Читать книгу The Third Pillar - Raghuram Rajan - Страница 11

In the last chapter, we saw how new military technologies such as siege cannons developed to overcome traditional fortifications and unify territories. No longer could every town or manor stand up to the king’s men simply because it had strong walls. (I will use “king,” since they were mostly kings, with due apologies to queens like Mary Tudor and Elizabeth I.) The emerging nation-state’s military power was too much for the traditional feudal community and broke its protections down. The centralizing of governance powers had begun. It was limited, though, by the difficulty of governance at a distance in an era when the fastest means of communication was through bonfires or via riders on horseback.

The nation-state still had to accomplish at least three tasks before it came to even remotely resemble today’s strong state. The first was for the king to obtain a monopoly of military power within his territory so that it was a unified whole with a common market. To do this, he had to suppress the large magnates—the domestic dukes and princes—who had the lands and revenues to rival his military power. We will see that this took different forms, but in England, it was achieved through direct confiscation as well as, interestingly, through competition in markets.

The second task was to create an identity that would replace religion—since religion did not distinguish one nation-state from another in Europe. That identity had to give people a sense of larger purpose. Increasingly, an identity that suited many requirements, including the king’s need to lead a unified country, was identification with the nation.

Even after unifying the land under his power, the king faced external threats. Some European country was always trying to establish supremacy—first Spain, then France, and in modern times, Germany and Russia. Any European country risked subjugation if it was not militarily powerful. As his feudal vassals’ obligations to supply arms and men waned with the demise of feudalism, the king needed money to maintain a strong military to defend the country against these external threats. Much of the subsequent development of the state can be seen as a consequence of steps taken to enhance its ability to raise revenues—the third task.

The nation-state that emerged had somewhat contradictory powers. It was strong in its ability to defend itself against external enemies and defeat internal threats to the state, yet it was compelled to respect the private property rights of its citizens. The constitutionally limited state was an important milestone in the path towards free markets. The security of private property did away with the need for private players to protect themselves through anti-competitive medieval business associations, such as guilds. It allowed them to compete as individuals. Greater competition raised efficiency and output, increasing the economic power of the nation-state that could foster it. The markets pillar and the state pillar now fortified each other.

Since different nation-states went through these developments in different ways, and my intent is to illustrate, not be exhaustive, I will focus on the path England followed, primarily because it was the first large nation-state with a constitutionally limited government. The process of stabilizing governance in the English nation-state took the Crown over two hundred years, spanned the reigns of two houses—the Tudors and the Stuarts—and involved substantial amounts of chance. Even though England’s path to constitutionally limited government and freer markets was unplanned and idiosyncratic, through war it imposed competitive pressures on other European countries to change if they wanted to survive. Eventually, many reached similar endpoints, albeit in their own ways.

THE DECLINE OF THE MAGNATES

As we have seen, the new military technologies required scale. At the outset of nation building, the monarch was not personally much wealthier than the most powerful of the landed aristocracy. He needed to build his own power as well as reduce theirs. In the process of eliminating the threat of the high aristocracy, the English king unleashed market forces that would help create entities that would eventually curtail his own freedom of action. Interestingly, as the king lost the ability to act willfully and outside the law, as his identity was submerged in the broader apparatus of the state, the state’s access to financing from its citizens increased. It could now expand in ways, such as maintaining a large army, which would earlier have raised public apprehension about the monarch’s intentions. The limited state became strong and improved its capabilities even while bolstering the confidence of the citizenry in the security of their property. Let us see how this happened.1

Henry VII, the first Tudor monarch, was the last king of England to win his crown on the battlefield. There were others who had some right to the throne, so Henry’s claim to be monarch other than by “right of conquest” was questionable, at best. From the outset, therefore, the Tudors had to dominate other aristocrats through sheer power. This was not a simple or quick task.

The monarch’s problem was difficult. The landed aristocracy had built militias out of their armed servants, and could also summon their vassals and tenants to fight for them. Even as Henry VII passed a series of Acts asserting that the prime loyalty of every subject was first to the Crown and only then to his lord, feudal tradition militated otherwise.2 The monarch only had control over a small militia, and was otherwise reliant on conscription. This meant that in any emergency requiring a prompt response, such as an internal rebellion by one of the lords, he needed the help of the other lords to defeat it. Furthermore, the king did not have a large bureaucracy to collect taxes. He depended on the high lords to collect and pass taxes on to the royal treasury. With the king so dependent on the aristocrats, he simply could not take them all on at the same time.

