Lesson 11: The Origins of Liberal Democracy in W. Europe

# Lesson 11: The Origins of Liberal Democracy in W. Europe
## ECON 317 · Economics of Development · Fall 2019
### Ryan Safner Assistant Professor of Economics <a href="mailto:safner@hood.edu"> safner@hood.edu</a> <a href="https://github.com/ryansafner/devf19"> ryansafner/devf19</a> <a href="https://devF19.classes.ryansafner.com"> devF19.classes.ryansafner.com</a>

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### [Feudal Europe (c.400-c.1500)](#3)
### [Escape from Feudalism (c.??-c.1500)](#66)
### [Mercantilist Europe (c.1500-c.1800)](#111)
### [The Transitions to Open Access Orders](#171)

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# Feudal Europe (c.400-c.1500)

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# Why Study Feudalism?

- Near synonymous with natural state/limited access order
  - in non-industrial societies, the most valuable resource is **land**
  - land-ownership is key source of economic & political power

- Vestiges of feudalism remain today
]

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# Feudalism

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<iframe width="560" height="315" src="https://www.youtube.com/embed/5Xd_zkMEgkI" frameborder="0" allow="accelerometer; autoplay; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
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# Other Feudalisms

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# European Feudalism

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# European Feudalism

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# European Feudalism (c.500-1500)

- Why was feudalism such a stable equilibrium for about 1,000 years?

- How, when, and why did countries transition out of this equilibrium?
]

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![:scale 100%](https://www.dropbox.com/s/vu9qfhizxeyq5ag/feudalism.jpg?raw=1)
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# Formation of the Feudal System (c.500) I

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# Formation of the Feudal System (c.500) II

.pull-left[
- Fall of Roman Empire and its dependencies by invasions of Germanic, Central Asian, later Scandinavian tribes

- Lots of sources of violence: invaders, bandits, local disputes/feuds without central authority

- Olsonian **roving bandits**: little incentive to produce or invest

]

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# Formation of the Feudal System (c.500) III

- .onfire[Patronage]: weaker individuals pledge themselves to strongmen (**lords**) who protect them from violence, dispense justice, resolve disputes, etc

- Most powerful warlords own large tracts of land that they can control

- Olsonian "stationary bandits"?

]

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![:scale 100%](https://www.dropbox.com/s/okyqur0vh8g5zod/patronage1.jpg?raw=1)
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# Formation of the Feudal System (c.500) IV

- .shout[Feudalism]: most people who who *occupy* but *don't own* land hold it as **tenants** from sovereign in exchange for military (or other) service

- Wealth and power determined almost entirely by land-ownership

- Lords own .onfire[manors] or .onfire[estates]
  - Constitute polities in themselves: entirely of political, economic, social, religious life for tenants

- Landowning elite have military power
  - Rent out land to tenants
  - Tenants constitute the elite's work force, and army - if needed

]

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![:scale 100%](https://www.dropbox.com/s/9n8sxfccy3h9x6h/feudalism.png?raw=1)
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# Formation of the Feudal System (c.500) V

- Crystalized into a *very formal and ritualized* system of **oaths of** .onfire[fealty] to lords

- Reputation and honor are extremely valuable and depreciable assets
  - Being an "oathbreaker" deigns one as a social outcast (and is a virtual death sentence without protection from sovereign lords)

- Person would pledge .onfire[homage] to their superior, to literally *"become his man"* (*homme*)

- Lord would provide protection and justice in exchange for **knight-service**

]

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# Formation of the Feudal System (c.500) V

- A political-military hierarchy that matched the landowner-tenant ownership hierarchy
  - NWW's proportionality principle!

- Lesser lords were .onfire[vassals] to their .onfire[liege] lord to whom they owe loyalty and service, all the way up to the .onfire[monarch]

]

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![:scale 70%](https://www.dropbox.com/s/c2sz0kxki4sm81h/homageedward.jpg?raw=1)
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# Formation of the Feudal System (c.500) VI

- In addition to oathes of fealty, other more "practical" incentives enforce peace, particularly among rival lords

- Hostages taken from rebellions

- Common for children of one aristocratic family to be "sired" by other aristocratic families

- Politically-arranged marriages

]

.source[Williamson, Oliver E. (1983), "Credible Commitments: Using Hostages to Support Exchange," *American Economic Review* 73(4): 519-540]

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# Manorialism I

- Nearly the entirety of Medieval life took place on the lord's .shout[manor] or .shout[fief]

- Subsistence agriculture by sharecropping tenants

- Tenants pay .shout[feudal dues] to their lord
  - often in-kind (fraction of agricultural surplus)
  - may be labor-service, military service, or (much later) **money rent**
]

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# Manorialism II

- .onfire[No separation between political, economic, social, religious spheres of life]

- Lord of the manor is boss, political ruler, judge, policeman, godfather, sometimes religious leader3

- All institutions are **personal** and **partial**, no separate existence of organizations from person
  - Who the lord *is*, their *identity*, matters for patronage!
  - No such thing as rule of law

]

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# The Economics of Sharecropping I

- Consider two individuals:

1. Farmer
2. Landowner

- Farmer wants to farm the landowner's land and generate some surplus

- Farmer and Landowner must write a contract to agree on how to divide the surplus

]

]

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# The Economics of Sharecropping II

- Participation constraints:
  - Contract must pay farmer enough to be willing to farm
  - Contract must pay landowner enough to be willing to rent out land

]

]

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# The Economics of Sharecropping III

- One extreme solution:

- Farmer pays a fixed fee up front, once paid, the farmer keeps all surplus

- Would have to be high enough to be worthwhile to the landlord

- Problems with this solution:
  1. requires high upfront cost to farmer (often poor, capital-constrained)
  2. imposes the entirety of the risk on the farmer (bad harvest, weather, invasion, theft)
]

]

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# The Economics of Sharecropping III

- A risk-sharing agreement: worker pays a smaller (or no) upfront fee, and surplus output is shared between parties somehow
  - for sake of argument, suppose surplus is split 50-50

- Risk of a bad harvest is shared by the farmer and the landowner

]

]

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# The Economics of Sharecropping III

- New **principle-agent problems** introduced:

1. Farmer has an incentive to *underreport* to landlord how much surplus they produce, effectively "stealing" more than their share
  - landowner must monitor farmer to reduce this possibility (and this is costly)

2. Farmer is effectively taxed (50%, in this example) on their output
  - has 50% less incentive to be productive than if they were 100% residual claimant
  - farmer will exert less effort since they get less of the output
]

]

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# The Economics of Sharecropping V

- A tradeoff between risk-sharing and tax on effort/incentives to shirk

- Most real world sharecropping today is a mixture of fixed and variable components

]

]

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# Serfdom I

- Strong disparity in wealth and power between peasants and landowning lords

- Lords had military power, patronage networks, peasants were often dependent
  - there's no "going on your own" in this society
  
- Freemen might become a serf on a lord's manor to escape brigands, violence, bad harvests

]

]

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# Serfdom II

- Formal ceremony of **bondage** between lord and serf (akin to **homage** between lords)

> "By the Lord before whom this sanctuary is holy, I will to [NAME] be true and faithful, and love all which he loves and shun all which he shuns, according to the laws of God and the order of the world. Nor will I ever with will or action, through word or deed, do anything which is unpleasing to him, on condition that he will hold to me as I shall deserve it, and that he will perform everything as it was in our agreement when I submitted myself to him and chose his will." - 7th Century Anglo-Saxon "Oath of Fealty"

]

]

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# Serfdom III

- How coercive? Certainly unequal barganing power

- Feudal rents and prices were extremely sticky and unflexible (held by custom)

- Serfs gain protection and security in exchange for service or rent

- Serfs' children were bonded into serfdom

- But serfs, unlike pure slaves, had *some* legal and property rights

]

]

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# The Stickiness of Feudal Rents I

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![:scale 80%](https://www.dropbox.com/s/0igc771chr1wf29/scott-james-c.jpg?raw=1)

James C. Scott

1936-
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> A good part of the **politics of measurement** sprang from what a contemporary economist might call **the "stickiness" of feudal rents.** Noble and clerical claimants often found it **difficult to increase feudal dues directly**; the levels set for various charges were the **result of long struggle,** and even a small increase above the customary level was viewed as a **threatening breach of tradition.** Adjusting the measure, however, represented a roundabout way of achieving the same end.

]

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# The Stickiness of Feudal Rents II

.left-column[
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![:scale 80%](https://www.dropbox.com/s/0igc771chr1wf29/scott-james-c.jpg?raw=1)

James C. Scott

1936-
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> The local lord might, for example, lend grain to peasants in smaller baskets and insist on repayment in larger baskets. He might surreptitiously or even boldly enlarge the size of the grain sacks accepted for milling (a monopoly of the domain lord) and reduce the size of the sacks used for measuring out flour; he might also collect feudal dues in larger baskets and pay wages in kind in smaller baskets. While the formal custom governing feudal dues and wages would thus remain intact (requiring, for example, the same number of sacks of wheat from the harvest of a given holding), the actual transaction might increasingly favor the lord. The results of such fiddling were far from trivial. Kula estimates that the size of the bushel (boisseau) used to collect the main feudal rent (taille) increased by one-third between 1674 and 1716 as part of what was called the reaction feodale.

]

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# The "Ideology" of Feudalism I

- Everyone, including serfs, had important role to uphold in feudal society

> Serfs and freemen "worked for all" while a knight or baron "fought for all" and a churchman "prayed for all"; thus everyone had a place

]

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# The "Ideology" of Feudalism II

- Forged in the crucible of a breakdown of empires and constant threat of violence and invasion

- Feudalism is primarily about stability and custom, preserving the social order, minimizing violence

- The *last thing* it's okay with is innovation, competition, experimentation, and rocking the boat
]

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# Religion and Feudalism

- The one thing everyone shares is religion

- Catholic Church is dominant, both in Medieval ethics and politics, the only "international" institution

- All actions, exchanges, social and political power are justified as moral (Christian), legitimate, and upholding ancient privileges and customs

]

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# The "Ideology" of Feudalism III

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> "**[T]he medieval way of determining the terms of exchange was by custom, usage, and law, not by negotiation between traders.** The division of labor was well developed by the Middle Ages, and there was a corollary exchange of products and services among specialized workers. But the **use of custom and law to set the terms of trade was as fundamental to the medieval economy as the unity of its political and economic institutions**," (p.38).

