class: center, middle, inverse, title-slide # 5.3 — The Path to Liberal Democracy ## ECON 317 • Economic Development • Fall 2021 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i>safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/devF21"><i class="fa fa-github fa-fw"></i>ryansafner/devF21</a><br> <a href="https://devF21.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i>devF21.classes.ryansafner.com</a><br> --- # North, Wallis, Weingast's Doorstep Conditions .pull-left[ .smallest[ - 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 .hi-purple[open-access orders] or .hi-purple[liberal democracies]? - .hi-purple[Again, it must be in the interest of the elite to reform] ] ] .pull-right[ .center[  ] ] --- # North, Wallis, Weingast's Doorstep Conditions .pull-left[ - North, Wallis, and Weingast (NWW) have three .hi["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 ] .pull-right[ .center[  ] ] --- # 1. Rule of Law for Elites I .pull-left[ .center[  ] ] .pull-right[ .smallest[ - 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-left[ .center[  ] ] .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 .pull-left[ .center[  ] ] .pull-right[ .smaller[ - 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 .pull-left[ .center[ "L'etat c'est moi!"  ] ] .pull-right[ - "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 .pull-left[ .center[  ] ] .pull-right[ - 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 .pull-left[ .center[  ] ] .pull-right[ - 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 .pull-left[ .center[  ] ] .pull-right[ .smallest[ - 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 .pull-left[ .center[  ] ] .pull-right[ .smallest[ - 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 & IR .pull-left[ .smallest[ - **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 (17^th Century) - Britain^.red[1] (18^th-19^th Centuries) ] ] .pull-right[ .center[  ] ] --- # Why Not France? I .pull-left[ - "France" a country in name only in 15^th 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[  France during the Hundred Years War (1415) ] ] --- # Why Not France? II .pull-left[ .quitesmall[ - 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[  ] ] --- # Why Not France? III .pull-left[ .center[  ] ] .pull-right[ - 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 .hi-purple[rebuild all social institutions from scratch via positivist science] - *la Terreur* ] --- # Why Not France? III .pull-left[ - 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[  ] ] --- # Why Not France? IV .center[  ] --- # Why Not France? V .pull-left[ - "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] ] .pull-right[ .center[  ] ] --- # Why Not Spain? I .pull-left[ .smaller[ - 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 ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 10] --- # Why Not Spain? II .pull-left[ .quitesmall[ - 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 ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 110] --- # The Netherlands I .pull-left[ - "**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 ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # The Netherlands II .pull-left[ .smallest[ - 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 ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # The Netherlands III .pull-left[ - 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 ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # The Netherlands IV .pull-left[ - 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 ] .pull-right[ .center[  ] ] .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] --- # The Netherlands V .pull-left[ .smallest[ - (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 .hi[revolt] under William of Orange (the Silent) - Right painting: *Phillip II of Spain berating William the Silent Prince of Orange* by Cornelis Kruseman (1832) ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # The Netherlands V .pull-left[ .smallest[ - **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 provinces (Catholic) don't join -- Belgium, Luxembourg - Become a dominant global power (gain colonies, dominate trade, etc) until Britain takes over ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # England I .pull-left[ .smallest[ - 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 .hi[Parliament] - Kings are forced to recognize rights and privileges of nobles - trial by jury - right of revolution? - impartial justice - consent for taxation ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 11] --- # England II .pull-left[ .smallest[ - 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! ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] --- # England III .pull-left[ .smallest[ - The 17^th 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 .hi-purple[the Crown is not above the law] ] ] .pull-right[ .center[  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] --- # England IV .center[ <iframe width="980" height="550" src="https://www.youtube.com/embed/FFkKm_4FOFE" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> .smallest[ King Charles storms the House of Commons (Jan 4, 1642) in *Cromwell* (1970) ] ] --- # England V .pull-left[ .quitesmall[ - 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+) ] ] .pull-right[ .center[ The Trial of Charles Stuart, King of England  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] --- # England VI .pull-left[ - 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 ] .pull-right[ .center[ James II of England  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] --- # England VII .pull-left[ .quitesmall[ - James II is ousted in a coup, the .hi["Glorious Revolution"] 1688-1689 - Parliament makes a deal with William of Orange (Netherlands) to co-reign with Mary (Protestant daughter of James II) - Establishes .hi[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* ] ] .pull-right[ .center[ William and Mary  ] ] .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] --- # England VIII .pull-left[ - 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* .source[North and Thomas, (1986), *The Rise of the Western World: A New Economic History, Ch. 12] ] .pull-right[ .center[ William and Mary  ] ] --- # England IX .pull-left[ .smallest[ - 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 ] ] .pull-right[ .center[ William and Mary  ] ] .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] --- # England X .pull-left[ .smallest[ - Liberal attitudes forged in the 17^th 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 ] ] .pull-right[ .center[ A meeting of the anti-slavery society  ] ] .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] --- # Britain I .pull-left[ .smallest[ - 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 ] ] .pull-right[ .center[ House of Commons during Great Reform Act  ] ] --- # Britain II .pull-left[ .smallest[ - 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 ] ] .pull-right[ .center[ House of Commons during Great Reform Act  ] ] --- # Britain III .pull-left[ - The .hi-purple[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 ] .pull-right[ .center[  ] ] --- # Britain IV .pull-left[ .smallest[ - 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 ] ] .pull-right[ .center[ A Meeting of the Anti-Corn Law League  ] ] --- # Britain V .left-column[ .center[  Richard Cobden 1804-1865 ] ] .right-column[ .smallest[ > "[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." ] ] --- # Britain VI .left-column[ .center[  Robert Peel 1788-1850 ] ] .right-column[ .smallest[ - 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 ] ] --- # Britain VI .left-column[ .center[  ] ] .right-column[ .smallest[ - 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 ] ]