Time and infertility were on the king’s side. He had no need to create powerful new aristocrats, and indeed no dukes were created by the Tudors.3 Furthermore, because some lords did not have male children, which was not an infrequent occurrence, existing houses came to an end. Their lands reverted to the Crown. Through such means, Henry VII doubled his revenues from Crown lands.4 Individual rebellious lords could also be picked off, convicted of treason, and executed, as was the duke of Buckingham by Henry’s son, Henry VIII. Their lands were seized by the Crown. Nevertheless, what really clipped the wings of the landed aristocracy was more indirect and perhaps unintended—the dissolution of monasteries and the great price inflation of the sixteenth century.

THE DISSOLUTION OF THE MONASTERIES AND THE RISE OF THE GENTRY

The Tudors were hungry for land, and looked for easy targets. After Henry VIII broke with the Pope over his marriage to Anne Boleyn, he turned his attention to the Church’s wealth in its various monasteries, which had grown substantially since the Gregorian reforms. Monastery property had two attractions. First, it had few armed men protecting it, unlike the land of the magnates. Many monasteries had also grown complacent and neglected their duties toward the needy. As a result, they enjoyed only modest public support. Second, and perhaps more important, monastery land was poorly managed. This attracted the attention of the capable, who felt they could do a better job using the latest methods of agricultural management.5 Henry VIII gave abbots and abbesses the choice between being accused of treason, convicted, and put to death cruelly (they needed to be convicted because only the property of traitors went legally to the Crown), or ceding property “voluntarily” to the Crown. Most made the obvious choice, and few among the public protested.

The seized property was soon sold, as the king needed funds to fight wars. Those who bought the land were primarily local moderately wealthy land owners—the local gentry. These were typically minor nobility, who did not have the vast land holdings the high aristocracy had, but owned more land than well-to-do peasants. The landed aristocracy were only a few dozen, while the gentry numbered in the thousands. The gentry had made their money managing their own properties well. They could bring their expertise to the new properties, especially because they knew local conditions and were closer to the land than the landed magnates. Since land ownership was the route to social status in those times, successful wealthy town-dwellers such as merchants and lawyers also bought land so that they could rise to the status of country gentlemen.

These men improved the management of the land they bought; they brought unused land into cultivation; they ended unproductive traditional techniques such as leaving one out of two fields fallow instead of one out of three; they appropriated customary-use common areas by enclosing them, and shifting them into more lucrative sheep rearing. Rather than continuing with the feudal practice of demanding unpaid labor from tenants, which was anyway grudgingly given, these “new” men instead hired labor directly for commercial wages. They raised rents on existing tenants in return for forgiving labor obligations. Not all were successful in making a go of land management, but the unsuccessful sold out to others who were more expert. At any rate, land management improved substantially, increasing agricultural output. Some economic historians argue that England’s prosperity in Elizabethan times was in substantial part due to higher national income growth resulting from the seized lands.6

Importantly, the successful country gentlemen, both old and new, went on to acquire more land. Some of the richer gentry came to own as much as the poorer aristocrats. Furthermore, because many of the high lords were not particularly good managers—after all, they and their ancestors had established their prowess on the battlefield, not in estate management—the incomes of the richer gentry far exceeded that of the poorer aristocracy. For crops that had a national market, the more efficient cheaper production from the gentry lowered prices and thus aristocratic incomes. The old guard was at risk of being blown away by the gales of competition.

The aristocracy, who no longer could distinguish themselves easily from lesser mortals based on land ownership or income, found new grounds for differentiation. What distinguished them from the nouveau-riche Calvinist gentry was their lavish entertainment and the liberal hospitality they showered on guests who passed their social threshold, their free-spending enjoyment of fashion, art, and architecture, and their sympathetic treatment of unproductive customary tenants paying low rents. These were exactly the wrong elements to distinguish themselves by as prices started rising.

THE GREAT INFLATION

The gold and silver flowing into Europe in the sixteenth century from its colonies in Africa and Asia first, then the Americas, raised prices of goods, as the growth in their production did not keep pace with the growth of coined precious metal. For the aristocracy, the tremendous increase in spending that was necessary to keep up their lifestyle and their army of retainers collided with the stagnant tenant rents that noblesse oblige demanded of them. Something had to give. For those who could not bring themselves to manage their lands commercially, it meant land sales and further decline—until some social-climbing wealthy merchant or member of the gentry could be persuaded to underwrite the aristocratic expenditure in return for a status-enhancing marriage alliance. For those who wanted to maintain their distance from the arrivistes, there was no alternative to moving to new techniques of agricultural production, raising rents on tenants who could cope, and terminating the tenancy of those who could not.