]

.source[Rosenberg, Nathan and L.E. Birdzell, Jr, (1986) *How the West Grew Rich: The Economic Transformation of the Industrial World*]

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# The "Ideology" of Feudalism IV

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> "**Exchange was also usually compulsory**, in that the great majority of **artisans and agricultural workers were obligated to supply their products and services on terms dictated by custom or law.** Agricultural workers were bound to the land in a system of serfdom, a **hereditary status assumed at birth, and they had no right to select a more attractive occupation.** Townspeople were not given much more choice of occupation, for having a trade...depended on an apprenticeship, usually arranged by one's father...**A member of the guild had to work and sell on the guild terms; there was no right to decline business at the fixed rates**," (p.38).

]

.source[Rosenberg, Nathan and L.E. Birdzell, Jr, (1986) *How the West Grew Rich: The Economic Transformation of the Industrial World*]

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# The "Ideology" of Feudalism V

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> "**The ideology of the system was epitomized in the phrases "just price" and "just wage."** Prices and wages expressed a moral judgment of worth. **Supply and demand were morally irrelevant**...it was mainly in time of famine or siege that prices forced their way into [equating supply and demand]," (p.38).

]

.source[Rosenberg, Nathan and L.E. Birdzell, Jr, (1986) *How the West Grew Rich: The Economic Transformation of the Industrial World*]

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# Opposition to Creative Destruction I

Virginia Postrel
]
]

> "[I]f every voluntary experiment must answer the question, 'Are you going to affect the way I live?' with a no, there can be no experiments, no new communities, no realized dreams. A city, an economy, or a culture is, despite the best efforts of stasists, fundamentally a 'natural' system. As a whole, it is beyond anyone’s control. Any individual effort at improvement changes not just the particular target but the broader system. In the process, there may be progress, but there will also be disruptions, adjustments, and losers," (p.204).

]

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# Opposition to Creative Destruction II

Virginia Postrel
]
]

> "Stasist institutions shift the burden of proof from the people who want to block new ideas to those who want to experiment. Such institutions seek not simply to compensate for or mitigate extreme side effects but, rather, to treat any change as suspect," (p.204).

]

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# Opposition to Creative Destruction III

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![:scale 80%](https://www.dropbox.com/s/onxlhlgrquh71pj/acemoglurobinson.jpg?raw=1)

Daron Acemoglu and James Robinson
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> "We argue that the effect of economic change on political power is a key factor in determining whether technological advances and beneficial economic changes will be blocked. In other words, we propose a "political-loser hypothesis." We argue that it is groups whose political power (not economic rents) is eroded who will block technological advances. If agents are economic losers but have no political power, they cannot impede technological progress. If they have and maintain political power (i.e., are not political losers), then they have no incentive to block progress. It is therefore agents who have political power and fear losing it who will have incentives to block. Our analysis suggests that we should look more to the nature of political institutions and the determinants of the distribution of political power if we want to understand technological backwardness," (pp.126-127).

]

.source[Acemoglu, Daron and James A. Robinson, 2000, "Political Losers as a Barrier to Economic Development," *American Economic Review* 90(2): 126-130]

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# Opposition to Creative Destruction IV

> "There is a story, repeated by a number of Roman writers, that a man - characteristically unnamed - invented un-breakable glass and demonstrated it to Tiberius in anticipation of a great reward. The emperor asked the inventor whether anyone shared his secret and was assured that there was no one else; whereupon his head was promptly removed, lest, said Tiberius, gold be reduced to the value of mud," (147). 
]

.source[Finley, Moses I, (1965), "Technical Innovation and Economic Progress in the Ancient World," *Economic History Review* 18: 29–45]

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# Opposition to Creative Destruction V

- Queen Elizabeth I to William Lee's request to a *letter patent* for his stocking frame:

> "Thou aimest high, master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars," (quoted in Acemoglu and Robinson 2012, pp. 182-183).

]

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# Players in the Feudal System: Nobility I

- .shout[Nobility] are the large landowners, clergy, strongest military factions and patronage networks

- Various titles: barons, earls, dukes, lords, etc.

- Born into land-owning aristocracy, would inherit lands or join church
]

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# Players in the Feudal System: Nobility II

- Lords and ladies lived off of the revenues of their manors (farmed by tenants)

- Nobles more interested in hunting, tournaments, and warfare
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# Nobility: Roving Bandits? I

The lord's problem:

1. **Choose:** .blue[ < a tax rate >]

2. **In order to maximize:** .green[< own revenue >]

3. **Subject to:** .red[< staying in power >]

- Peasants are subsistence-farmers, have little incentive to innovate or produce surplus (see below)

- Variation in production across manors:
  - More due to: weather, terrain, luck
  - Than due to: productivity, efficient organization, innovation

- So how else to increase your Manor's revenue?

]

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# Nobility: Roving Bandits? II

- Comparative advantage in violence

- Many fight for monarch in war, turn to brigandage in peace

- War something of a "gentlemanly" sport between nobles (goal is to capture nobility for ransom)

]

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# Nobility: Roving Bandits? III

- Strategic marriage, hostages, as a credible commitment bridging rival families

- Inheritance -- heirs of marriage can inherit lands of both families

- Failing to produce an heir means family will lose title to land!

]

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![:scale 90%](https://www.dropbox.com/s/g32bewg1h34zrhu/noblemarriage.jpg?raw=1)
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# Monarchs and State Capacity I

- How do we go from roving bandits to one stationary bandit?

- Where is the King to keep his barons in check?
]

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![:scale 80%](https://www.dropbox.com/s/hwhp3lvv2gmwv3k/kingofhearts.jpg?raw=1)
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# Monarchs and State Capacity I

- Kings/Queens not all powerful -- "primus inter pares"

- Germanic tradition: for centuries, kings were *elected* by nobility
  - Witan, Althing, Kingsmoot, etc.

- *Primogeniture* and rules of royal succession are not crystallized until 13-14th centuries

- Again: Kings are more rulers of *people* and *patronage networks* than *territory*
]

Anglo-Saxon king with his *witan*
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# Monarchs are Often Weak Relative to Other Elites I

- Monarch *might* nominally rule all land in country (as in post-Conquest England) and grant fiefs to lords

- Often Monarch is just one ruler with his/her own land

- Barons, earls, dukes, etc. have their own realms and sources of power, nominally loyal to the monarch

]

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![:scale 80%](https://www.dropbox.com/s/2bntwlycimdmw70/francemercantilismmap.png?raw=1)

"France" in 1477
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# Monarchs are Often Weak Relative to Other Elites II

.pull-left[
- .shout[NWW's Proportionality principle]: for a stable political system, .onfire[rents must be allocated in proportion to groups' capacity for violence]

- Rational elites will revolt if they believe their relative strength is greater than the rents they are earning
  - Other elites need to "buy off" their support or else risk revolt

- Dynamics: if distribution of wealth and power changes, the allocation of rents must change!

]

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![:scale 100%](https://www.dropbox.com/s/nvi7chxerk9md4c/baronswar.jpg?raw=1)
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# Power and Personality

- Elites are loyal to the king as a *person*, not as an office!

- Loyalty depends on king's ability to distribute booty and rents to elites

- "King" or "Warlord" does not control *territory*, controls *vassals* based on social networks and bundle of privileges

]

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![:scale 55%](https://www.dropbox.com/s/ol7kqiqacmmn5t1/henryviii.jpg?raw=1)
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# Monarch's Role as Head of Patronage Networks I

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- Monarch is head of many patronage networks, often from the most powerful/wealthiest family

- Has siblings and many blood relations that expect patronage or else they might challenge claim to throne

- Monarch must redistribute as patronage (land, titles, marriages, inheritances) to loyal supporters to maintain support

]

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![:scale 80%](https://www.dropbox.com/s/g32bewg1h34zrhu/noblemarriage.jpg?raw=1)
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# Monarch's Role as Head of Patronage Networks II

- Nobody owns land in their own right, all land is property of the King
  - Of course, King cannot govern entirety of land all the time
  - Nobles retain control over their domains, but nominally owned by King
  
- Monarchs often reclaim ("escheat") land from nobles who *break* fealty, commit treason, or die without heirs
  - redistribute to loyal elites as patronage
  - inheritance must be "bought" with "relief" (a fee) to the King

]

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![:scale 90%](https://www.dropbox.com/s/m08nrx2hxicpegd/williamconquerorbayeux.jpg?raw=1)
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# Monarch's Power and Revenue Sources

- Feudal dues owed from lords and knights (or scutage)

- Monarchs dispensed justice at royal courts (for fees)

- Borrow money (if monarch's credit was good - which was almost never)
  - frequent defaults, expropriation of creditors, expulsions of Jews

- *Some* taxes that could collect *some* revenue
]

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![:scale 80%](https://www.dropbox.com/s/g32bewg1h34zrhu/noblemarriage.jpg?raw=1)
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# Monarch's Weakness Relative to Nobles

- Few pitched battles

- Warfare *favors the defender*

- Very easy for rebellious lords to raise their banners, sit in their castles, and outlast the King's army (or vice versa)

- Pre-artillery, pre-gunpowder

]

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# Peasants

- Most peasants not freeholders - tied to the land of their lord

- A two-way feudal obligation: peasants must stay and work for lord, but lord has a duty to protect peasant; cannot evict or replace peasant without legal cause

- Illegal for peasants to leave one manor for another (or a town), but lords unable to extradite

- Vagrancy laws, suspicion of outsiders and foreigners, the "undeserving poor"

]

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# Why Don't the Peasants Revolt?

- Peasants outnumber king and lords `$>20:1$`, why not revolt?

- Mass revolution is a collective action problem
  - Public benefits (individual shares small fraction), *very* large private cost (risk of a gruesome death)

- Very high coordination costs: peasant "class" is scattered across thousands of manors (their whole social world), different families, tribes, etc.

- General peasant revolts do happen a few times
  - Response to changing economic conditions (see below)
  - Even if you win, what do you do then??

