, here).

Such skepticism is striking to the modern economic historian, who since Robert Fogel’s work on the impact of the railroad on American economic growth has been trained to think explicitly in terms of counterfactuals. Far from being the absurdity Foner suggests, counterfactuals represent the gold standard in economic history today. Why? Because they are the sine qua of causal analysis. As David Hume noted, a counterfactual is exactly what we invoke whenever we use the word “cause”: “an object, followed by another, . . . where, if the first object had not been, the second would had never existed” (Hume, 1748, Part II).

Hume’s reasoning can best be understood in the context of a controlled experiment. Suppose a group of randomly selected patients are treated with a new drug while another randomly selected group are assigned a placebo. If the treatment and control groups were ex ante indistinguishable, then the difference between the outcomes for these two groups is the causal effect of the drug. The outcome for the control group provides the relevant counterfactual which enables us to assess the effectiveness of the drug.

The modern revival of economic history is based largely on the skill with which economic historians have been able to use econometric tools to replicate this style of experimental design using observational data. Such techniques enable economic historians to assess such counterfactuals as how much did slavery contribute to Africa’s underdevelopment?, what was the impact of the Peruvian Mita? or the effects of the Dust bowl?

The rejection of the counterfactual approach by historians such as Foner seems to run deep and constitutes a major divide between historians and economic historians; it is therefore well worth exploring its source.

To begin with, let’s set aside some of the reasons why historians have dismissed counterfactuals in the past. We need not, for instance, pay too much attention to the attachment of Marxists (like Carr) and Hegelian idealists (like Oakeshott) to teleological history. Of course, if history represents the unfolding of a dialectical process, then events that did not occur cannot, by definition, constitute the subject of historical analysis. Crude Marxism (and Hegelianism) is, I hope, still out of favor. But another reason why historians are skeptical of the counterfactual seems better grounded. And this is historians’ attachment to the factual.

Consider, Niall Ferguson’s edited volume Virtual History. It provides an excellent defense of counterfactual history. The counterfactuals considered by Ferguson and co, however, are largely in military or diplomatic history: what would have happened had the Nazis’ invaded Britain? etc.

These counterfactuals are a useful way to think through a question. But their power typically depends on reversing a single decision or event, i.e. suppose Hitler doesn’t issue his Stop Order in June 1940 or Edward Grey decides not to defend Belgium neutrality, what then? To be plausible everything else has to be held constant. This means that counterfactuals in diplomatic and military history shed light on the short term consequences of particular events. But the ceteris paribus assumption becomes harder to maintain as we consider events further removed from the initial counterfactual intervention. Thus, we have a reasonable idea of what Nazi rule of Britain in 1940 might have looked like — with the SS hunting down Jews, liberals, and intellectuals and restoring Edward VIII to the throne. But once we consider the outcomes of a Nazi ruled Britain into the 1950s and 1960s, we have much less guidance. Lacking any documentary evidence of the intentions of Britain’s Nazi rulers in the post-war era leaves us in the realm of historical fiction like Robert Harris’ Fatherland or CJ Sansom’s Dominion; there are simply too many degrees of freedom to do conduct historical analysis. Counterfactuals become problematic once we run out of facts to discipline our analysis.

This is the one fact it a valid reason for historians to be skeptical of counterfactuals. The actual historical record has to serve as a constant constraint on historical writing. This goes back to Leopold von Ranke, the scholar responsible for history’s emergence as an academic discipline in the 19th century. Ranke and his followers insisted on rigorous documentation and established the idea that the craft of the historian lay in the discovery, assembly, and analysis of primary sources. Ranke urged historians to focus on what actually happened; simply put, the facts ma’am, just the facts. Many criticisms have been levied at Ranke in the intervening 150 years, and to jaded post-modern eyes this approach no doubt appears hopeless naïve. But we should not dismiss Ranke’s strictures too quickly given what happens when historians abandon them (here and here). What is important here is that the same Rankian strictures that helped form history as an academic discipline, also rule out speculating about things that didn’t happen. They instill in historians a natural skepticism of counterfactual, alternative, history.