The demands of the market—the competition from the gentry accentuated by the great inflation—thus killed the capacity of the aristocratic lord to look out for his tenant and see him through difficulty, the essence of the feudal obligation. At the same time, it also killed any loyalty the tenant might have had to his lord.7 Transactions were now on strictly commercial terms—the market, by competing away the rents on aristocratic estates, once again had eroded community ties. No longer would tenants flock to their lord’s banner in times of military need. For the monarch, this was a distinct relief, since his army was based far more on recruits drafted for a wage than on loyal feudal retainers.8

The king also undermined the landed aristocracy in matters of local governance. As the gentry grew more prominent, the monarchy appointed them as justices of peace to judge small claims and local cases, as sheriffs, and as tax and military draft commissioners. These positions were unpaid, but offered their occupants prestige and local influence. And they became essential to administering local justice as well as collecting taxes and administering services for the poor. As one historian put it, “the gentry were essential to the power of the king, but he was not essential to theirs.”9

THE POWER OF THE GENTRY

All this meant that even though the aristocracy had been undermined, as had the Church before it, the monarchy did not have absolute power; a new power, the gentry, now stood in the way. The king was vastly more powerful than any single member of the gentry, but he could not treat them like Henry VIII treated the monasteries. Unlike the poorly managed monastery land, the gentry used their superior knowledge of farming and the locality to manage their land productively. There were no unrealized bonanzas that could be obtained through expropriation.10 It made far more sense for the king to tax the gentry regularly than to expropriate some of them and risk upsetting an entire class. Ironically, one of the most infamous violations of property rights in history, the expropriation of the monasteries, had strengthened property rights by moving land into the most productive hands. With the markets having done much of the work, courts and their judgments soon established property rights over land more firmly, eliminating the last vestiges of feudal constraints on property ownership and transfers, while protecting contractual ownership and tenancy rights.11

The gentry also dominated the House of Commons in Parliament, an institution whose purpose we will describe shortly. It offered them a venue to coordinate their actions if they perceived any threat from the monarch such as moves toward expropriation or levying additional unapproved taxes. With their limited individual influence, they preferred an arm’s-length rule by law that would protect all of them. They were collectively wealthy—a peer ruefully noted in 1628 that the House of Commons could buy up the Lords thrice over—so together, they could influence the nature of those laws.12 And they were closer to their tenants than the great lords were, and thus could command more of the much-diminished sense of loyalty in their locality than either the great lord or the king. The gentry, not the landed magnates, thus became the primary source of possible opposition to the Stuart kings.

As an aside, the belief that widely distributed property leads to better security of property and stronger constraints on the state has a long tradition. Some societies set maximum limits on the amount of land anyone could own so that it would be distributed widely. The Roman Republic had an agrarian law that limited how much land any one person could own, which of course was breached as it progressed toward empire. In his treatise, Oceana, James Harrington, a writer in seventeenth-century England, argued that ownership of property was the source of all power, and the group that had the most property dominated government.13 Influenced by Harrington, Jefferson’s draft constitution for Virginia, written in 1776, required that each adult have fifty acres of land. The minimum limit would ensure that the owner would be reasonably prosperous and independent—if not quite a member of the gentry.14 Yet we have seen, it is not just how land is distributed, the efficiency of owners also makes a difference—the inefficient monasteries were not powerful while the gentry were. The vibrant land market had the dual effect of moving land into the hands of the efficient and, through their competition, eliminating the last vestiges of the feudal community such as the loyal but inefficient hereditary tenant.

TOWNS, GUILDS, AND MONOPOLIES . . .

Even as they were suppressing the landed magnates domestically, monarchs continued to face external threats, which was the source of their perennial problem, their need for funds. The competition with other European nations for political supremacy was bloody and never-ending. Whenever any state became strong enough to potentially acquire an enduring advantage, the other states banded together to defeat its quest for domination and achieve a new balance of power.15 Yet dreams of supremacy never faded.

Any money the monarch could access to fund his military machine, whether through borrowing or tax revenues, ultimately was supported by economic production. So competition between states for supremacy, in the long run, would favor states that had stronger economies with which to sustain their war machines. Every country faced steady pressure from the outside to beef up its economic capabilities, else risk subjugation.

