Why Nations Fail: The Origins of Power, Prosperity, and Poverty (16 page)

The attempt by the English state to stop the changes of institutions and wages that came in the wake of the Black Death didn’t work. In 1381 the Peasants’ Revolt broke out, and the rebels, under the leadership of Wat Tyler, even captured most of London. Though they were ultimately defeated, and Tyler was executed, there were no more attempts to enforce the Statute of Laborers. Feudal labor services
dwindled away, an inclusive labor market began to emerge in England, and wages rose.

The plague seems to have hit most of the world, and everywhere a similar fraction of the population perished. Thus the demographic impact in Eastern Europe was the same as in England and Western Europe. The social and economic forces at play were also the same. Labor was scarce and people demanded greater freedoms. But in the East, a more powerful contradictory logic was at work. Fewer people meant higher wages in an inclusive labor market. But this gave lords a greater incentive to keep the labor market extractive and the peasants servile. In England this motivation had been in play, too, as reflected in the Statute of Laborers. But workers had sufficient power that they got their way. Not so in Eastern Europe. After the plague, Eastern landlords started to take over large tracts of land and expand their holdings, which were already larger than those in Western Europe. Towns were weaker and less populous, and rather than becoming freer, workers began to see their already existing freedoms encroached on.

The effects became especially clear after 1500, when Western Europe began to demand the agricultural goods, such as wheat, rye, and livestock, produced in the East. Eighty percent of the imports of rye into Amsterdam came from the Elbe, Vistula, and Oder river valleys. Soon half of the Netherlands’ booming trade was with Eastern Europe. As Western demand expanded, Eastern landlords ratcheted up their control over the labor force to expand their supply. It was to be called the Second Serfdom, distinct and more intense than its original form of the early Middle Ages. Lords increased the taxes they levied on their tenants’ own plots and took half of the gross output. In Korczyn, Poland, all work for the lord in 1533 was paid. But by 1600 nearly half was unpaid forced labor. In 1500, workers in Mecklenberg, in eastern Germany, owed only a few days’ unpaid labor services a year. By 1550 it was one day a week, and by 1600, three days per week. Workers’ children had to work for the lord for free for several years. In Hungary, landlords took complete control of the land in 1514, legislating one day a week of unpaid labor services for each worker. In 1550 this was raised to two days per week. By the end of
the century, it was three days. Serfs subject to these rules made up 90 percent of the rural population by this time.

Though in 1346 there were few differences between Western and Eastern Europe in terms of political and economic institutions, by 1600 they were worlds apart. In the West, workers were free of feudal dues, fines, and regulations and were becoming a key part of a booming market economy. In the East, they were also involved in such an economy, but as coerced serfs growing the food and agricultural goods demanded in the West. It was a market economy, but not an inclusive one. This institutional divergence was the result of a situation where the differences between these areas initially seemed very small: in the East, lords were a little better organized; they had slightly more rights and more consolidated landholdings. Towns were weaker and smaller, peasants less organized. In the grand scheme of history, these were small differences. Yet these small differences between the East and the West became very consequential for the lives of their populations and for the future path of institutional development when the feudal order was shaken up by the Black Death.

The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance in society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe.

Understanding how history and critical junctures shape the path of economic and political institutions enables us to have a more complete theory of the origins of differences in poverty and prosperity. In addition, it enables us to account for the lay of the land today and why some nations make the transition to inclusive economic and political institutions while others do not.

England was unique among nations when it made the breakthrough to sustained economic growth in the seventeenth century. Major economic changes were preceded by a political revolution that brought a distinct set of economic and political institutions, much more inclusive than those of any previous society. These institutions would have profound implications not only for economic incentives and prosperity, but also for who would reap the benefits of prosperity. They were based not on consensus but, rather, were the result of intense conflict as different groups competed for power, contesting the authority of others and attempting to structure institutions in their own favor. The culmination of the institutional struggles of the sixteenth and seventeenth centuries were two landmark events: the English Civil War between 1642 and 1651, and particularly the Glorious Revolution of 1688.

The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions.

As a consequence, economic institutions also started becoming more inclusive. Neither slavery nor the severe economic restrictions of the feudal medieval period, such as serfdom, existed in England at the beginning of the seventeenth century. Nevertheless, there were many restrictions on economic activities people could engage in. Both the domestic and international economy were choked by monopolies. The state engaged in arbitrary taxation and manipulated the legal system. Most land was caught in archaic forms of property rights that made it impossible to sell and risky to invest in.

This changed after the Glorious Revolution. The government adopted a set of economic institutions that provided incentives for investment,
trade, and innovation. It steadfastly enforced property rights, including patents granting property rights for ideas, thereby providing a major stimulus to innovation. It protected law and order. Historically unprecedented was the application of English law to all citizens. Arbitrary taxation ceased, and monopolies were abolished almost completely. The English state aggressively promoted mercantile activities and worked to promote domestic industry, not only by removing barriers to the expansion of industrial activity but also by lending the full power of the English navy to defend mercantile interests. By rationalizing property rights, it facilitated the construction of infrastructure, particularly roads, canals, and later railways, that would prove to be crucial for industrial growth.