Moreover, while military history lends itself naturally to counterfactual analysis, other areas of history such as social or economic history where change is typically more gradual appear less suitable. After all: how is one to assess such complex counterfactuals as the fate of slavery in the US South in the absence of the Civil War?

These are questions which benefit from counterfactual reasoning but which, unlike diplomatic, political or military history, often requires training in the social sciences to answer. For example, take a question that is of interest to historians of capitalism: would slavery have disappeared quickly without the civil war?

From the 1950s to the 1970s, cliometric historians utilized economic theory to try to answer this. They employed economic models to assess the profitably of slavery and to infer the expectations of slave owners in the south (here). The main finding was that, contrary to the suppositions of historians (who at the time were often sympathetic to the southern cause): slavery was extremely profitable in 1860 and slaveholders foresaw the institution lasting indefinitely. In this case, their use of counterfactual reasoning overturned the previous historical orthodoxy.

The issue of the economic importance of slavery to the American economy in the early nineteenth century is also a counterfactual question. Implicitly it asks what would GDP have been in the absence of the slave-produced cotton. Here it is not only economic historians who are making counterfactual arguments. Foner championed Ed Baptist’s book The Half Has Never Been Told. But in it, Baptist argued that almost 50% of GDP in 1836 was due to slavery, itself a counterfactual argument. He is arguing that, in the absence of slavery, the American economy would have been roughly half the size that it was. This claim is certainly false based as it is on double-counting. But the problem with Baptist’s argument is not that he had made a counterfactual claim, but that he conducted counterfactual analysis ineptly and that his estimates are riddled with errors (see here and here).

All of this sheds light on why counterfactuals are so often dismissed by historians. There is an important and deeply shared sense that the counterfactual approach is ahistorical and an unfamiliarity with the techniques involved. A natural lesson from the Baptist affair is that historians should become more familiar with the powerful tools social scientists have to assess counterfactual questions. Taking counterfactuals seriously is a way to make progress on uncovering answers to important historical questions. But there is also a sense in which the historians’ suspicion of counterfactual may be justified.

There remain many questions where counterfactuals are not especially useful. The more complex the event, the harder it is to isolate the relevant counterfactual. Recently Bruno Gonçalves Rosi at Notes on Liberty suggested such a counterfactual: “no Protestant Reformation, no freedom of conscience as we know today”.

But in comparison to what we have considered thus far, this is a tricky counterfactual to assess. Suppose Bruno had said, “no Martin Luther, no freedom of conscience as we know it today”. This would be easier to argue against as one could simply note that absent Luther there probably won’t have been a Reformation starting in 1517, but at some point in the 1520s-1530s, it is likely that someone else would have taken Luther’s place and overthrown the Catholic Church. But taking the entire Reformation as a single treatment and assessing its causal effect is much harder to do.

In particular, we have to assess two separate probabilities: (i) the probability of freedom of conscience emerging in Europe in the absence of the Reformation (P(Freedom of conscience|No Reformation)); and (ii) the probability of freedom of conscience emerging in Europe in the presence of the Reformation (P(Freedom of conscience| Reformation)). For Bruno’s argument to hold we don’t just need P(FC|R) > P (FC|NR), which is eminently plausible. We also need P(FC|NR) to equal zero. This seems implausible.

The problem becomes still more complex once one recognizes that the Protestant Reformation was itself the product of economic, social, political and technological changes taking place in Europe. If our counterfactual analysis takes away the Reformation but leaves in place the factors that helped to give rise to it (urbanization, the printing press, political fragmentation, corruption etc.), then it is unclear what the counterfactual actually tells us. This problem can be illustrated by considering a causal diagram of the sort developed by Judea Perle (2000).

Here we are interested in the effect of D (the Reformation) on Y (freedom of conscience). The problem is that if we observe a correlation between D and Y, we don’t know if it is causal. This is because of the presence of A, B, and F. Perhaps these can be controlled for. But there is also C. We can think of C as the printing press.

The printing press has a large role in the success of the Reformation (Rubin 2014). But it also stimulated urbanization and economic growth and plausibly had an independent role in stimulating the developments that eventually gave rise to modern liberalism, rule of law, and freedom of conscience. The endogeneity problem here seems intractable.