]

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# The Towns I

- Proto-capitalist havens

- Genuine division of labor and specialization

- Clusters of merchants, major international trading centers

- *"Stadluft macht frei"*

- An escape for freemen to leave manors and increase their opportunities

]

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# The Towns II

- Late Medieval Ages and "**bastard feudalism"** (see below)

- Revival of international trade through towns and trade fairs

- Production for subsistence `$\rightarrow$` production *for exchange*

- Growing demand for food and labor from countryside in growing towns

- More wealth `$\implies$` use of money to "buy out of" feudal dues ("**scutage**")

]

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# The Towns III

- Towns became a countervailing force between the monarch and the nobles

- Kings increasingly ally with towns to give them special privileges
  - exemptions from feudal dues or ties to lords
  - self-government: choose own mayor, aldermen, make own laws

- In exchange: Kings get tax revenue from towns' growing wealth

]

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# The Towns IV

![:scale 100%](https://www.dropbox.com/s/0msjrjjt7sn37ga/freeimperialcities.png?raw=1)
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.center[
Charter issued by Emperor Frederick II granting "Imperial immediacy" to the City of Lubeck (1226)

![:scale 60%](https://www.dropbox.com/s/tnt0rw9e2us0xc9/charter.png?raw=1)
]

]

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# The Towns and Trade I

- Rise of commercial institutions from wealth generated by trade
  - banking, credit and debt instruments, merchant courts, *Lex Mercatoria*

- Rise of powerful trade-based city-states in Northern Italy
  - Dominates trade in Mediterranean after Crusades (see below)
  - Intersection of centuries of conflict between Pope (S. Italy) and Holy Roman Emperor (Germany)
  - It is here you will get "The **Renaissance** (c.1500)

]

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# The Towns and Trade II

- Some city-states form leagues to foster and standardize international trade

- Hanseatic League ("Hansa") of Northern German, Baltic, and North Sea city-states

]

.source[Greif, Avner, Paul Milgrom, and Barry R Weingast, (1994), "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," *Journal of Political Economy* 102(4): 745-776]

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# The Towns and Trade III

- Towns are dominated by .shout[urban craft guilds]

- Another feudal group with major economic and political power

- Essentially cartels that restrict entry into trades
  - illegal to produce in an industry without being a guild member
  - production, exchange, and prices must be according to guild laws and regulations
  - require patronage and apprenticeships, etc.

- Alliance with monarchs (exclusive privileges in exchange for tax revenues)

]

.source[Ogilvie, Sheilagh, (2014), "The Economics of Guilds," *Journal of Economic Perspectives* 28(4): 169-192

Greif, Avner, (1989), "Reputation and Coalitions in Medieval Trade: Evidence on Maghribi Traders," *Journal of Economic History* 49(4): 857-882.

Greif, Avner, Paul Milgrom, and Barry R Weingast, (1994), "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," *Journal of Political Economy* 102(4): 745-776]

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# The Revival of International Trade (c.1100) I

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# The Revival of International Trade (c.1100) II

.pull-left[
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![:scale 80%](https://www.dropbox.com/s/f8k8tdydrog3s5s/merchantlaw.png?raw=1)
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- .shout["Commercial Revolution"] of 1100s-1200s

- *International* merchants can't depend on weak and biased States to enforce *international* contracts!

- Merchants adopted their own "laws" and best practices to minimize transaction costs

- For-profit merchant courts emerge to settle disputes and enforce international contracts
  - More efficient, cheaper, and less partisan than Royal courts
  - Legal and jurisdictional competition

- Developed contract law and advanced legal instruments - debt, credit, loans, equity contracts

- This is a major basis of international commercial law today!

]

.source[Benson, Bruce, 1989. "The Spontaneous Evolution of Commercial Law," *Southern Economic Journal* 55(3): 644-661

Milgrom, Paul R, Douglass C North, and Barry R Weingast, (1990), "The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs," (Economics and Politics*2(1): 1-23]

---

# Escape from Feudalism (c.??-c.1500)

---

# A Lot of Theories of European Institutional Origins

---

# Let's Explore Three (Among Many) Explanations

## [2. War and State Capacity](#75)

## [3. Other Key Historical Events](#89)

]

---

# Adam Smith's Explanation I

Adam Smith

1723-1790
]
]

> "In order to understand [the kings’ grant of independence to the towns], it must be remembered, that in those days the sovereign of perhaps no country in Europe, was able to protect, through the whole extent of his dominions, the weaker part of his subjects from the oppression of the great lords.

> "The inhabitants of cities and burghs, considered assingle individuals, had no power to defend themselves: but by entering into a league of mutual defence with their neighbours, they were capable of making no contemptible resistance."

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]

---

# Adam Smith's Explanation II

Adam Smith

1723-1790
]
]

.right-column[
> "The lords despised the burghers...The wealth of the burghers never failed to provoke their envy and indignation, and [the lords] plundered them upon every occasion without mercy or remorse. The burghers naturally hated and feared the lords. The king hated and feared them too; but though perhaps he might despise, he had no reason either to hate or fear the burgher," (Book III, Chapter III).

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]

---

# Adam Smith's Explanation III

Adam Smith

1723-1790
]
]

> "Mutual interest, therefore, disposed [the burghers] to support the king, and the king to support them against the lords. They were the enemies of his enemies, and it was his interest to render them as secure and independent of those enemies as he could. By granting them magistrates of their own, the privilege of making bye-laws for their own government, that of building walls for their own defence, and that of reducing all their inhabitants under a sort of military discipline, he gave them all the means of security and independency of the barons which it was in his power to bestow. Without the establishment of some regular government of this kind, without some authority to compel their inhabitants to act according to some certain plan or system, no voluntary league of mutual defence could either have afforded them any permanent security, or have enabled them to give the king any considerable support," (Book III, Chapter III).

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]

---

# Adam Smith's Explanation IV

Adam Smith

1723-1790
]
]

> "In countries such as France or England, where the authority of the sovereign, though frequently very low, never was destroyed altogether, the cities had no opportunity of becoming entirely independent. They became, however, so considerable that the sovereign could impose no tax upon them, besides the stated farm-rent of the town, without their own consent. They were, therefore, called upon to send deputies to the general assembly of the states of the kingdom, where they might join with the clergy and the barons in granting, upon urgent occasions, some extraordinary aid to the king. Being generally, too, more favourable to his power, their deputies seem, sometimes, to have been employed by him as a counter-balance in those assemblies to the authority of the great lords. Hence the origin of the representation of burghs in the states-general of all the great monarchies in Europe," (Book III, Chapter III).

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]

---

# Adam Smith's Explanation V

Adam Smith

1723-1790
]
]

- Three players:
  1. king
  2. noblity (lords)
  3. towns

- Nobles control vast manors and estates in the countryside

- Towns are full of freemen (with no lords), grow wealthy from trade

- Lords hate towns, towns hate lords
]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)

Weingast, Barry R, 2017, "Adam Smith's Theory of Violence and the Political-Economics of Development," Manuscript]

---

# Adam Smith's Explanation VI

Adam Smith

1723-1790
]
]

- King and towns find a mutually-beneficial exchange against common enemy: the lords:
  - King exempts towns from feudal ties to lords (effectively grants independence)
  - Allows towns to govern themselves, and pledges mutual protection against lords, in exchange for regular taxes to the King

- Towns choose governance that benefits themselves: stronger property rights, rule of law, justice, military defense against lords
  - Don't get too excited: they are a clear oligarchy, not a democracy!
  
]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)

Weingast, Barry R, 2017, "Adam Smith's Theory of Violence and the Political-Economics of Development," Manuscript]

---

# Adam Smith's Explanation VII

Adam Smith

1723-1790
]
]

- King gained increased fiscal capacity (regular tax revenue from towns) and military capacity to weaken the lords

- a lot more wealth, people start buying their way out of feudal dues
  - "bastard feudalism"

- Merchants and townspeople have enough wealth and power to have a seat at the table

- King requires consent of Parliaments, not just of landowning Lords, but also of towns and merchants

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)

Weingast, Barry R, 2017, "Adam Smith's Theory of Violence and the Political-Economics of Development," Manuscript]

---

# War and State Capacity I

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/0nyfsxm4tpqn5iw/charlestilly.png?raw=1)

Charles Tilly

1929-2008
]
]

> *Wars made the State and the State made war.*

- Constant warfare between small European States created an evolutionary selection mechanism for political-economic success via state capacity

---

# War and State Capacity II

![:scale 60%](https://www.dropbox.com/s/sd1w2ckfg83hkii/europe1500.jpg?raw=1)
]

---

# War and State Capacity III

.right-column[
.center[
![:scale 100%](https://www.dropbox.com/s/iluh60r1mif8w1t/napoleonicwar.png?raw=1)
]
]

- Threat of war 
- `$\rightarrow$` need for large expenditures on military
- `$\rightarrow$` strong centralized States
- `$\rightarrow$` expand rule, bureaucracy, industrialized economy
- `$\rightarrow$` strong States survive, weak States imitate or perish

]

---

# War and State Capacity IV

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/vecagucz6a0wpdw/medievalcannon.png?raw=1)
]
]

- Military technology, *gunpowder*, especially *cannon* shift dynamics of Medieval warfare

- Defensive advantages and walled cities no longer effective!

- Economies of scale for large-scale warfare: mass infantry, artillery

- Waging a successful war becomes very capital-intensive, expensive endeavor

- Central management of mass conscripts by monarch replaces private armies of nobles

]

---

# War and State Capacity V

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/w8bejws1qg3h26o/napoleonictroops.jpg?raw=1)
]
]

- Cash-strapped rulers need to rapidly invest in fiscal capacity to stay afloat

- Hard to borrow money and finance State/military operations
  - high interest rates for monarchs from high risk of default or confiscation!
  - debt financing wars play a bigger role in world economic history than you imagine...
    - keep an eye out for the Dutch Netherlands and England

- Need more effective revenue sources: regular taxation, centrealized bureaucracy, encourage towns to buy their way out of feudal dues to lords

]

---

# War and State Capacity VI

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/e8ilj22atvbwixp/libertyleadingthepeople.jpg?raw=1)

*Liberty Leading the People* by Eugene Delacroix (1830)
]
]

- Sentiment changes:
  - citizens more willing to acquiesce to taxes if at war
  - common external threat puts aside petty domestic differences
  - ratchet effect after war is over, people are used to more government power

- *Very* eventually: fighting not for your Lord, or even for your king
  - but for your *country*, or for *God*, or for *an idea*
]

---

# War and State Capacity: Europe vs. China I

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/ub5cdaq28i2ppch/DividedEurope.png?raw=1)
]
]

- A dominant Empire is less stable in Europe than China

- Geographic divisions (rivers, mountains) and defensive advantages in Europe

- More historic threats in Europe
  - Germanic and Turkic Tribes (North/East), Vikings (North), Arabs (South)

