The rise of the modern state and the rise of Europe

I recently read a couple of interesting economic history papers on the interactions between institutions, economic and political power, and economic growth. The first was the econ-famous paper, The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth, by Harvard economists Daron Acemoglu, Simon Johnson, and James Robinson, which has managed to rack up 682 citations (so says Google Scholar). The second was the less-cited (12) but equally-good paper, The Open Constitution and its Enemies: Competition, Rent Seeking, and the Rise of the Modern State, by Oliver Volckart of LSE.

I found the two papers quite stimulating, and as you might have guessed from their titles, their similarities extend to the rise (and fall) of things (essentially power relations; kinds of ‘states’), competitive processes, and the distribution of rents and growth under differing institutional arrangements. The Volckart paper covers medieval-to-early-modern Central Europe (1000-1500), while the Acemoglu et al paper takes up from the early-modern period until the rise and rise of colonial Europe and industrialisation (1500-1800). What I found interesting is that these two papers seem to rely on the same underlying model of how power relations affect distributions of wealth (which then feed back into power relations, and so on), but work in opposing ways.

To summarise the underlying mechanism, very crudely, in a sentence: (1) take an institutional arrangement, I0, specifying political and economic power relations; (2) add a technological development and subsequent new sources of wealth, that is potentially disruptive of I0; and (3) get new political and economic power relations It, that is dependent, of course, on I0. Moreover, where I0 is relatively decentralised (or competitive or non-absolutist) and the technological development is such that new sources of wealth fall into many new hands, rather than accumulating to incumbent elites, the system will evolve in the direction of dispersing political-economic power. If however, the technological development favours the accumulation of economic rents, we see an institutional evolution with political centralising tendencies. Essentially technological development leverages economic growth, and – depending on the nature of the development, and the current state of power relations – this triggers an evolution of the institutional system. Crucially, it is the ‘openness’ of the initial institutional system I0 (beyond some threshold) that determines whether this process takes place.

In the Volckart paper, the disruptive technology was a combination of the increasing use of written records, development of road systems between regions, and the spread of a money economy. These allowed a quicker spread of news among feudal regions and caused a sharp reduction in transaction costs, especially information costs, for feudal lords. Lords were better able to strictly monitor their vassals, reducing competition in the ‘market for protection’, and leading to increases in the optimal scale of security provision. At the same time, agricultural productivity improved, population increased, many new cities were founded (density increased), and less and less lords were able to extract more and more economic rent from their subjects. This resulted in a ‘virtuous’ cycle of accumulation of economic power (as lords collected greater rents) and centralisation of political power (as feudal ‘states’ expanded territorially) – ultimately leading down the path to the modern state (monarchy). So this is a tale of how a relatively open political system (feudalism) met with technological development and economic growth, and evolved into a more closed political system (monarchism).

In the Acemoglu et al paper, the disruptive technology was seafaring and the development of Atlantic trade and colonialism. This meant that European nations were able to tap new source of wealth by establishing extractive institutions in their colonies, and where initial political institutions placed significant checks on the monarchy, merchant groups were the ones to benefit economically. Further, as a result of their burgeoning economic strength (relative to the monarchy) merchants were able to obtain changes in institutions to protect property rights, fuelling a virtuous cycle that cultivated private enterprise and further economic growth. Further, Acemoglu et al find that this did not occur (or happened less so) in nations characterised by relatively absolutist institutions, since monarchies were the primary beneficiaries of Atlantic trade and extractive colonialism, and were able to further strengthen their economic and political dominance. Hence, no virtuous cycle occurred, and there was no institutional evolution to speak of (or, again, this happened more slowly than elsewhere in Europe). So this is a tale of how relatively open political systems (nonabsolutist monarchies) met with technological development and economic growth, and evolved into even more open political systems (protective of property rights and conducive to private enterprise) – while relatively closed political systems further entrenched power relations.

Of course, the models and analyses in the two papers are much more sophisticated than I have outlined here, and differ in their own ways – but I couldn’t help thinking that there was a nice symmetry to them:

open institutional systems + infusion of wealth = institutional evolution

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