It was not enough for the country to just produce more—the monarch had to be able to collect his share in taxes. The more he threatened to take in taxes, and the more unpredictable his behavior in doing so, the less his people would want to invest in, or put effort into, income-generating economic activity. Instead, they would focus on hiding their income and wealth. The monarch needed a mechanism to signal that he would tax reasonably, even in times of war when he might be tempted to levy huge taxes or expropriate property in order to preserve his reign. So the king had to create institutions that would limit his own ability to be arbitrary, thus convincing people that their taxes would not be used to extort yet more from them. The Church was one such institution, but as discussed in the last chapter, its power was fading. In most European countries, monarchs therefore committed to levy new taxes or raise old ones only if approved by the representatives of the rich and propertied. In England, for instance, these were seated in Parliament (and the Estates General in France and the Riksdag in Sweden). Given the difficulty of getting anyone to approve higher taxes on themselves, monarchs tried to find ways to not put the question to the representative bodies if they could find other ways of gathering revenues.

The obvious alternative was to do cozy deals with the businessmen in the towns, which the emerging absolute monarchs of sixteenth- and seventeenth-century Europe proceeded to do. Europe’s first stab at a regime more tolerant of business resulted in a pro-business but not pro-enterprise economy. Government and business formed a closed community—or what would be called crony capitalism today. The towns were certainly not free markets.

Taxing Towns

As agriculture became more commercialized and prosperous, it could provide more taxable income. There were limits, though, on how much the powerful landed could be taxed—in France they were not, and in England, landowners colluded to pass laws in Parliament to avoid taxes.16 Moreover, the king needed every last bit of revenue for the new forms of mass warfare because, as Louis XIV declared, “after all it is the last Louis d’or which must win.”17 So the king looked to the towns and ports, where excise duties could be levied on goods like beer and bricks and customs duties could be charged on imports. In England, for instance, over two-thirds of government revenue from taxation came from Customs and Excise in the early eighteenth century.18

In order to tax urban production, the monarch had to deal with town bodies like the guilds that had formed for different trades and crafts, as well as the emerging monopoly merchant companies. In the same way as the manorial community protected the peasant against the uncertainties of life lived at the economic margin, the guild in a town protected its members from competition, both from others within the guild and from outsiders. It fixed membership fees; hours of work; the prices the master craftsmen could charge, and the wages they could offer; the terms, number, and fees for apprenticeships; and it negotiated on behalf of its members with the monarch or with town leaders for restrictions to be placed on outside competitors. If the response from the authorities was inadequate, the guild was not above taking the law into its own hands. Some organized armed expeditions of their members to search out and destroy any competitor that tried to do business in the territory they had earmarked for themselves.

The guild was effectively a cartel trying to ensure all its members got a decent living in an environment of weak economic growth, but also seeing to it that none was so energetic or entrepreneurial so as to put the others at a disadvantage. Like the manor, it aggregated the power of its members, a necessity in times when the law was weak, and might often right. It was also a social organization like the medieval manor, providing economic support to those in need and encouraging interactions between its members. A somewhat disapproving description of members of the merchant guild of the Dutch city of Tiel dating from 1024 comments that members “begin their drinking bouts at the crack of dawn, and the one who tells dirty jokes with the loudest voice, and raises laughter and induces the vulgar folk to drink, gains high praise among them.”19 Like the manor, it ensured stability and comradery, at the cost of innovation and efficiency.

The Alliance of Town and Crown

The interests of the towns were initially opposed to those of the landed nobility. For the peasant working in the lord’s fields, the town represented new opportunities. The efforts of towns to attract additional labor set them in opposition to the lords, who resented the attractive pull of the town on their field workers. Furthermore, while towns wanted cheap food for themselves and their workers, and thus preferred low tariffs on food imports (and high tariffs on manufactured goods), the landed nobility who produced food and consumed manufactured goods preferred the opposite. Also, the increasingly wealthy merchants and financiers were a challenge to the social status of the landed nobility.

The alliance of the town and Crown was more than just a matter of befriending the enemy of the enemy. Each offered something important to the other. For the merchant or the craftsman, the king offered protection, not just from physical attack or intrusion from manorial or canon law, but also from competition—he endorsed the anticompetitive guild and its practices through a royal charter. The resulting monopoly profits were the rents that are so necessary to sustain relationships. It kept the guild members united, creating a tight-knit association that was a powerful defense against other predatory powers of the time. The guild shared some of those profits with the king through periodic fees or loans, thus fulfilling its side of the Faustian bargain.20

Why Monopolies?

Why could the king not tax his people directly, instead of leaving them to the tender mercies of the monopolist guilds? As we have seen, taxation required authorization by Parliament. Instead, the king could offer royal monopoly charters directly, thus bypassing Parliament. Royally licensed monopolies were less clearly offensive to the people, since high monopoly prices were an implicit concealed tax. So long as they were on a relatively few items, they would be borne with only a little grumbling.