- China has had a single unidirectional threat for centuries (until British Opium Wars in 1830s)
  - Nomadic steppe tribes to the North in Central Asia (Xiongnu, Mongols)
]

.source[Ko, Chiu Yu, Mark Koyama, and Tuan-Hwee Sng, 2017, "Unified China and Divided Europe," *International Economic Review* 59(1): 285-327]

---

# War and State Capacity: Europe vs. China II

.source[Mellinger, Andrew D., Jeffrey Sachs, and John L. Gallup, (1999), "Climate, Water Navigability, and Economic Development," *CID Working Paper* No. 24]

---

# War and State Capacity: Europe vs. China III

.source[Ko, Chiu Yu, Mark Koyama, and Tuan-Hwee Sng, 2017, "Unified China and Divided Europe," *International Economic Review* 59(1): 285-327]

---

# War and State Capacity: Europe vs. China IV

.source[Ko, Chiu Yu, Mark Koyama, and Tuan-Hwee Sng, 2017, "Unified China and Divided Europe," *International Economic Review* 59(1): 285-327]

---

# War and State Capacity: Religious Wars I

![:scale 100%](https://www.dropbox.com/s/wgt5a5fnvmtztbu/holyromanempire1648.png?raw=1)
]
]

.pull-right[
- .shout[Protestant Reformation] in Christianity (Catholics vs. Cathars, Huguenots, Hussites, Lutherans, Calvinists, Anglicans)

- Constantly shifting alliances between nobles, kings, the pope against religious opponents

- Thirty Years War (1618-1648) fought on basis of religion
  - One of the most devastating wars in human history, 8 million deaths, 20% of German population died

]

---

# War and State Capacity: Religious Wars II

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/ea36mdwjms15sqh/westphalia.jpg?raw=1)
]
]

.pull-right[
- .shout[1648 Peace of Westphalia] puts an official end to State-sanctioned religious warfare
  - Ends Thirty Years War, and Eighty Years War (Dutch revolt against Spain)

- "*Cuius regio, euis religio*"

- Recognizes the .shout[nation-state] as the sovereign actor in the world, other entities cannot interfere with a nation-state's internal affairs (i.e. religion)

- Territorial borders established between States

- Balance of power in Europe: nation-states create credible commitment to ally against any one state seeking domination

]

---

# War and State Capacity: Summary I

> "Understanding economic history is critical for comprehending the importance of state capacity. **In historical terms, the emergence of well functioning states is a relatively recent phenomenon.** For many premodern polities, even **the term state is an anachronism: there was no state in much of Europe prior to the late middle ages.** Otto Heinze observed that feudal rulers ‘lacked the attributes of sovereignty—that is, independence beyond its borders and exclusive rights within them’ (Hintze, 1906, 1975, p. 192). In medieval Europe, characterized by fragmented political authority, overlapping and competing legal jurisdictions, and private armies—the modern concept of a state—has little empirical purchase (Strayer, 1970). **The word 'state' only came to acquire its modern meaning in English at the end of the sixteenth century** (Skinner, 2009). This was not merely a semantic change; when 'the word 'state', l'etat, stato' or Der Staat came into usage in the early modern period **it was 'a word for a new political experience'** (Oakeshott, 2006, p. 361)," (p.2).

.source[Koyama, Mark and Noel D. Johnson, 2016, "States and Economic Growth: Capacity and Constraints," *Explorations in Economic History*, forthcoming]

---

# War and State Capacity: Summary II

> "Perhaps the most important function of the state is to provide defense. Frequently this is defense against aggression by other states. Premodern polities were often at war. In the early modern period, particularly bellicose states like Russia and France were at war more often than they were at peace (Voigtlander and Voth, 2013). **Warfare was economically costly, typically involving the devastation of agriculture land**—as in the chevauchée of the Hundred Years War, for example—and often the destruction of towns and cities that resisted a siege. It seems likely that **the ability of early modern states after 1700 to establish territorial borders and limit the destructiveness of warfare played an important role in allowing Smithian economic growth to take place**," (pp.8-9).

.source[Koyama, Mark and Noel D. Johnson, 2016, "States and Economic Growth: Capacity and Constraints," *Explorations in Economic History*, forthcoming]

---

# Other Key Historical Events

- A number of key historical events and technoloical developments 
  1. The Crusades
  2. The Black Death
  3. The Reformation
  4. The Age of Discovery

- Would Industrial Revolution begin in Western Europe without them??

- Role of **path dependency** in history

- Are these the *only* important events? Of course not. Just the most-talked about.

]

.pull-right[
.center[
![:scale 100%](https://www.dropbox.com/s/rl2ogfz9zrzoood/divergence1.png?raw=1)
]
]

---

# The Crusades I

- First Crusade 1095, goal of retaking the Holy Land from Arabs

- Lost Jerusalem to Saladin in 1187, never recaptured

- At least 9 crusades by 1291

]

---

# The Crusades II

- "Outremer" Crusader kingdoms in Levant for 200 years

- Last (in some form) until 1300

- Outlet for peasants, nobles, merchants, etc. fleeing hardships of Europe

- "International" institutions
  - Knights Templar
  - Knights Hospitalier

]

.pull-right[
.center[
![:scale 70%](https://www.dropbox.com/s/t5mq6z45zmogzeg/outremer.png?raw=1)
]
]

---

# The Crusades III

- Increase European interaction with rest of the world via Arabs (who trade with India and China)

- (Re)discovery of classical philosophy, mathematics, literature, art from Arabs (who retained it from Ancient Greece and Rome)

]
]

---

# The Black Death I

- Bubonic plague ravages Europe (esp. 1340s-1350s)

- 75-200 million die (30-60% of European population)

- Absolutely enormous social, political, economic consequences
  - Some good in the long run??
]

---

# The Pre-Black Death Malthusian Economy I

- Malthusian Dynamics:

- Land scarcer than labor

- Diminishing returns to land

- Commercial Revolution `$\implies$` population growth

- Movement to frontiers, clearing forests, bringing more marginal land into cultivation

]

.source[North, Douglass C. and Robert Paul Thomas, (1973), *The Rise of the Western World: A New Economic History*, p 12-13]

---

# The Pre-Black Death Malthusian Economy II

- Change in relative factor prices & bargaining power
  - Land-intensive goods (agriculture) real prices and rents increase
  - Labor-intensive goods real prices and wages decrease

- More `$\pi$` for lords to buy back and (hire professionals to) manage land, and sell produce than to rent land out to others
]

.source[North, Douglass C. and Robert Paul Thomas, (1973), *The Rise of the Western World: A New Economic History*, p 12-13]

---

# The Pre-Black Death Malthusian Economy III

- Malthusian constraint is hit: population with diminishing returns to land and labor `$>$` growth in output

- Great Famine of 1315-1317 in Europe

]

.source[North, Douglass C. and Robert Paul Thomas, (1973), *The Rise of the Western World: A New Economic History*, p 12-13]

---

# Other Variables are Changing Too

---

# The Black Death Consequences I

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/w2z08kc08e2kagy/blackdeath.jpg?raw=1)
]
]

- Reverses the effects of the Commercial Revolution from decimated population

- Real wages increase, real rents decrease, agricultural prices decrease

- Drastic shift in bargaining power from lords to peasants
  - Peasants gain longer leases and more direct property rights in land

- Scarce labor `$\rightarrow$` incentive to seek out labor-saving innovations
]

---

# The Black Death Consequences II

- Lords attempt to force a return to "normal"

- **1351 Statute of Laborers** in England: fix price controls, force down wages

- Leads to Peasant Revolt (1381)

- Manorialism fades away slowly, Lords and peasants need more *flexibility* in prices and contracts to change with circumstances (not immutable custom)

- Peasants become more "indepedent contractor" than feudal serf

- Europe recovers by 15th Century
]

---

# Other Key Historical Events: The Reformation I

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/zg4f6rzi6x2nc40/luthertheses.jpg?raw=1)

]
]

- Printing press emerges in Europe around 1450 via Johannes Gutenberg in Mainz
  - Prints the first "Gutenberg Bible"

- Martin Luther publishes *95 Theses* against the Catholic church in 1517 Wittenberg

- Luther is far from the first dissident within the Catholic church with a following

- But he is the first to be protected by a powerful group of dissident lords away from the reaches of the Holy Roman Emperor
  - plus he is the first with a printing press!
]

---

# Other Key Historical Events: The Reformation II

Over the next 300 years, religious wars overlaid on political and military competition between early European states
]

---

# Other Key Historical Events: The Age of Discovery I

Byzantine Empire falls in 1453 to Ottoman Turks, which cuts off Europe's access to the Eastern trade; search for sea-routes to India and China begin
]

---

# Other Key Historical Events: The Age of Discovery II

---

# Other Key Historical Events: The Age of Discovery III

- Trade (and later colonization) with world is immensely profitable

- "Discovery" of New World & Atlantic trade
  - Colonies ship raw materials back to Europe in exchagne for manufactured goods
]

---

# Other Key Historical Events: The Age of Discovery IV

- Europe recovers from the Black Death, population growth from economic improvements

- Land-abundant, labor-scarce colonies are an "escape valve" for Malthusian pressures in land-scarce, labor-abundant Europe

- Also an escape valve for some religious dissident groups (Puritans, Quakers, etc.)

