The Institutional Revolution: Measurement and the Economic Emergence of the Modern World

Overview

Few events in the history of humanity rival the Industrial Revolution. Following its onset in eighteenth-century Britain, sweeping changes in agriculture, manufacturing, transportation, and technology began to gain unstoppable momentum throughout Europe, North America, and eventually much of the world—with profound effects on socioeconomic and cultural conditions.

In The Institutional Revolution, Douglas W. Allen offers a thought-provoking account of another, quieter revolution ...

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The Institutional Revolution: Measurement and the Economic Emergence of the Modern World

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Overview

Few events in the history of humanity rival the Industrial Revolution. Following its onset in eighteenth-century Britain, sweeping changes in agriculture, manufacturing, transportation, and technology began to gain unstoppable momentum throughout Europe, North America, and eventually much of the world—with profound effects on socioeconomic and cultural conditions.

In The Institutional Revolution, Douglas W. Allen offers a thought-provoking account of another, quieter revolution that took place at the end of the eighteenth century and allowed for the full exploitation of the many new technological innovations. Fundamental to this shift were dramatic changes in institutions, or the rules that govern society, which reflected significant improvements in the ability to measure performance—whether of government officials, laborers, or naval officers—thereby reducing the role of nature and the hazards of variance in daily affairs. Along the way, Allen provides readers with a fascinating explanation of the critical roles played by seemingly bizarre institutions, from dueling to the purchase of one’s rank in the British Army.
 
Engagingly written, The Institutional Revolution traces the dramatic shift from premodern institutions based on patronage, purchase, and personal ties toward modern institutions based on standardization, merit, and wage labor—a shift which was crucial to the explosive economic growth of the Industrial Revolution.

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Editorial Reviews

Marginal Revolution - Tyler Cowen

“I thoroughly enjoyed this excellent book.”
Times Literary Supplement

"What are the connections among aristocrats, duels, private lighthouses and private police forces in the conduct of early modern economies? Douglas W. Allen in The Institutional Revolution brings together a whole series of customs and behaviors we now associate with irrational premodern practices and shows the part they played as informal institutions to ensure the provision of civil service goods before the nineteenth century."
Economic History Review - Graham Brownlow

“In 1910, J. H. Clapham memorably described the industrial revolution as a ‘thrice squeezed orange.’ Yet writing more than a century later, Douglas W. Allen has written a brilliant and enjoyable book that shows there is still plenty of juice left in this orange. With The Institutional Revolution, Allen provides a stimulating microeconomic reinterpretation of English economic development in the period between 1780 and 1850. The range of reading, the quality of the analysis, the elegance of the writing, and the lightness of touch displayed by Allen are all extremely impressive.”
Thr�inn Eggertsson

“Douglas W. Allen has written a brilliant and challenging book that puts the measurement problem in the foreground to convincingly explain the logic of premodern institutions—institutions that the typical modern person, until reading Allen, views as the embodiment of chaos, inefficiency, corruption, and ineptitude. The Institutional Revolution contains a wealth of historical information that anyone with an interest in history will find interesting and often delightful.”
Gary D. Libecap

“This is a very important book that increases understanding of how changes in measurement and institutions can increase trade and welfare. Allen uses economic logic to show that quaint premodern institutions—including the social rules of the old aristocracy, and the practice of dueling—aligned incentives at a time when variance in outcomes due to the enormous effects of nature could not easily be separated from those due to human behavior. Especially interesting is his insight into how the industrial and institutional revolutions in Britain developed interactively. This wonderful book sets the groundwork for further essential investigation into the micro foundations of specific institutional changes and economic growth, topics that are at the forefront of modern efforts to increase welfare.”
Richard N. Langlois

“In the early modern period, British aristocrats engaged in a panoply of seemingly inefficient activities. They owned grandiose, high-maintenance estates. . . . They refused to engage directly in any commercial activity and spent their hours cultivating demanding but seemingly useless skills like, music, dancing, repartee, and Latin conjugations. Yet, despite these apparently wealth-destroying behaviors, aristocrats grew wealthy, often astoundingly wealthy. As Allen asks in his marvelous book, ‘what economic puzzle were they solving in order to generate this wealth?’ . . . A milestone in the New Institutional Economics."
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Product Details

  • ISBN-13: 9780226014746
  • Publisher: University of Chicago Press
  • Publication date: 12/1/2011
  • Series: Markets and Governments in Economic History Series
  • Edition description: New Edition
  • Pages: 288
  • Sales rank: 1,045,010
  • Product dimensions: 6.20 (w) x 9.10 (h) x 1.00 (d)

Meet the Author

  Douglas W. Allen is the Burnaby Mountain Professor of Economics at Simon Fraser University in Canada. He is the author of numerous books, including The Nature of the Farm: Contracts, Risk, and Organization in Agriculture.

