What Did Institutions Really Do?

Market and State in Eighteenth-Century Britain

The Glorious Revolution was not the watershed moment for British political economy. But in the century-and-a-half that followed, the country’s governance was altered irrevocably, if gradually, with deep ramifications for the economic sphere. Historians and political scientists have naturally focused on the dramatic changes apparently wrought by 1688, particularly the ratcheting of executive constraints and the increased security of rights to landed property and wealth that supposedly accompanied it. Yet in many respects, the Hanoverian state of the long eighteenth century was not a limited-government, laissez-faire parliamentary democracy at all. Instead, Britain’s government frequently violated or failed to uphold the sanctity of certain property rights in order to promote what it saw as the national interest. What emerged after 1688 was a hybrid state, in some cases limited and in others despotic, marked not by constraints but by powerful and professional administration.

The Northian narrative of the Industrial Revolution favors two key sorts of institutions: parliamentary democracy (with a constrained monarch) and private property. With the handover of royal prerogative to the legislature, the interests of improving landowners, merchants, and industrialists gained increased representation in government and wealth became increasingly secure. Parliament’s control over the public purse encouraged fiscal responsibility, credibly committing the regime to pay its debts and thus respect its obligations to bondholders. With the once-predatory monarch in chains, the all-powerful solvents of private property and lowered transaction costs would be free to encourage efficient economic activity and investment. Entrepreneurs, manufacturers, and inventors would be able to capture (something approaching) the full social returns on their initiatives without fear of arbitrary confiscation. Or so the story goes.

It’s true that eighteenth-century Britain had a constrained monarchy, and that at least by Continental standards her politics were somewhat representative. Only a fraction of the electorate could vote, no doubt, and corruption—patronage and rotten boroughs, among other things—was endemic. With the emergence of a hegemonic Whig Party under Horace Walpole after 1715, political competition faded and an oligarchic organization arose in the House of Commons, designed to reward loyal followers of the administration with offices and sinecures. The system of “private bills” meant that politicians and local legal changes were essentially up for sale, and these acts composed an astonishing 70 percent of all legislation. In the early eighteenth century, special interests repeatedly won out. The Calico Acts of 1700 and 1721 restricted first the import and then the sale of printed cotton, a flagrant capitulation in favor of the wool and silk industries in the face of competitive innovations. Under an Act of 1729, beer brewers were forced to secure licensing from local magistrates, ending a once-open system for a century. Alcohol distributors continued to be favored with tariffs on French wines, while the Corn Laws were not repealed until 1846, and even included an export subsidy until 1815. After the passage of the Bubble Act of 1720, the formation of joint-stock companies was difficult and subject to strict Parliamentary approval. Oligopolies, enforced through licensing, mandatory inspections, and price controls, were often promoted for revenue-raising purposes, as their concentration eased the collection of the excise. And even if Britain was more averse to such rent-seeking than its European counterparts (which is contestable), the reason probably had less to do with Parliamentary restraint than with the absence of a paid local bureaucracy to enforce destructive policies.

Landowners remained the paramount faction in national politics and, until the end of the nineteenth century, they were the economic winners of industrialization. Already buoyed by rising land values around coal and water power sites, they continued to extract significant rents from their legislative dominance. As tax receipts accelerated—five times faster than national product—during the eighteenth century, the land tax barely changed. The aristocracy passed on the costs of fighting Britain’s wars to the commercial middle class through the excise and customs, the extraction of which was aided by a quadrupling in the size of the fiscal bureaucracy. On finding that 179 of 189 millionaires dying between 1809 and 1859 were landed, Rubinstein (1981) remarked that “an observer entering a room full of Britain's 200 wealthiest men in 1825 might be forgiven for thinking that the Industrial Revolution had not occurred.” But merchants, industrialists, and capitalist farmers were well-represented among the small elite eligible to run and vote in elections, and became increasingly so during the eighteenth and especially the nineteenth centuries. The Whigs generally represented urban financial interests and manufacturers, and in their thirty years of ascendancy, they promoted infrastructural developments—turnpikes, canals, river extensions—that tended to open up the domestic market. They were also recognized as more creditworthy by public bondholders, as reflected in interest rate movements. If we forget momentarily that the Whigs were most dominant in narrow urban electorates and lost to Tories in the widest (i.e. that most people were probably Tory), the political situation may have been at least mildly positive by the mid-eighteenth century. It was definitely limited, not open-access, but it’s not clear that the latter was either necessary or sufficient for commercial development.