]

---

# Other Key Historical Events: The Age of Discovery IV

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/5u0vycuiog6ao51/amsterdamstockexchange.jpg?raw=1)

The Amsterdam Stock Exchange (1601)
]
]

- Towns become specialized and very wealthy cities

- .shout[The Middle Class] emerges in terms of wealth, power, and social status
  - Not peasants
  - Not landowners or aristocratic nobles
  - Small-property-holding townspeople growing wealthy from manufacturing, shipping, or colonial trading ventures
]

---

# Other Key Historical Events: The Age of Discovery V

.font90[
> "The rise of Western Europe after 1500 is due largely to growth in countries with access to the Atlantic Ocean and with substantial trade with the New World, Africa, and Asia via the Atlantic. This trade and the associated colonialism affected Europe not only directly, but also indirectly by inducing institutional change. Where “initial” political institutions (those established before 1500) placed significant checks on the monarchy, the growth of Atlantic trade strengthened merchant groups by constraining the power of the monarchy, and helped merchants obtain changes in institutions to protect property rights. These changes were central to subsequent economic growth," (p.546)
]
]

.source[Acemoglu, Daron, Simon Johnson, and James Robinson, 2005, "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," *American Economic Review* 95(3): 546-579]

---

# Other Key Historical Events: The Age of Discovery V

]

.source[Acemoglu, Daron, Simon Johnson, and James Robinson, 2005, "The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth," *American Economic Review* 95(3): 546-579]

---

# Mercantilist Europe (c.1500-c.1800)

---

# Mercantilism I

- Feudalism fades away slowly - feudal custom and obligatory service replaced by cash payment and flexible contracts

- A rising merchant class grows outside of the feudal system of land and patronage-dominated custom
  - in some countries, they becomes major members of the dominant coalition of elites

- A new political-economic ideology of nationally-managed trade to replace feudalism: .shout[mercantilism]
]

---

# Mercantilism: The Rise of a New Class I

---

# Mercantilism: The Rise of a New Class II

Karl Marx (1818-1883)

Friedrich Engels (1820-1895)

]
]

.font90[
> "The feudal system of industry, in which industrial production was monopolised by closed guilds, now no longer sufficed for the growing wants of the new markets. The manufacturing system took its place. The guild-masters were pushed on one side by the manufacturing middle class; division of labour between the different corporate guilds vanished in the face of division of labour in each single workshop," `$(\S2$` Proletarians and Communists)
]
]

.source[Marx, Karl and Friedrich Engels, 1848, [*Manifesto of the Communist Party*](https://www.marxists.org/archive/marx/works/1848/communist-manifesto/)]

---

# Mercantilism: The Rise of a New Class III

Karl Marx (1818-1883)

Friedrich Engels (1820-1895)

]
]

.font90[
> "The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his "natural superiors," and has left remaining no other nexus between man and man than naked self-interest, than callous "cash payment." It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom---Free Trade," `$(\S2$` Proletarians and Communists)
]
]

.source[Marx, Karl and Friedrich Engels, 1848, [*Manifesto of the Communist Party*](https://www.marxists.org/archive/marx/works/1848/communist-manifesto/)]

---

# Mercantilism: The Rise of a New Class IV

Karl Marx (1818-1883)

Friedrich Engels (1820-1895)

]
]

.font90[
> "The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature's forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground---what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?," `$(\S2$` Proletarians and Communists)
]
]

.source[Marx, Karl and Friedrich Engels, 1848, [*Manifesto of the Communist Party*](https://www.marxists.org/archive/marx/works/1848/communist-manifesto/)]

---

# Mercantilism as a Political-Economic Ideology I

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/y2xrc1sedez37oi/goldsmith.png?raw=1)
]
]

- What does the new merchant class want?

- Commerce! Trade!

- But not just any commerce...like any self-interest elite, they want commerce favorable to themselves
  - Monopolies, privileged terms of trade

- Commerce between nations is war by other means
]

---

# Mercantilism as a Political-Economic Ideology II

- Nation-states (monarchs) as principle actors

- National economies, stimulated by activist State interventions

- *The wealth of nations* is the quantity of their "specie" (gold and silver; i.e. money)
  - More money `$\implies$` hire more soldiers `$\implies$` win more wars `$\implies$` gain more wealth
]

---

# Mercantilism as a Political-Economic Ideology III

- .onfire[Wealth comes from international trade]! 
  - Particularly producing selling **manufactures** abroad

- A nation must maintain a .onfire["favorable balance of trade"]
  - export more than you import

- International trade between nations/empires is war by other means
]

---

# Mercantilism as a Political-Economic Ideology IV

Thomas Mun

1571-1641

]
]

> "The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value [sic]"

]
.source[Mun, Thomas, 1664, *England's Treasure by Forraign Trade or the Ballance of our Forraign Trade is the Rule of our Treasure*]

---

# Policy Implications of Mercantilism I

- Mine gold & silver at home

- Seek colonies with gold & silver mines

- Prohibit exports of gold & silver

- Export goods to import gold & silver (as payments for our exports)
]

---

# Policy Implications of Mercantilism II

.pull-left[
.center[
![](https://www.dropbox.com/s/17b4eopxqmdwzhr/textilemanufacturing.jpg?raw=1)
]
]

- Import raw materials
  - cotton, timber, wool, silk, spices, furs, sugar, molasses, etc.
  - better yet, acquire colonies that have these so you don't have to give other countries gold or silver for them!

- Limit imports of manufactured goods from other countries

- Limit exports of raw materials
  - other countries can use them to make their own manufactures for export

]

---

# Policy Implications of Mercantilism III

- Try to poach inventors from other countries to immigrate (receive protection & exemptions from guild laws)

- Sales of monopoly privileges a major source of State revenue (less costly than raising a tax)
  - Especially in France

- Political considerations: monarchs give privileges to dominant commercial elites in exchange for loyalty
  - logic of the natural state/LAO

]

---

# Policy Implications of Mercantilism IV

- English crown can't directly colonize, so "license out" exploration and governance to private English merchants and chartered companies

- English & Spanish colonial experience very different (see below)

]

---

# Trading Monopolies I

- Created a chartered trading company that had a monopoly on a trade
  - e.g. sugar, salt, tea, tobacco
  - or found a colony

- Crown often gave these to powerful elites as patronage for support
  - often *sold* as a source of State revenue

- Not all that different from a guild
]

---

# Trading Monopolies II

- Created a chartered trading company that had a monopoly on a trade
  - e.g. sugar, salt, tea, tobacco
  - or found a colony

- Crown often gave these to powerful elites as patronage for support
  - often *sold* as a source of State revenue

- Not all that different from a guild
]

---

# Trading Monopolies III

Lord Edward Coke

1552--1634

Chief Justice (King's Bench)

]
]

> "A monopoly is an institution or allowance by the king, by his grant, commission, or otherwise...to any person or persons, bodies politic or corporate, for the sole buying, selling, making, working, or using of anything, whereby any person or persons, bodies politic or corporate, are sought to be restrained of any freedom or liberty that they had before, or hindered in their lawful trade."

]

---

# Trading Monopolies IV

> "[A man lives] in a house built with monopoly bricks, with windows...of monopoly glass; heated by monopoly coal (in Ireland monopoly timber), burning in a grate made of monopoly iron...He washed himself in monopoly soap, his clothes in monopoly starch. He dressed in monopoly lace, monopoly linen, monopoly leather, monopoly gold thread...His clothes were dyed with monopoly dyes. He ate monopoly butter, monopoly currants, monopoly red herrings, monopoly salmon, and monopoly lobsters. His food was seasoned with monopoly salt, monopoly pepper, monopoly vinegar...He wrote with monopoly pens, on monopoly writing paper; read (through monopoly spectacles, by the light of monopoly candles) monopoly printed books," (quoted in Acemoglu and Robinson 2011, pp.187-188).

---

# Trading Monopolies V

> "[N]o goods of the growth, production, or manufacture of Asia, Africa, or America, shall be imported only by ships that belong to the people of the British Commonwealth."

- All trade with Britaih and her colonies must use British ships and British seamen

- Intended to target rival European empires

- Was a major grievance for the American colonists (along with later taxes)
]

---

# Trading Monopolies VI

]

- Such mercantilist-inspired laws upset a lot of merchants (not politically-connected to the crown)

- Lots of resistance: golden age of piracy, smuggling, "interloping"
  - How many "Founding Fathers" of the U.S. made their fortunes!

- Empires needed to continuously patrol the oceans with their navies against smugglers, pirates, and other Imperial navies

- Navies are expensive, often turned to **privateers** and **Letters of Marque**
]

---

# Trading Monopolies VII

]

> The Congress shall have Power...
> To define and punish Piracies and Felonies committed on the high Seas, and Offenses against the Law of Nations;
> To declare War, **grant Letters of Marque and Reprisal**, and make Rules concerning Captures on Land and Water;
> - Constitution of the United States, Article I, `$\S$` 8, Clauses 10-11

]

---

# Colonization and Imperialism I

.center[
European Empires at their (anachronistic) *maximal* historical extent
![:scale 70%](https://www.dropbox.com/s/9g547tv4ge2y1vy/europeanempires.png?raw=1)
]

---

# Colonization and Imperialism II

.pull-right[
- Portugal (c.1498+), Spain (c. 1492+), France (1530s+), Netherlands (1540s+), Britain (1600s+) establish colonies in Africa, Caribbean, Latin America, and Southern Asia

- Between 15th and 20th, many wars and changes of hands and fortunes of different European colonial overlords

- Several waves of colonialism - some are for conquest, some are for trade, some are for settlement

- Recall the connection to mercantilist political and economic philosophy
]

---

# Colonization and Imperialism II

- Acemoglu, Johnson, and Robinson:
 - Europeans chose one of two colonization strategies
 - Strategy chosen in 16th century *strongly* affects whether those former-colony countries are wealthy & developed or not *today*

Acemoglu, Johnson, and Robinson, 2001: 1253
]

.source[Acemoglu, Daron, Simon Johnson, and James A Robinson, (2001), "The Colonial Origins of Comparative Development: An Empirical Investigation," *American Economic Review* 91(5): 1369-1401

Acemoglu, Daron, Simon Johnson, and James A Robinson, (2002), "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," *Quarterly Journal of Economics* 117(4): 1231-1294

Acemoglu, Daron, Simon Johnson, and James A Robinson, (2005), "Institutions as a Fundamental Cause of Long-Run Growth," Chapter 6 in Phillippe Aghion and Steven N. Durlauf, eds, *Handbook of Economic Growth*

Acemoglu, Daron and James A Robinson, (2012), *Why Nations Fail: The Origins of Power, Prosperity, and Poverty*]

---

# Extractive Institutions I

- .shout[Extractive colonies]: focused on exploiting indigenous population to extract resources to export to mother country

- Examples: Latin America, West Indies, sub-Saharan Africa, India
]

---

# Extractive Institutions II

Potosi silver mines in (modern day) Bolivia
]
]

- Set up highly stratified colonial elite with monopolies and privileges and enslave indigenous peoples

- Ex: Spanish *encomienda* system rewarded conquistadors with land and forced labor from conquered indigenious peoples, especially for mining gold and silver through the *mita*
]

---

# Extractive Institutions III

]
]

- Monopolies and property rights only for privileged colonial elite

- Wealth from extracted minerals and coerced labor

- Colonial elites stood to lose a lot from innovation, experimentation, creative destruction

]

---

# Inclusive Institutions I

- Less indigenous population to coerce into labor, had to sustain themselves from European settlers

- Settlers demanded more inclusive institutions

- Examples: United States, Canada, Australia, New Zealand

]

---

# Inclusive Institutions II

- Focused primarily on agriculture and producing cash crops

- Trade with the mother countries: sell raw materials & buy manufactures

]

---

# Inclusive Institutions III

.pull-right[
- Colonies are **labor scarce** and **land abundant** (the exact opposite of late Medieval Europe!)