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Read an Excerpt

The Institutional Revolution

Measurement and the Economic Emergence of the Modern World
By DOUGLAS W. ALLEN

THE UNIVERSITY OF CHICAGO PRESS

Copyright © 2012 The University of Chicago
All right reserved.

ISBN: 978-0-226-01474-6


Chapter One

Introduction

To my Lords in the morning, where I met with Captain Cuttance, but my Lord not being up I went out to Charing Cross, to see Major-general Harrison hanged, drawn, and quartered; which was done there, he looking as cheerful as any man could do in that condition. He was presently cut down, and his head and heart shown to the people, at which there was great shouts of joy. SAMUEL PEPYS, The Diary of Samuel Pepys, October 13, 1660

If it were not for his remarkable diary and detailed records, Samuel Pepys would hardly rate a footnote in history as an able naval administrator. But he did write a literary gem of a diary, in which his personal accounts and keen observations of life in seventeenth-century London enjoyably take us back in time to a world much different than our own. Today many (though perhaps not that many) read the diary for a firsthand account of the Great Plague of 1665 or the Great Fire of London in 1666, or simply to feel nostalgia for days gone by in Freshman English. But even a casual reader cannot overlook some outlandish curiosities ... like how it came to pass that a major-general was hanged, drawn, and quartered in public, much to the thrill of onlookers. Some readers are old enough to remember hanging as a capital punishment, but no one today has any experience with a public drawing and quartering.

There is more to Pepys's diary than gory dismemberment. By any account, Pepys was a successful man: chief secretary to the Admiralty, justice of the peace, member of Parliament, fellow and president of the Royal Society, and brother and master of Trinity House, to name only a few posts. Some of these positions ring familiar, others less so, but a closer inspection of any single office reveals many strange things.

For example, Pepys got his start in the navy when his first cousin once removed, Sir Edward Montagu, was willing to act as his patron. A patron in Pepys's day was a person of influence who, with a word, could make or break a career. A patron was almost always necessary for any advancement in what we would now call the "public ser vice," and Sir Edward had his own—a well-known character named King Charles II. Charles granted Montagu a number of titles, offices, and honors—including the 1st Earl of Sandwich—for his loyal ser vice during the restoration of his Crown in 1660, and his positions allowed Montagu to influence the Admiralty to grant Pepys his first office, the clerk of the acts, in the navy. Pepys had no administrative experience or formal knowledge of the navy, but this hardly mattered at the time. Patronage appointments were given to people whom the patron could trust; ability was a distinctly secondary matter. What was also strange about Pepys's office, along with most others of the age, was that it became a matter of (mostly) private property once received. When Pepys became the clerk of the acts, he owned the office the way we now own our homes: he could sell, borrow against, and earn an income from it.

As a member of Trinity House, Pepys was part of an ancient monopoly organization that privately built light houses and actually charged ships for the ser vice: no payment, no light. When he was elected to Parliament, it was first on behalf of a Lord Howard, and very few of his countrymen were allowed to vote—perhaps none of them freely, given the lack of secret ballots, the influence of sheriffs, and the ownership of many boroughs by high nobility. Though a justice of the peace, he received no salary for his efforts, and he openly accepted bribes at his naval office. His day-to-day life was very commonplace for a gentleman, but he also lived in quiet fear that someone might challenge him to a duel. Thus, Pepys provides a nice example of the paradox of life between the modern and the pre-modern world. On the one hand, Pepys's life was as ordinary as a human life could be: he worried about his supper and his gold, he was proud that his home had a spare bed for visitors, he pursued his mistresses, and he gossiped about his friends and co-workers. And yet, on the other hand, his life took place within the context of a set of social rules, norms, and organizations quite alien—and often offensive—to us today. In the West, patronage and bribes now imply corruption, duels are long gone, and universal suffrage with a secret ballot is a fundamental right. Indeed, it is this contrast in institutional context between the past and present that rivets students of history to the Pepys narrative.

