Abstract
This review essay discusses and appraises Douglas Allen’s The Institutional Revolution (2011) as a way of reflecting on the uses of the New Institutional Economics (NIE) in economic history. It praises and defends Allen’s method of asking “what economic problem were these institutions solving?” But it insists that such comparative-institutional analysis be imbedded within a deeper account of institutional change, one driven principally by changes – often endogenous changes – in the extent of the market and in relative scarcities. The essay supports its argument with a variety of examples of the NIE applied to economic history.
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Notes
See Miller et al. (2013) for a formal model in which offering a risky alternative sorts for higher-productivity individuals.
One might argue that the availability of soft naval targets would have been enough to explain the differences in the two systems. But the army was also tempted by incidental (not battle-related) plunder, which was forbidden by rule. Allen argues that the lower variability of land fighting made it easier for the higher-ups to monitor the behavior of army officers directly.
The conception of institutional change I am pushing here actually goes beyond just the effects of the extent of the market to include, as we will see, changes in relative prices more generally. It is essentially the original Northian account of institutional change (North 1981), as elaborated by Ruttan and Hayami (1984). I do not deny the cognitive dimension of institutions, which North stresses in his more recent work (North 2005). But for present purposes the extent of the market is all we need.
Another important factor, as Allen (2011, p. 104) mentions, is that the bourgeois commercial economy had grown significantly in relation to the aristocratic sector, shifting the marginal career choice between commerce and aristocracy increasingly in the direction of the bourgeoisie. I return below to the importance of commerce for explaining British aristocracy.
It is also not clear to me that we need to assume that the rules were “consciously designed.”
“All of the following sources of institutional changes are changes in relative prices: changes in the ratio of factor prices (i.e., changes in the ratio of land to labor, labor to capital, or capital to land), changes in the cost of information, and changes in technology (including significantly and importantly, military technology). Some of these relative price changes will be exogenous … (such as the changes in land/labor ratios that resulted from the plague in late medieval Europe); but most will be endogenous, reflecting the ongoing maximizing efforts of entrepreneurs (political, economic, and military) that will alter relative prices and in consequence induce institutional change. The process by which the entrepreneur acquires skills and knowledge is going to change relative prices by changing perceived costs of measurement and enforcement and by altering perceived costs and benefits of new bargains and contracts.” (North 1990, p. 84.)
I’m being a bit fast-and-loose here about what Smith actually said. For a thorough discussion of Smith, the division of labor, and fixed costs, see (Langlois 2003a).
A typical large elevator of the era could simultaneously empty 12 railroad cars and load two ships at the rate of 24,000 bushels per hour (Cronon 1991, p. 113).
“The factory system … was the necessary outcome of the use of machinery” (Mantoux 1961, p. 246).
Some piece rates continued even in a factory setting, as in the case of master spinners, who were effectively inside contractors who did not own their own machines (Lazonick 1990, pp. 80–85). But these master spinners were themselves employers (indeed the principal employers of child labor in the period) and they did not pay their own employees by the piece.
Physics tells us that all that matters for water power is the height of the fall, and pre-existing large cities, even ones that had grown up around Roman or medieval water mills, are not likely to have had enough suitable falls. “[N]o factory could be established far from a stream powerful and swift enough to set the machines in motion. For this reason it was not in towns that the millowners at first established their factories, but near the hills, in narrow valleys where by using dams it was easy to create an artificial waterfall. The beginnings of the modern factory system are to be found in small hamlets, far removed from those great industrial centres round which the mass of the working population has since gathered. These small places were scattered along the foot of the Pennine range, on all three sides of it; on the west towards Manchester and the Irish Sea, on the south towards the Trent valley, and on the east towards the Yorkshire plain and the North Sea” (Mantoux 1961, p. 247). One could easily multiply citations; but see especially Unwin (1924, pp. 119–123), drawn from primary sources, which also points out that the demand for rural falls led to rapid and dramatic change in water-rights law.
Allen contends that the peculiar forms of paternalism of the “factory colonies” shows that their raison d'être was monitoring for embezzlement and standardization. In fact, even in a world with no embezzlement, such paternalism would be perfectly consistent with the need to attract, retain, and train costly workers in a remote location with thin markets. Indeed, owners like Oldknow generally resorted to long-term contracts and indenture (Chapman 1967, p. 137) – contractual features consistent with a desire to eliminate worker mobility (cf. serfdom once again) but inexplicable in an embezzlement story.
Studying for these exams took years, which was clearly a major investment in human – and probably hostage – capital. But the skills one learned in the Chinese process were much more highly correlated with the tasks of the bureaucracy and public service than were the skills European aristocrats invested in.
As Allen (2011, pp. 101–103) also notes, Oliver Cromwell had moved to a somewhat more meritocratic system during the Republic. This ultimately failed not because variance made it unworkable but because the narrowness of Cromwell’s (largely religion-driven) patron-client network made the larger elite coalition unstable, leading to the Restoration and eventually a sort of equilibrium after the Glorious Revolution.
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Langlois, R.N. The Institutional Revolution: A review essay. Rev Austrian Econ 26, 383–395 (2013). https://doi.org/10.1007/s11138-013-0237-5
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DOI: https://doi.org/10.1007/s11138-013-0237-5