- Frontier opens up possibility of **exit**: if your colony's governance is not effective, leave and **go on your own**
  - Colonies constrained to have effective governance to avoid losing their populations
  - Requires including citizens in political and economic life
]

---

# Inclusive Institutions IV

- Economy and politics were (*relatively*) open to competition

- Stronger protection of property rights, rule of law, "town-hall" style meetings

- Incentives for experimentation, innovation, creative destruction

- Some settlers were refugees or (often religious) dissidents fleeing Europe 
  - strong desire for autonomy and liberty,
  - strong suspicion of tyranny and monopoly
]

---

# Why The Variation in Colonies? I

![:scale 80%](https://www.dropbox.com/s/r5nmwbz9j4wpxu7/populationdensity1500.png?raw=1)
]

---

# Why The Variation in Colonies? II

![:scale 80%](https://www.dropbox.com/s/xmtx8gk7akahjle/geographycolonies.png?raw=1)
]

---

# Why The Variation in Colonies? III

![:scale 80%](https://www.dropbox.com/s/acjunmo2e75kr2t/malariaindex.png?raw=1)
]

---

# Why The Variation in Colonies? IV

![](https://www.dropbox.com/s/a36l6meuvotc2vh/cortesburn2.jpg?raw=1)
]
]

- Conquer the indigenous ruling elite and use its *existing* system of exploiting indigenous population (become the *new* stationary bandit)

]

---

# Why The Variation in Colonies? V

- AJR: Settler mortality determined colonial institutions, which determine modern day prosperity of poverty

- First Stage:  	
`$$\widehat{\text{Expropriation Risk}_i}=\widehat{\gamma_0}+\widehat{\gamma_1}ln(\text{Settler Mortality in 1500}_i)+\widehat{\gamma}Controls+\nu_i$$`
- Second Stage:
`$$\widehat{\text{ln(Present GDP per capita)}}=\hat{\beta_0}+\hat{\beta_1}\widehat{\text{Expropriation Risk}_i}+\cdots+\hat{\beta_k}\text{Controls}+\epsilon_i$$`
]
]

.source[Acemoglu, Daron, Simon Johnson, and James A Robinson, (2001), "The Colonial Origins of Comparative Development: An Empirical Investigation," *American Economic Review* 91(5): 1369-1401]

---

# Why The Variation in Colonies? VI

.source[Acemoglu, Daron, Simon Johnson, and James A Robinson, (2001), "The Colonial Origins of Comparative Development: An Empirical Investigation," *American Economic Review* 91(5): 1369-1401]

---

# Colonization and Imperialism: Persistent Long-Run Effects I

- (Not very surprisingly) countries today that were predominantly extractive colonies have had more troubled histories and are less developed than countries that were predominantly inclusive colonies     
.pull-left[
.center[
![](https://www.dropbox.com/s/3wohf12mfnt5pvb/jamestown.jpg?raw=1)
]
]

---

# Colonization and Imperialism: Persistent Long-Run Effects II

- In extractive colonies, Europeans **divided and conquered** local indigenous groups (to prevent them from uniting to resist)

- Alternatively, exploit *existing* extractive institutions of coercive labor (Incan *mita* system, African slave trade)
  - supplant the existing stationary bandit with a new European (or European-friendly) stationary bandit

- Centuries of extractive institutions make colonial elite very wealthy and unequal relative to rest of society

]

---

# Colonization and Imperialism: Persistent Long-Run Effects III

- Decolonization and independence (1820s in Latin America; 1960s in Africa)

- Local ruling elites continue the extractive institutions from colonialism and become the new stationary bandits

]

---

# Assessing the Legacy of Imperialism I

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/7fpsxccetgm8145/cecilrhodescolossus.png?raw=1)
]
]

On the one hand, European colonization often

- built centralized bureaucracy and state capacity

- ended violent infighting between indigenous groups

- introduces ideas, technology

- increases trade, provides some public goods
]

---

# Assessing the Legacy of Imperialism I

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/saw3gx4ar5t67kj/europeanimperialism.png?raw=1)
]
]

On the other hand,

- often violent conquest

- many institutions built for extraction and tribute

- often heavily monopolized and regulated economies

- coercive, racist, subjugation of peoples
]

---

# Classical Economists Emerge In Opposition to Mercantilism

.pull-left[
- .shout[Classical Economics] (1770s-1870) emerges through *joint opposition to mercantilism*
  - Half of Smith's *Wealth of Nations* (1776) is about why mercantilism is stupid

- Wealth `$\neq$` money, but a nation's ability to consume (by production and trade)

- Monopolies and tariffs benefit a small group of domestic producers at the expense of everyone else

- Colonies and empire are expensive and often immoral

- .shout[(Classical) Liberalism]: focus on individual liberty, autonomy, democracy, free trade, pluralism; opposition to slavery, monopoly, and intolerance
]

---

# Mercantilism: Wrong on the Wealth of Nations I

David Hume

1711-1776
]
]
.right-column[

> For suppose that, by miracle, every man in Great Britain should have five pounds slipped into his pocket in one night; this would much more than double the whole money that is at present in the kingdom; yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest, (Political Discourses, 1752)

]

---

# Mercantilism: Wrong on the Wealth of Nations II

Adam Smith

1723-1790
]
]
.right-column[

> We trust with perfect security that the freedom of trade, without any attention of government, will always supply us with the wine which we have occasion for: and we trust with equal security that it will always supply us with all the gold and silver which we can afford to purchase or to employ, (Book IV, Chapter 1: Of the Principle of the Mercantile System).

]

---

# Mercantilism: Wrong on Trade I

Adam Smith

1723-1790
]
]
.right-column[

> As every individual, therefore, endeavours as much as he can ... to employ his capital [in] that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry ... and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention...By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it., (Book IV, Chapter 2: Of restraints upon the importation from foreign countries of such goods as can be produced at home).

]

---

# Mercantilism: Wrong on Trade II

Adam Smith

1723-1790
]
]
.right-column[

> Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter.  But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both., (Book IV, Chapter 3: Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds, from those Countries with which the Balance is supposed to be Disadvantageous, Part II).

]

---

# Mercantilism: Wrong on Trade III

Frederic Bastiat

1801-1850
]
]
.right-column[

> [A]ccording to the theory of the balance of trade, France has a quite simple means of doubling her capital at any moment.  It suffices merely to pass its products through the customhouse, and then throw them into the sea.  In that case the exports will equal the amount of her capital; imports will be nonexistent and even impossible, and we shall gain all that the ocean has swallowed up, ([The Balance of Trade](http://www.econlib.org/library/Bastiat/basEss13.html\#Chapter 13l) 1848).

]

---

# Mercantilism: Wrong on Trade IV

Frederic Bastiat

1801-1850
]
]
.right-column[

> The truth is we should reverse the principle ... and calculate the national profit from foreign trade in terms of the excess of imports over exports...But this theory, which is the correct one, leads directly to the principle of free trade...Assume, if it amuses you, that foreigners flood our shores with all kinds of useful goods, without asking anything from us; even if our imports are *infinite* and our exports *nothing*, I defy you to prove to me that we should be the poorer for it., ([The Balance of Trade](http://www.econlib.org/library/Bastiat/basEss13.html\#Chapter 13l) 1848).

]

---

# Mercantilism: Wrong on Trade V

Adam Smith

1723-1790
]
]
.right-column[

> Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce., (Book IV, Chapter 9: Conclusion of the Mercantile system).

]

---

# Mercantilism: A Corporate Welfare Scheme for Merchants I

Adam Smith

1723-1790
]
]
.right-column[

> It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects, (Book IV, Chapter 9: Conclusion of the Mercantile system).

]

---

# Mercantilism: A Corporate Welfare Scheme for Merchants II

Frederic Bastiat

1801-1850
]
]
.right-column[

> From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps, Snuffers and Extinguishers, and from the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.

> To the Honorable Members of the Chamber of Deputes.
> We are suffering from the ruinous competition of a foreign rival who apparently works under conditions far superior to our own for the production of light that he is *flooding* the *domestic market* with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation., ([The Candlemakers Petition](http://bastiat.org/en/petition.html) 1845).

]

---

# Mercantilism: A Corporate Welfare Scheme for Merchants II

Frederic Bastiat

1801-1850
]
]
.right-column[

> We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bulls'-eyes, deadlights, and blinds - in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

> [This will] encourage industry and increase employment...If you grant us a monopoly over the production of lighting during the day...we shall buy large amounts of tallow, charcoal, oil, resin, wax...and moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry., ([The Candlemakers Petition](http://bastiat.org/en/petition.html) 1845).

]

---

# Mercantilism: End the Artificial Restrictions I

Adam Smith

1723-1790
]
]
.right-column[

> Let the same natural liberty of exercising what species of industry they please, be restored to all his Majesty's subjects...break down the exclusive privileges of corporations, and repeal the statute of apprenticeship, both which are real encroachments upon natural liberty, and add to these the repeal of the [anti-migration laws] so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place without the fear either of a prosecution or of a removal, (Book IV, Chapter 9: Conclusion of the Mercantile system).

]

---

# Mercantilism: End the Artificial Restrictions II

Adam Smith

1723-1790
]
]
.right-column[

> The natural effort of every individual to better his own condition...is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations. (Book IV, Chapter V)

]

---

# Mercantilism: Wrong on Colonies I

Adam Smith

1723-1790
]
]
.right-column[

> Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater part of the people who engage in them, there is none perhaps more ruinous than the search after new silver and gold mines. It is perhaps the most disadvantageous lottery in the world, or the one in which the gain of those who draw the prizes bears the least proportion to the loss of those who draw the blanks: for though the prizes are few and the blanks many, the common price of a ticket is the whole fortune of a very rich man, (Book IV, Chapter VII, Part I: Of the Motives for establishing new Colonies)

]

---

# Mercantilism: Wrong on Colonies II

Adam Smith

1723-1790
]
]
.right-column[

> Folly and injustice seem to have been the principles which presided over and directed the first project of establishing those colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality., (Book IV, Chapter VII, Part I: Of the Motives for establishing new Colonies)

]

---

# Mercantilism: Wrong on Colonies III

Adam Smith

1723-1790
]
]
.right-column[

> o prohibit a great people, however, from making all that they can of every part of their own produce...is a manifest violation of the most sacred rights of mankind. Unjust, however, as such prohibitions may be, they have not hitherto been very hurtful to the colonies..