What of property rights? North’s original focus was on the security and clear definition of landed, monetary, and intellectual property, which—by lowering transaction costs—provided incentives for the transfer of assets to their most productive uses and for investment projects without fear of expropriation. The last two decades, however, has seen a wealth of research emerge showing that the scope of the discussion needs to be widened. Landownership, as we recently discussed, had been secure since the Middle Ages under the common law, and was enshrined in the Magna Carta agreed at Runnymede in 1215. Small farmers and great landowners alike regarded property rights as sacrosanct and fundamental to English freedom, and these rights could be held or transferred at will, thanks to a constellation of competing courts. By the mid-eighteenth century, agricultural expansion had been taking place for 200 years on that basis. But this security was not static; between 1750 and 1830, Parliament passed 5200 acts of enclosure, converting communal property over open fields, commons, and wastes (21 percent of the kingdom) to private forms regardless of opposition. This was not a restriction per se, but rather a transition from particularized—where assets can be used and transferred by a small set of people defined extra-economically—to generalized rights. Enclosure may have failed to generate significant short-term growth, but it did reduce feudal ownership patterns based on membership in certain social strata and created larger, contiguous blocs of land over which tenants had control over investment and cropping choices. Tellingly, enclosed farms were more likely than open to have introduced the new experimental crops of the late agricultural revolution—turnips, clover, and sainfoin. Parliament also intervened to remove land from “equitable estate,” which prohibited holders from mortgaging, leasing, or selling most of their plots.

Beyond promoting a transition to generalized property rights, Parliament also helped to reorganize land for the provision of public goods. Acts established “statutory authorities” empowered to build, maintain, and operate public infrastructure and services and secure funding through taxes, debt, and tolls. These organizations replaced inadequate governmental entities lacking revenue-raising abilities and eminent domain, such as the sewer commissions that in the seventeenth century had to maintain river navigation without the ability to tax users or purchase land along the banks. Turnpike acts, for example, created trusts that could levy tolls on roads and mobilize labor (or the equivalent in taxes) from communities alongside them. These organizations could issue debt and equity secured by tolls, which could be claimed by bondholders if default occurred. Crucially, if landowners on the route attempted to obstruct construction by refusing to sell their plots, the trusts could appeal to commissions that forced a sale at a juridically-determined “fair price.” The mechanism eliminated the hold-up problem and was “legal origin for modern laws concerning eminent domain.” Similar solutions were devised for the construction of bridges and canals. The total number of estate, statutory authority, and enclosure acts increased from 30 per year during the 1600s to 400 by 1800. The novel characteristic of eighteenth-century landed property rights appears to have been flexibility, not rigid security. Bogart and Richardson (2006), whose research has underlined the significance of this Parliamentary process, stress that the acts "authorized the improvement, sale, and leasing of land; and thus, enabled land to be shifted to higher value uses.”

Intellectual property rights are a cherished aspect of the institutionalist program. North, in his famous Structure and Change in Economic History (1981), argued that the establishment of a patent system was crucial to the upswing in technological change, as it allowed inventors to privately a capture a greater portion of the social rate of return on their innovations. The logic is straightforwardly neoclassical and compelling, and fits what appears to be the historical reality: the coincident rise in the number of patent filings and the pace of technically-driven economic growth after 1750. “What could be wrong with this picture?” asked Joel Mokyr (2009). “The answer,” he concluded, “is basically ‘almost everything.’” Before the system was reformed in 1852, taking out a patent in England alone cost £100 and over three times that for the United Kingdom as a whole. Moser (2007) showed that at the Crystal Palace exhibition of 1851, only 11 percent of British exhibits (and 16 percent of award winners) had successfully filed. Patents were frequently violated, a practice facilitated by judges who often deemed the holders monopolists. And in many cases, they were right to think so; Thomas Savery’s steam engine patent blocked Thomas Newcomen from getting one for his far more successful device, while James Watt used his own to delay the development of the high-pressure steam engine. “Caveats” allowed speculators to express the intention of filing a patent in an area, prohibiting future applications with actual content. Mokyr—following Nye (1991)—suggests that the importance of the system may have been that a few famous examples led inventors to innovate in the expectation of securing a patent, but which didn’t actually grant the hoped-for monopoly rights. Instead, the technical information could be freely disseminated and used. Once again, as with land use, the achievement of the British state appears to have been a fortunate flexibility, not rigid adherence to guarantees.