In general, what often attracts us to history is the exotic within the context of the ordinary. We marvel at the spectacular military leader in an otherwise common battle. We are drawn to understand polygamy and arranged marriage among almost universal monogamous heterosexual marriage. Although we relate to, and sympathize with, the complaints of the eighteenth-century shipowner over excessive port taxes, we are more curious about the private "tax farmer" who paid the Crown for the right to collect the dues. And, of course, we are flabbergasted at the seventeenth-century diarist who unabashedly traded naval contracts for every form of payment from cow's tongue to sexual favors. If history did not have these exotic episodes, if the organization of life never changed, or if we could not relate to the individuals of the past, then history would make an unattractive study indeed. Fortunately, history has the common thread of humanity that makes it relevant. Doubly good is that its organizational detail changes over time and is therefore compelling and interesting.

Economics provides a useful tool for understanding the past because the human experience, over time, is connected through a common economic reality. At the most fundamental level, all people at all times have dealt with the problem of scarcity. There has never been enough, there will never be enough, and as a result people always have been driven to find better ways to increase their wealth and consumption. Scarcity has several universal implications: choices always have had to be made, trade-offs always have existed, actions always have had costs, and there always have been winners and losers. Modern readers recognize the signs of scarcity in our past and understand things like sibling rivalry—whether told through Cain and Abel, the daughters of King Lear, or Michael and Fredo Corleone in The Godfather. Humans have always used innovations to reduce the level of scarcity; thus technology, which is ever present in one form or another, has improved over time. Markets have also existed since antiquity, and life throughout history is a continuous attempt to get and produce more through exchange. The Romans had capital markets and interest rates. In many ways the baker of antiquity was similar to our baker on the corner because all bakers are simply trying to make a living.

What then, in a broad sense, is different? What captures our attention when we see a historical society different from our own? Economists naturally tend to focus on measures of well-being such as technology, incomes, height, or the absence of violence. This is an economic history of quantifiable averages. Output has increased over time, along with population and per capita incomes—on average. Health is better, people are taller, transportation is faster—on average. This is all well and good, but it often fails to capture what many sense to be a greater difference. Armies today are not just more deadly on average; they look different. They wear camouflage, do not fight in tight formations, are not composed of foreign mercenaries, and do not receive compensation through the spoils of battle. If we go back to our friend Samuel Pepys, we see that a middle-class administrator in the British navy today would have more possessions and live longer, but we are also aware that no one in the West today nonchalantly watches a man's heart get ripped out in a public square. So we realize that there is more to change over time than just a difference in averages.

Nevertheless, it is unfair to accuse economists of being completely focused on averages. Many have recognized that a major component of what differs over time are the rules we live by and how life is organized.. For the moment, call these rules "institutions." The more institutions differ over time, the more different the past appears. Today, in the West, the world is considered "modern." By that is meant a world governed by a series of secular institutions: the rule of law; well-enforced property rights; elected democratic governments; human rights; public provision of courts, health care, national defense, and education; professional ser vices; regulated markets; concerns over social welfare and income distributions; and the concept of individual liberty within a modern state. We are comfortable with corporations producing food, with public police investigating our stolen automobiles, with money used as a unit of account for everything, with wage labor, with free mobility, and with individuals determining who they will marry and what occupation they will have. Perhaps above all, we expect to have equal social standing among our neighbors. Ours is a society based on a concept of merit, and those who work hard and produce much expect to be rewarded. The race may not always be to the swift, but the laborer is worthy of his hire, and we believe that, with effort and a little luck, anyone can reach the top of the social ladder. But it was not always so.

Not so long ago there was a strong social class structure where a large gulf separated ordinary people from the elite, and seldom did one cross over from one station to the other. Masters controlled servants, and both knew their place in the world. Merit was valued, but it was not the coin of the realm—personal connections, conduct, and birth mattered much more. Markets and prices existed for votes, state offices, and roads. There were jails where criminals were temporarily housed, but no penitentiaries for long-term incarceration and reform. There was money, but many payments were made in kind, with truck and barter, or through gleaning scraps off the workroom floor. There were watchmen but no police. The institutional landscape was shockingly different in the pre-modern world.

Amazingly, our Western world has been institutionally modern for only a short period. Institutions tend to last longer than any one person, and as a result, even a relatively young institution can feel old to the current generation. Communism, at the time of the fall of the Berlin wall, might as well have been an ancient form of government to the twenty-and thirty-somethings who pounded away at the concrete with sledgehammers in November 1989. The leaders were old, the state machinery was tired, the barbed wire was rusted, and everything about the system appeared outdated. Yet formal communist governments were just over 70 years old—mere infants in the life cycle of an institution.