These foundations decisively changed incentives for people and impelled the engines of prosperity, paving the way for the Industrial Revolution. First and foremost, the Industrial Revolution depended on major technological advances exploiting the knowledge base that had accumulated in Europe during the past centuries. It was a radical break from the past, made possible by scientific inquiry and the talents of a number of unique individuals. The full force of this revolution came from the market that created profitable opportunities for technologies to be developed and applied. It was the inclusive nature of markets that allowed people to allocate their talents to the right lines of business. It also relied on education and skills, for it was the relatively high levels of education, at least by the standards of the time, that enabled the emergence of entrepreneurs with the vision to employ new technologies for their businesses and to find workers with the skills to use them.

It is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution. The great inventors such as James Watt (perfecter of the steam engine), Richard Trevithick (the builder of the first steam locomotive), Richard Arkwright (the inventor of the spinning frame), and Isambard Kingdom Brunel (the creator of several revolutionary steamships) were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably sold and
used. In 1775, just after he had the patent renewed on his steam engine, which he called his “Fire engine,” James Watt wrote to his father:

This letter reveals two things. First, Watt was motivated by the market opportunities he anticipated, by the “considerable demand” in Great Britain and its plantations, the English overseas colonies. Second, it shows how he was able to influence Parliament to get what he wanted since it was responsive to the appeals of individuals and innovators.

The technological advances, the drive of businesses to expand and invest, and the efficient use of skills and talent were all made possible by the inclusive economic institutions that England developed. These in turn were founded on her inclusive political institutions.

England developed these inclusive political institutions because of two factors. First were political institutions, including a centralized state, that enabled her to take the next radical—in fact, unprecedented—step toward inclusive institutions with the onset of the Glorious Revolution. While this factor distinguished England from much of the world, it did not significantly differentiate it from Western European countries such as France and Spain. More important was the second factor. The events leading up to the Glorious Revolution forged a broad and powerful coalition able to place durable constraints on the power of the monarchy and the executive, which were forced to be open to the demands of this coalition. This laid the foundations for pluralistic political institutions, which then enabled the development of economic institutions that would underpin the first Industrial Revolution.

World inequality dramatically increased with the British, or English, Industrial Revolution because only some parts of the world adopted the innovations and new technologies that men such as Arkwright and Watt, and the many who followed, developed. The response of different nations to this wave of technologies, which determined whether they would languish in poverty or achieve sustained economic growth, was largely shaped by the different historical paths of their institutions. By the middle of the eighteenth century, there were already notable differences in political and economic institutions around the world. But where did these differences come from?

English political institutions were on their way to much greater pluralism by 1688, compared with those in France and Spain, but if we go back in time one hundred years, to 1588, the differences shrink to almost nothing. All three countries were ruled by relatively absolutist monarchs: Elizabeth I in England, Philip II in Spain, and Henry II in France. All were battling with assemblies of citizens—such as the Parliament in England, the Cortes in Spain, and the Estates-General in France—that were demanding more rights and control over the monarchy. These assemblies all had somewhat different powers and scopes. For instance, the English Parliament and the Spanish Cortes had power over taxation, while the Estates-General did not. In Spain this mattered little, because after 1492 the Spanish Crown had a vast American empire and benefited massively from the gold and silver found there. In England the situation was different. Elizabeth I was far less financially independent, so she had to beg Parliament for more taxes. In exchange, Parliament demanded concessions, in particular restrictions on the right of Elizabeth to create monopolies. It was a conflict Parliament gradually won. In Spain the Cortes lost a similar conflict. Trade wasn’t just monopolized; it was monopolized by the Spanish monarchy.

These distinctions, which initially appeared small, started to matter a great deal in the seventeenth century. Though the Americas had been discovered by 1492 and Vasco da Gama had reached India by rounding the Cape of Good Hope, at the southern tip of Africa, in
1498, it was only after 1600 that a huge expansion of world trade, particularly in the Atlantic, started to take place. In 1585 the first English colonization of North America began at Roanoke, in what is now North Carolina. In 1600 the English East India Company was formed. In 1602 it was followed by the Dutch equivalent. In 1607 the colony of Jamestown was founded by the Virginia Company. By the 1620s the Caribbean was being colonized, with Barbados occupied in 1627. France was also expanding in the Atlantic, founding Quebec City in 1608 as the capital of New France in what is now Canada. The consequences of this economic expansion for institutions were very different for England than for Spain and France because of small initial differences.

Elizabeth I and her successors could not monopolize the trade with the Americas. Other European monarchs could. So while in England, Atlantic trade and colonization started creating a large group of wealthy traders with few links to the Crown, this was not the case in Spain or France. The English traders resented royal control and demanded changes in political institutions and the restriction of royal prerogatives. They played a critical role in the English Civil War and the Glorious Revolution. Similar conflicts took place everywhere. French kings, for example, faced the Fronde Rebellion between 1648 and 1652. The difference was that in England it was far more likely that the opponents to absolutism would prevail because they were relatively wealthy and more numerous than the opponents to absolutism in Spain and France.