> We must carefully distinguish between the effects of the colony trade and those of the monopoly of that trade. The former are always and necessarily beneficial; the latter always and necessarily hurtful. But the former are so beneficial that the colony trade, though subject to a monopoly, and notwithstanding the hurtful effects of that monopoly, is still upon the whole beneficial, and greatly beneficial; though a good deal less so than it otherwise would be...Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies., (Book IV, Chapter VII, Part II: Causes of Prosperity of new Colonies)

]

---

# Mercantilism: Wrong on Slavery

Adam Smith

1723-1790
]
]
.right-column[

> Fortune never exerted more cruelly her empire over mankind, than when she subjected those nations of heroes to the refuse of the jails of Europe, to wretches who possess the virtues neither of the countries which they come from, nor of those which they go to, and whose levity, brutality, and baseness, so justly expose them to the contempt of the vanquished, (Part V, Chapter 2: Of the Influence of Custom and Fashion upon Moral Sentiments)

]

---

# Liberalism: Analytic Egalitarianism

- People are naturally the same, nobody born with a silver spoon

- Luck, education, and division of labor lead to differences in people as they specialize for labor markets

- Counter to feudal and customary hierarchy of status or later Progressive turn to eugenics, racial superiority and inferiority of different races

- Read "[How the Dismal Science Got its Name](http://www.econlib.org/library/Columns/LevyPeartdismal.html)".red[1]

]

---

# The Transitions to Open Access Orders

---

# North, Wallis, Weingast's Doorstep Conditions

.pull-left[
- How can we get from natural states that benefit the elite to open access orders (that might harm elites?)

- We saw plausible stories about how **feudal societies** transitioned to **mercantilist societies**
  - mercantilist societies are still natural states/limited access orders
  
- How did some countries transition further to .whisper[open-access orders] or .whisper[liberal democracies]?

- **Again, it must be in the interest of the elite to reform**

]

---

# North, Wallis, Weingast's Doorstep Conditions

.pull-left[
- North, Wallis, and Weingast (NWW) have three .shout["Doorstep Conditions"] to reach the *possibility* (not guarantee!) of attaining an Open Access Order:

1. Rule of law for elites

2. Perpetually-lived organizations (public and private) for the elite, including the State itself

3. Consolidation of military control under civilian leadership

]

---

# 1. Rule of Law for Elites I

- In a **natural state**, rule of law is *impossible*, law and politics is *personal*, *partial*, *patronage* network

- Elites have privileges and rents (lands, titles, etc) based on the price of their loyalty (ability to rebel or threaten violence)

- Equilibrium: dominant coalition of elites respects one another's privileges in proportion to their power

- Dynamic: as relative power distribution changes, privileges are added or revoked to groups that gain/lose power

]

---

# 1. Rule of Law for Elites II

.pull-right[
- If *most* elites enjoy *similar* privileges (e.g. trial by jury, secure property rights, inheritance), in their common interest to protect against arbitrary infringements to *any* elite member

- Convert (elite) **privileges** into **rights** that cannot be infringed by other elites or the King

- Elites must be able to **coordinate a response** against infringers (often the King)
  - "An attack on one is an attack on all"
  - Allows King to **credibly commit** to respecting rights (if he knows he will be resisted by *all* powerful groups)

]

---

# 2. Perpetual Organizations I

- Elites must be able to create organizations outside the State

- Organizations must exist as entities separate from individual members ("perpetual") and be capable of bearing legal rights and responsibilities ("legal persons")

- Relationships must transform from *personal* patronage to *impersonal* contracts
  - The office must become more important than office*holder*!

]

---

# 2. Perpetual Organizations II

![:scale 60%](https://www.dropbox.com/s/aqzm9m8mb0gf5ob/louisxvi.jpg?raw=1)
]
]

- "The State" must become a perpetual organization separate from the individual ruler(s)

- **A mortal State cannot make credibly commitments!**
  - What if future king disagrees with a previous king's policy?
  - What if *the same* king changes his mind in the *future*?

- King must not be *above* or *equal to* the law, but be *bound* by it

]

---

# 2. Perpetual Organizations III

- Movement from (e.g.) "King Henry VIII" to "The Crown"

- The king's "two bodies": "corporeal" (the individual officeholder) and "corporate" (the office itself as an institution)

- An individual king cannot alienate or alter features of The Crown

- Elites can collectively manage and defend The Crown against a renegade king!

]

---

# 2. Perpetual Organizations IV

- Elites must be able to form their own "corporate" organizations that
  - can exist separate from individuals
  - have its own privileges and obligations

- At first: chartered monopolies for production, exploration, and colonization

]

---

# 3. Consolidation of Military Control I

- Key to equilibrium in Natural State: groups of armed elites with own private armies balance one another with mutual threats
  - "successful societies wage peace"

- A State is a *monopoly* on the legitimate use of violence within a territory

- Need to move from elites with private armies (an oligopoly on violence) to a monopoly where *the* State controls "*the*" military
  - Requires *rule of law* and *perpetual organizations*!

]

---

# 3. Consolidation of Military Control II

- Elites must have *rule of law* protecting their **rights**
  - free from threat of arbitrary military attack, harassment by the State
  - only then does it make sense for them to disarm their private armies

- Elites need access to form orgs to specialize in non-military production (e.g. trade, business)

- State & military as perpetual organizations separate from personality of whomever is in charge

- Decisions about how to use military (funding, objectives, etc) decided *outside* of the military ("civilian control")
  - military specializes in tactics and execution of civilian-determined goals

]

---

# First Semblance of Market Economy and Industrial Revolution

- **Industrial Revolution** generally agreed to be *somewhere* between 1750-1850 in Britain
  - many inventions 
  - technology and capital augmenting labor 
  - centralized, factory mode of production, joint-stock companies
  - takes a long time for these inventions to show up as wage and income growth!
  - major political institutional changes

- Countries that develop institutions capable of free markets and industrial revolution:
 - The Netherlands (17th Century)
 - Britain.red[1] (18th-19th Centuries)

]

.pull-right[
.center[
![](https://www.dropbox.com/s/i6cpxnky275sguu/industrialrevolution.png?raw=1)
]
]

---

# Why Not France? I

- "France" a country in name only in 15th century
 - King's domain small compared to patchwork of powerful Dukes, etc.

- Hundred Years War with England (1337-1453)
  - Civil war *within* French Armagnacs/Valois and Burgundians
  - Charles VII *the Victorious* famously turns the tide and centralizes power with his standing army

]

.pull-right[
.center[
![:scale 80%](https://www.dropbox.com/s/djjt2xpj1h3otno/france100yearswarmap.png?raw=1)

France during the Hundred Years War (1415)
]
]

---

# Why Not France? II

- Absolutist France most powerful country in Europe for centuries - *could* have been an economic powerhouse

- King sold offices and monopolies as primary source of revenue
  - **tax farming** very popular for King

- Regions remained isolated under local lords with *their own* taxes, tariffs, and privileges restricting *internal* French trade

- France a near **autarkic** nation full of internal tariffs, tolls,  regulations, and superfluos bureaucrats
  - Access to markets required privileges
  - 90% of all French wine produced was consumed in France

]

.pull-right[
.center[
![:scale 75%](https://www.dropbox.com/s/2bntwlycimdmw70/francemercantilismmap.png?raw=1)

]
]

---

# Why Not France? III

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/05be8gtazjb7foa/frenchrevolutionguilotine.jpg?raw=1)

]
]

- Well after Industrial Revolution in Britain, which has taken the lead

- Not until French Revolution (1789-1799):

- Revolutionaries overthrow the Ancien regime, abolish feudal hierarchy and traditions

- New republican government aims to .onfire[rebuild all social institutions from scratch via positivist science]

- *la Terreur*

]

---

# Why Not France? III

- Napoleon siezes control from infighting of republican groups

- Universalizes and standardizes French language, law (*Code Napoléon*), customs, military under central State control

]

.pull-right[
.center[
![:scale 70%](https://www.dropbox.com/s/vplxyk0h2hlx533/napoleoncoup.jpg?raw=1)

]
]

---

# Why Not France? IV

---

# Why Not France? V

- "Exports" the French Revolution throughout Europe via military conquest

- Ironically, Napoleonic conquest overthrew feudalism and rent-seeking lords in conquered territories - had long lasting good effects in these countries!
  - Institutional reform and change towards more inclusive institutions

.source[Acemoglu, Daron, David Cantoni, Simon Johnson, and James A Robinson, 2011, "The Consequences of Radical Reform:  The French Revolution," *American Economic Review* 101: 3286-3307]

]

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.center[
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# Why Not Spain? I

- Iberian Peninsula reclaimed from Muslim Moors in *Reconquista* (711-1492)

- Like France: monopoly of military & taxation gained by Crown fighting against external threat

- "Spain" is a patchwork of different regions and cultures colonized and dominated by *Castille* ("Spanish" is truly *Castellano*)
  - Some regions (e.g. Catalonia, Basque) discriminated against and isolated with trade barriers, oppression
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# Why Not Spain? II

- More importantly, Spain has a vast colonial empire, that is directly controlled by the monarchy

- A vast source of treasure (gold, silver) coming in from colonies
  - No reason to invest in fiscal capacity (regular taxation, bureaucracy, administration) at home!

- But running the world's largest empire is expensive
  - Not to mention the *inflation* from all that gold and silver incoming!