It is because our world has been modern only since around the middle of the nineteenth century that we do not have to go far back in time before institutions become foreign to our modern senses. Our local government administrations; systems of taxation; our widespread views on marriage, occupation, and social status; the practice of universal suffrage; and our sense of individualism, to name but a few, are all relatively recent institutional innovations. Institutionally speaking, if someone today could teleport back in time from modern America to late Victorian En gland, it would not be much different than traveling from Los Angeles to Christchurch—with apologies to the beautiful city of Christchurch. The traveler would notice some less functional plumbing and the absence of insulation, but the rules of the game would be basically the same. The traveler would be able to get by.

The same could not be said of traveling back to the middle of the eighteenth century, and it would involve more than noticing all the bad teeth and lack of cell phones. Much of the organization of life was different in the pre-industrial world, and a modern time traveler would be hard-pressed to fit in or understand it all. The institutional reality is that around 1850 the modern world—the world containing the modern institutions we are accustomed to—emerged. This is not to say there was no institutional overlap between the modern and premodern world—of course there was. There were elections in 1500 and 1900; there were banking, commerce, and coins; there were stocks, bonds, and interest rates; and there were families, firms, and churches. Some pre-modern institutions hardly changed at all over the course of the Industrial Revolution, but many changed in some manner, while others were completely transformed, discarded, or invented. Overall, and especially with respect to civil ser vices, our modern world emerged out of a time organized far differently. Often the changes in the rules of life were so radical that we are now dismayed the old rules ever existed at all. Dueling? How barbaric! Lordship? How evil!

At some level, we are familiar with the historical organizations covered in this book. Almost everyone recognizes a picture of Queen Elizabeth II and knows something of the House of Lords—if only its existence. But few of us, except for fans of Jane Austen, are familiar with the institutional rules that governed the lives of the pre-modern aristocrats that allowed them to govern a nation for 300 years. Many have seen the movie version of The Count of Monte Cristo, where the wrongfully accused Edmond Dantès, after his revenge against his rivals, purposely shoots wide in an unanticipated duel with his son. Little do we realize that this type of behavior—shooting wide, not dueling—was not allowed and was equivalent to declining the duel in the first place. It is only by examining the details of pre-modern institutions that we appreciate the deep institutional changes that took place throughout the nineteenth century.

The institutions analyzed in this book are all of this sort—seemingly odd ones that either ended or were created over this transition period. They mostly span the time period I will call "pre-modern," that time after the fall of feudalism in En gland (c. 1500) until the Industrial Revolution was well on its way (c. 1850). In terms of English monarchs, the period spans from the first pre-modern ruler, Henry VIII, to the first modern one, Victoria. By the end of this time period there was what can only be described as a revolution in institutions. The Institutional Revolution was mostly—but not exclusively—centered on the changes that took place in the rules of public governance, and so the topics covered here include a host of institutions we now consider part of the public service: a nonexhaustive list includes the aristocrats, dueling, naval and army administration, light houses, private roads, taxation, factories, private police, and the evolution of criminal law.

Other institutions changed as well, and some contemporary writers such as Marx and Engels noticed what was going on:

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 resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom—Free Trade..

Although they clearly did not approve, Marx and Engels were on to something. They noticed a change was afoot; they recognized the past was not all bad; and they identified freedom to exchange as a key to the modern world.

My purpose here is to make the general claim that "measurement costs" are the common source behind the Institutional Revolution that troubled Marx and Engels. Free trade and the ability to socially interact with only "naked self-interest" and "callous cash payment" required the ability to measure what was being traded. Until this ability to measure materialized, communities required "patriarchal relations," "feudal ties," and "chartered freedoms" to get many things done. Which is not to say there was only a single source. Institutions arise and develop over several factors; I wish to highlight an important one that has been ignored.

(Continues...)



Excerpted from The Institutional Revolution by DOUGLAS W. ALLEN Copyright © 2012 by The University of Chicago . Excerpted by permission of THE UNIVERSITY OF CHICAGO PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents


Preface

Chapter 1. Introduction
Chapter 2.Variance Everywhere
Chapter 3. The Aristocrats
Chapter 4. A Matter of Honor
Chapter 5. The Royal Navy
Chapter 6. Purchasing Army Commissions
Chapter 7. Lighthouses, Private Roads, and the Treasury
Chapter 8. The Courts, Criminal Law, and Police
Chapter 9. Conclusion

Index

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