Absent some way to control for all these potential confounders, we are unable to estimate the causal effects of the Protestant Reformation on something like freedom of conscience. In contrast to the purely economic questions considered above, we don’t have a good theoretical understanding of the emergence of religious freedom. Counterfactual reasoning only gets us so far.

Historians need economic history (and this means economic theory and econometrics). And economists need historians. They need historians to make sense of the complexity of the world and because of their expertise and skill in handling evidence.

Some Thoughts on State Capacity

State capacity is an important topic and the subject of much recent attention in both development economics and economic history. Together with Noel Johnson I’ve recently written a survey article on the topic (here). At the same time, many libertarians and classical liberals are uncomfortable with the concept (see here and here). I think these criticisms are useful but misplaced. Addressing them will hopefully move the debate forward in a useful fashion.

Here I will just focus one issue. This is the argument recently made by Alex Salter that state capacity is a black box. Alex notes correctly that we have a detailed and convincing theory for how markets can lead to economic growth (by directing resources to their most efficient use). In contrast, according to Alex:

“State capacity, by itself, addresses neither the information issue nor the incentive issue. While governance institutions obviously began centralizing at the beginning of the modern era, this is just a morphological description of what happened to institutions. On its own, that’s insufficient as a causal explanation”.

I think Alex and other critics are on the wrong track here. State capacity is not alternative explanation for economic growth to that offered by markets. The relevant question is what impeded market development before, say, 1700, and what enabled the growth of markets after around 1700. The evidence provided by a body of research suggests that prior to 1700 market development was impeded by political fragmentation both within and between states. Critics of the state capacity argument should engage with this literature.

A second claim Alex makes is that we lack a theory for why the more centralized states that arose after 1700 were less rent-seeking and predatory than their weaker and more internally fragmented predecessors. But in fact we have a fairly good understanding of many of the mechanisms responsible for the demise of the more costly forms of recent seeking that characterized medieval and early modern Europe. This understanding is based on the work of James Buchanan and Mancur Olson.

The basic argument is this. Medieval and early modern states were mostly devices for rent-extraction and rent-seeking. But this rent-extraction and rent-seeking was largely decentralized. They collected taxes through a variety of costly and inefficient means (such as selling monopolies). They then spent the tax revenue on costly wars.

Decentralized rent-extraction was costly and inefficient. For example, it is well known that weights and measures varied from place to place in preindustrial Europe. What is less well known is that there were institutional reasons for this, as each local lord wanted to use his own measures in order to extract more surplus from the peasants who were forced to grind their grain using his mill. Local cities similarly used their own systems of weights and measures in order to extract surplus from traveling merchants. This benefited each local lord and city authority but imposed a large deadweight loss on the economy at large.

The logic of internal tariffs was similar. Each local lord or city would choose their internal tariffs in order to maximize their own income. But we know from elementary microeconomics that in this setting each local authority will set these tariffs “too high” because they will not take into account the effect of their tax rate on the tax revenue of their neighbors who also set their tariffs too high.

When early modern European rulers invested in state capacity, they sought to abolish or restrict such internal tariffs, to impose uniform taxes, and to standardize weights and measures. This resulted in a reduction in deadweight loss as when the king set the tax rate he considered the tax revenue he gets from his entire realm, and internalized the negative externality mentioned above.  The reasoning is identical to that which states that a single combined monopolist may be preferable to an up-stream and down-stream monopolist. When it comes to a public bad (like rent-seeking) a monopolist is preferable to competition.

Political Decentralization and Innovation in early modern Europe

My full review of Joel Mokyr’s A Culture of Growth is forthcoming in the Independent Review. Unfortunately, it won’t be out until the Winter 2017 issue is released so here is a preview. Specifically, I want to discuss one of the main themes of the book and my review: the role of political decentralization in the onset of economic growth in western Europe.

This argument goes back to Montesquieu and David Hume. It is discussed in detail in my paper “Unified China; Divided Europe’’ (forthcoming in the International Economic Review and available here). But though many writers have argued that fragmentation was key to Europe’s eventual rise, these arguments are often underspecified, fail to explain the relevant mechanisms, or do not discuss counter-examples. Mokyr, however, has an original take on the argument which is worth emphasizing and considering in detail.