- The fate of Spain is tied to the fate of its colonies
  - During bad times, monarchy arbitrarily confiscated property and privileges
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# The Netherlands I

- "**The Low Countries**" A small collection of marshland and key trading cities
 - Amsterdam, Rotterdam, Utrecht, Antwerp, Ghent, Bruges, Brussels, Luxembourg.red[1]

- Perhaps the richest region in Europe
  - The crown jewel of the Habsburg Spanish Empire
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# The Netherlands II

- Economic history of the Netherlands:

- A small region with few resources and marginal land
  - Mostly swampland, poor suitability for agriculture

> "God created the earth, but the Dutch created the Netherlands"

- Unprofitable agriculture for landowners, few vassals or serfs renting land

- Reclaiming land, draining marshes, polders
  - Very **capital-intensive** projects
  - Require **secure property rights**, **financial markets**, secure returns to investment

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# The Netherlands III

- Grew wealthy from efficient **economic organization** and **international trade**

- Trading cities, entrepot trading hubs for Northern Europe
  - Focus almost entirely on open international trade
  - regional specialization in textile manufacturing and export

- Becomes world renowned source of art, culture, science, innovation
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# The Netherlands IV

- Dutch East India Company (1602)
  - openly tradeable shares of stock in company

- Bank of Amsterdam (1609)
  - world's first central bank

- Amsterdam "price current" tracked market prices like financial newspaper

- Efficient capital markets: stock exchange, short and long term debt and credit
  - largely privately-organized

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.source[Stringham, Edward, (2003), "The Extralegal Development of Securities Trading in Seventeenth-Century Amsterdam," *Quarterly Review of Economics and Finance* 43: 321-344

North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11]

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# The Netherlands V

- (Northern) Netherlands are heavily **Protestant**

- Oppression by Catholic Imperial Spain (Phillip II)
  - arbitrary rules that intervene with trade
  - heavy taxation
  - considered the backwater of the Spanish Empire (despite being the wealthiest "colony")

- 17 Provinces .shout[revolt] under William of Orange (the Silent)
  - Right painting: *Phillip II of Spain berating William the Silent Prince of Orange* by Cornelis Kruseman (1832)

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# The Netherlands V

- **Eighty Years War (1568-1648)**

- Provinces form the Union of Utrecht and declare **independence** as the *Netherlands*

- Small country with *efficient credit markets* that can out-finance a war against the greatest Empire in the world

- 1648 Peace of Munster (simultaneous with Peace of Westphalia) recognizes independent Netherlands

- Southern providences (Catholic) don't join -- Belgium, Luxembourg

- Become a dominant global power (gain colonies, dominate trade, etc) until Britain takes over
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# England I

- Long history of struggles and warfare between nobility and a weak crown desperate for revenue

- 1215/1225 **Magna Carta**

- 1264-1267 Second Baron's War: Simon de Montfort's rebellion against Henry III establishes .shout[Parliament]

- Kings are forced to recognize rights and privileges of nobles
  - trial by jury
  - right of revolution?
  - impartial justice
  - consent for taxation

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# England II

- Constant pressure internally and externally, King desperate for revenues
  - Hundred Years War vs. France (1337-1453)
  - Wars of the Roses (1455-1487)
  
- Powerful kings (Edward I, Henry VII, Henry VIII) recognize they can get more of what they want if they ask nicely (via Parliament)

- Parliament represents the lords (laity and clergy, all large landowners) and the commons (lesser gentry, towns)
  - But constituencies are fixed for centuries
  - No representation in towns where industrial revolution would occur!

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# England III

- The 17th century turning point

- Growing merchant elite disgruntled with Stuart kings' monopolies, arbitrary justice, forced loans, restriction of speech

- Parliament passes 1623 of Monopolies
  - removes Crown's ability to grant *letters patent* to cronies
  - *Parliament* gains authority to grant *limited* patents for *novel and non-obvious* inventions

- View emerging among both nobles (Tories) and merchants (Whigs) that .onfire[the Crown is not above the law]
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# England IV

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King Charles storms the House of Commons (Jan 4, 1642) in *Cromwell* (1970)]

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# England V

- Charles I's behavior pushes country into the English Civil War(s) (1642-1651)

- Parliamentarians vs. Royalists
  - most Parliamentarians are merchants and lesser gentry ("Whigs")
    - also religious dissidents
  - most Royalists are nobles and landowning aristocracy ("Tories")

- Parliamentarians win, try and execute Charles I for high treason

- Brief dictatorship under Oliver Cromwell (1649-1660)

- Restoration of the monarchy under King Charles II (1660+)

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# England VI

- Openly-Catholic James II comes to throne

- Previous Stuart kings were smart enough to play factions off against one another

- James II manages to anger *both* the Whigs and the Tories who unite against him

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# England VII

- James II is ousted in a coup, the .shout["Glorious Revolution"] 1688-1689

- Parliament makes a deal with William of Orange (Netherlands) to co-reign with Mary (Protestant daughter of James II)

- Establishes .shout[Parliamentary sovereignty] and a **constitutionally-limited** monarchy
  - credibly commits (from past actions) to oust the monarch if s/he acts without Parliament's consent
  
- English Bill of Rights 1689
  - right of regular parliaments, free elections, freedom of speech, confirms habeaus corpus, taxation with consent
  - again, these are rights *for Parliament, for the elite*

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# England VIII

- English Bill of Rights 1689
  - right of regular parliaments, free elections, freedom of speech, confirms habeaus corpus, taxation with consent
  - again, these are rights *for Parliament, for the elite*

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![:scale 100%](https://www.dropbox.com/s/92z4fp8fgyira4r/williamandmary.jpg?raw=1)

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.source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12]

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# England IX

- Major effects of the Glorious Revolution
  - Parliament made a perpetual organization and source of lawmaking and taxation power

- Credible commitment: Parliament can commit to always pay State debts via taxes
  - No more arbitrary will of the Crown
  - Credit to England goes from 5% of GDP to 40% of GDP
  - Interest rates plummet

- Creates an *enormous* rise in State capacity and tax revenue as a percent of GDP compared to anywhere in the world

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![:scale 100%](https://www.dropbox.com/s/92z4fp8fgyira4r/williamandmary.jpg?raw=1)

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.source[North, Douglass C and Barry R Weingast, (1989), "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," *Journal of Economic History* 49(4): 803-832]

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# England X

- Liberal attitudes forged in the 17th Century turmoil and oppression
 - freedom of speech, press, trial by jury, habeas corpus

- The "English Constitution" creates a government to protect rights

- England is not yet an open access order!

- Act of Settlement 1701: personal union with Scotland, becomes United Kingdom of Great Britain
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# Britain I

- Parliament had elections, but not competitive, full of "rotten boroughs"

- 1760s-1850s: Industrial Revolution taking off in Manchester, Liverpool, Lancaster
  - but these places are not represented in Parliament!
  - still dominated by large landowners

- 1832 Great Reform Act
  - Seats of rotten boroughs redistributed to new commercial cities
  - Began registration of voters and extending the franchise

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![:scale 100%](https://www.dropbox.com/s/oxkgzlvr08lhjr1/houseofcommons1833.jpg?raw=1)

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# Britain II

- Great Reform Acts were in the interest of intra-elite bargaining amidst a natural state

- Elite continues to expand definition of who counts as elite and deserving of rights

- Unintended consequences:
  - leads to competitive elections, mass political parties, participatory democracy
  - Selectorate (and winning coalition) expands: need more public goods and less private rents for political support!

- Slavery Abolition Act (1833)

- Further Reform Acts in 1867, 1884, 1918, 1928
  - extend franchise to working class, counties (instead of just towns), all men, then all women

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![:scale 100%](https://www.dropbox.com/s/oxkgzlvr08lhjr1/houseofcommons1833.jpg?raw=1)

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# Britain III

- The .onfire[Corn Laws] were tariffs to prevent importation of "corn" (grains)
  - rising population in Britain, once a grain-exporter, now an importer
  - tariffs create enormous benefit by propping up aristocratic landowners

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![:scale 80%](https://www.dropbox.com/s/if5g5gq9owoyclo/cornlaws.png?raw=1)

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# Britain IV

- Corn Laws became a huge political issue in England in 1830s-1840s

- Industralization, rising population, but rising price of bread

- Great Famine in Ireland 1845-1849

- Radical liberals Richard Cobden & John Bright create the *Anti-Corn Law League* 1838
  - large rallies, major riots in London
  - Classical economiests (especially Ricardo and Bastiat) wrote vehemently against Corn Laws

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![:scale 80%](https://www.dropbox.com/s/l9weinfuyyhz00z/anticornlawleague.png?raw=1)

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# Britain V

Richard Cobden

1804-1865

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> "[Repealing the Corn laws would solve four problems.] First, it would guarantee the prosperity of the manufacturer by affording him outlets for his products. Second, it would relieve the Condition of England question by cheapening the price of food and ensuring more regular employment. Third, it would make English agriculture more efficient by stimulating demand for its products in urban and industrial areas. Fourth, it would introduce through mutually advantageous international trade a new era of international fellowship and peace. The only barrier to these four beneficent solutions was the ignorant self-interest of the landlords, the "bread-taxing oligarchy, unprincipled, unfeeling, rapacious and plundering."

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# Britain VI

Robert Peel

1788-1850

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- Tory Robert Peel becomes P.M. 1841-1846

- Repeals the Corn Laws in 1846
  - ruins his political career
  - splits the Tory Party into the Whigs; radicals leave and become the Liberal Party

- Price of corn plummets
  - working classes can now afford food, more shift from farms to factories
  - last vestiges of feudal privileges eroding
  - transition to Open Access Order
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# Britain VI

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- Tory Robert Peel becomes P.M. 1841-1846

- Repeals the Corn Laws in 1846
  - ruins his political career
  - splits the Tory Party into the Whigs; radicals leave and become the Liberal Party

- Price of corn plummets
  - working classes can now afford food, more shift from farms to factories
  - last vestiges of feudal privileges eroding
  - transition to Open Access Order
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# Open Access Order

Adam Smith

1723-1790
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> "All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men ... According to the system of natural liberty, the sovereign has only three duties to attend to ... first, the duty of protecting the society from violence and invasion of other independent societies; secondly ... the duty of establishing an exact administration of justice}}; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions..." (Book IV, Chapter 9).

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]

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# Open Access Order

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> "All systems either of preference or of restraint, therefore, being thus completely taken away, **the obvious and simple system of natural liberty** establishes itself of its own accord. **Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man,** or order of men ... According to the system of natural liberty, **the sovereign has only three duties** to attend to ... **first, the duty of protecting the society from violence and invasion** of other independent societies; **secondly** ... **the duty of establishing an exact administration of justice**; and, **thirdly**, the **duty of erecting and maintaining certain public works and certain public institutions**..." (Book IV, Chapter 9).

]

.source[Smith, Adam, 1776, [*An Enquiry into the Nature and Causes of the Wealth of Nations*](https://www.econlib.org/library/Smith/smWN.html)]