Mokyr and Nye (2007) synthesized some of these patterns into a broader thesis about the dynamics of institutional change during the Industrial Revolution. They argued that a “distributional coalition” emerged in English politics during the eighteenth century, uniting “Big Land” and “Big Commerce” in a “centralized government structure” dedicated to ripping up the feudal ancien regime and replacing it with a uniform national regulatory framework. Private acts solved hold-up problems in land use and—through infrastructural development—created a single national market, one in which inefficient local monopolies would be wiped out by firms operating with the latest technologies on a country-wide scale. Rent-seeking moved away from the regional to the Parliamentary level, preventing the installation of internal tariff barriers of the kind that plagued many Continental economies. Legislation ceased to be primarily redistributionary—exemplified by the repeal of the Calico Act in 1774—and pursued, if not the national interest, at least those of the critical wealth-holding factions represented in government. The Glorious Revolution’s establishment of Parliamentary supremacy made the body the uncontested rule-maker in the land, able to elastically supply the demand for economic reorganization. Mokyr and Nye point to the gradual but inexorable decline of rent-seeking legislation once exposed to the censure of national political debate, from the repeal of the Statute of Artificers in 1814 to the final removal of the Corn Laws in 1846 as an indication of the coalition’s liberalizing bent.

What remains uncertain, however, is whether this had much significance for industrialization. Advocates of the Northian institutionalism had no doubts about the causal chain running from institutions to economic discontinuity. Mancur Olson (1982), for example, wrote unambiguously that “a few decades after stable and nationwide government had been established in Britain, the Industrial Revolution was on its way.” But there’s a disparity between the character of the gains achieved by institutional change and the technologically-fueled growth of the Industrial Revolution. There were static efficiency benefits to be had from an open, connected internal market, and even some dynamic harvests to be reaped from bills for road, railway, and canal construction. But was adaptability enough to promote Schumpeterian growth? At best, I think, the institutional matrix described above could help to keep industrialization moving, unless one weights very strongly the size of the market in technological change.

And even if improving state of Mokyr and Nye emerged during the eighteenth century, the timing looks wrong. If we’re discussing the very type of Smithian growth that infrastructural development and tariff removal promotes, its origins should be sought in the seventeenth century, well before the land-commerce coalition solidified. As we’ve discussed in previous weeks, enclosure came between the two primary waves of British agricultural development and was in any event a response to urban growth. By the time that the rollback of the old regulatory state was underway—Statute of Artificers repealed 1814, the enumeration clauses of Navigation Acts in 1822, artisan exports in 1824, machine exports in 1843, the Bubble Act in 1825, the Corn Laws in 1846—the turning point had been reached. Liberalization was a response to the inadequacy of mercantilist and patronage-based legislation in a modernizing industrial world. Even the entrance of manufacturing interests into Parliament was probably a result of their economic success, not a precondition for it.

None of this is to suggest that British institutions were unhelpful. The Industrial Revolution would have been impossible without some form of secure property rights in land and physical capital. What’s less clear is the extent to which particularly British institutions gave the country an edge over France and the Low Countries. I think that it’s hard to argue that the eighteenth-century regime was critical to the early start; given the accidental, ad-hoc nature of British legislation, to cite it as most optimal—especially with regard to patenting—appears to me an act of rationalization. Langford (1991) called it “a great bog of uncoordinated lawmaking, ever expanding but always unplanned.” We must also distinguish between factors that facilitated industrial change and factors that drove it. And for the latter, we need to look at different forces—at Britain’s precocious urbanization, international commercial success, and manufacturing productivity. If there were institutional sources, they lay elsewhere and operated over a much longer period than the century-and-a-half separating the coronation of William and the Congress of Vienna.