Mokyr focuses on how the competitive nature of the European state system provided dynamic incentives for economic growth and development. This argument is different from the classic one, according to which political competition led to fiscal competition, lower taxes, and better protection of property rights (see here). That argument rests on a faulty analogy between competition in the marketplace and competition between states.  The main problem it encounters is that while firms can only attract customers by offering lower prices (lower taxes) or better products (better public goods), states can compete with violence. Far from being competitive, low tax states like the Polish-Lithuanian commonwealth were crushed in the high-pressure competitive environment that characterized early modern Europe. The notion that competition produced low taxes is also falsified by the well-established finding that taxes were much higher in early modern Europe than elsewhere in the world.

It is also not the case that political fragmentation is always and everywhere good for economic development. India was fragmented for much of its history. Medieval Ireland was fragmented into countless chiefdom prior to the English conquest. Perhaps we can distinguish between low-intensity but fragmented state systems which tended not to generate competitive pressure such as medieval Ireland or South-East Asia and high-intensity fragmented state systems such as early modern Europe or warring states China. But even then it is not clear that a highly competitive and fragmented state system will be good for growth. In general, political fragmentation raised barriers to trade and impeded market integration. Moreover a competitive state system means more conflict or more resources spent deterring conflict. For this reason political fragmentation tends to result in wasteful military spending. It can be easily shown, for instance, that a much higher proportion of the population spent their lives in the economically wasteful activity of soldiering in fragmented medieval and early modern Europe than did in either the Roman empire or imperial China (see Ko, Koyama, Sng, 2018).

Innovation and Decentralization

What then is Mokyr’s basis for claiming that political fragmentation was crucial for the onset of modern growth? Essentially, for Mokyr the upside of Europe’s political divisions was dynamic. It was the conjunction of political fragmentation with a thriving trans-European intellectual culture that was crucial for the eventual transition to modern growth. The political divisions of Europe meant that innovative and heretical thinkers had an avenue of escape from oppressive political authorities. This escape valve prevented the ideas and innovations of the Renaissance and Reformation from being crushed after the Counter-Reformation became ascendant in southern Europe after 1600. Giordano Bruno was burned in Rome. But in general heretical and subversive thinkers could escape the Inquisition by judiciously moving across borders.

Political fragmentation enabled thinkers from Descartes and Bayle to Voltaire and Rousseau to flee France. It also allowed Hobbes to escape to Paris during the English Civil War and Locke to wait out the anger of Charles II in the Netherlands. Also important was the fact that the political divisions of Europe also meant that no writer or scientist was dependent on the favor of a single, all powerful monarch. A host of different patrons were available and willing to compete to attract the best talents. Christina of Sweden sponsored Descartes. Charles II hired Hobbes as a mathematics teacher for a while. Leibniz was the adornment of the House of Hanover.

The other important point that Mokyr’s stresses is Europe’s cultural unity and interconnectedness. As I conclude in my review, Mokyr’s argument is that

“the cultural unity of Europe meant that the inventors, innovators, and tinkers in England and the Dutch Republic could build on the advances of the European-wide Scientific Revolution. Europe’s interconnectivity due to the Republic of Letters helped to give rise to a continent-wide Enlightenment Culture. In the British Isles, this met a response from apprentice trained and skilled craftsmen able to tinker with and improve existing technologies.  In contrast, political fragmentation in the medieval Middle East or pre-modern India does not seem to have promoted innovation, whereas the political unity of Qing China produced an elite culture that was conservative and that stifled free thinking”.

It is this greater network connectivity that needs particular emphasize and should be the focus of future research into the intellectual origins of growth in western Europe. At present we can only speculate on its origins. The printing press certainly deserves mention as it was the key innovation that helped the diffusion of ideas. Mokyr also points to the postal system as a crucial institutional development that enabled rapid communication across political boundaries. Other factors include the development of a nascent European identity and what Chris Wickham calls, in his recent book on medieval Europe, “the late medieval public sphere” (Wickham, 2016). These developments were important but understudied complements to the fragmented nature of the European state system so frequently highlighted in the literature.