Equally important, the nation-states in their early incarnations had weak bureaucracies and therefore limited abilities to collect taxes, tolls, or custom duties. The king benefited far more by investing scarce revenue in an army of soldiers than in an army of tax collectors. Therefore, the guilds and the merchant companies essentially served as the king’s tax collectors, estimating and collecting what was owed from their members. They often paid directly to the treasury upfront for the monopoly privilege, which reduced the king’s need to borrow or rely on a costly corrupt bureaucracy to collect taxes.21 Moreover, monopoly profits came into the guild’s coffers as repayment for the advances it had made the king, so it did not have to stand in line outside the treasury for an uncertain repayment, unlike ordinary creditors. Finally, because the privileges came directly from the king for the most part (only some were authorized by Parliament), the guilds and monopolist companies became his loyal supporters, if nothing else because their continued fortunes depended on his survival. Every side benefited except the consumer who paid the higher cartelized prices!

The monopoly charter was not a secure form of property right. It was an easily transferred right, not fortified by the competence of the holder—indeed, the longer the monopoly was held, the more inefficient the holder would get, and the easier it would be to expropriate, as was the case with the monastery land. What kept the monarch from large-scale taking-back-and-reselling of monopolies was probably concerns about the risk of angering a large group of merchants or craftsmen in the guilds or companies, as well as the loss of reputation and the damage it would do to the sale price of future monopolies. These were fragile supports on which to build large-scale investments, and typically such businesses invested little.

. . . AND MERCANTILISM

The alliance of town and Crown was not without other vulnerabilities. Foreign producers could compete with domestic ones and push prices down. Monarchs, however, had a very short-term view of economic might, perhaps influenced by the multiple reign-ending military threats they faced. They essentially believed that economic prowess depended on what was produced in the country in the short run, and thus sought to discourage imports and encourage exports—a practice which was called mercantilism. It was thought this would create more domestic jobs and income, exactly the argument that today’s populist politicians put forward. A collateral benefit would be that as a country sold more abroad than it imported, it would accumulate gold and silver, allowing it to reduce its dependence on foreign loans. So over and above the domestic restraints on competition, nations imposed tariffs on imports, and encouraged exports by offering subsidies. Not only did all this subject domestic consumers to yet higher prices, it gave domestic producers yet another layer of protection from the need to compete and innovate. Indeed, that was the purpose of mercantilism—to favor domestic producers over consumers.

Mercantilism, as we have seen with the recent export-led growth of Asian economies, can be helpful in the initial stage of a country’s growth, provided other countries do not join in. If, however, other countries practice a tit-for-tat mercantilism, it impoverishes everyone. Moreover, as economic philosopher David Hume argued, if a country did prove successful in exporting more than it imported through mercantilist policies, the resulting inflow of gold and silver would eventually raise domestic wages, rendering its producers uncompetitive.22 Furthermore, mercantilism, appealing as it was to producer interests in the short run, created distortions over the long run. It led to inefficient production methods and investment in the wrong industries. It raised prices of goods domestically, and hurt consumers who consequently had to consume less. Finally, it made producers yet more dependent on the sovereign for protection, preventing them from emerging as an independent power.

Clever monarchs repeatedly emphasized national identity as an alternative to religious, regional, feudal, or community loyalties. This made mercantilism easier for the public to swallow. Nationalism helped justify higher prices, for they were the cost of keeping jobs at home, thus making the nation stronger. For example, the preamble to the Book of Rates in 1610 (which set trade tariffs in England) appealed to this sentiment, stating that importing unfinished raw materials from other countries was better for “the people of our kingdom might thereby be set on work.” Other finished goods imports were frivolous and not “for the necessary use of our subjects or any ways for enriching our kingdom.” If it was desirable to prefer “our own people to strangers,” it was better to set tariffs on such imports “than that the people of our own kingdom should not be set on work or the country impoverished by the importation of unprofitable or unnecessary merchandises.”23 There is probably no pithier statement of mercantilist nationalism—import less, consume less, produce more!

Nationalism attempted to bring the country together under one monarch. The advantage, then as now, is that it provided a potent force to motivate citizens to support a national program, usually war, as the power of religion to motivate waned. It also allowed the monarch to break down internal barriers—instead of town-based guilds with small local markets, the monarch encouraged nationwide guilds and a national market. The state gained power at the expense of the community. The disadvantage, then as now, is that it could be misused to persuade people to support unnecessary wars or policies like mercantilism that served narrow interests, and were against the collective good.

It was hard to suppress competition and the market indefinitely. As with the feudal manor, market forces started eroding some of these cozy restrictive arrangements.24 Skilled craftsmen who were unwilling to put up with the guild’s anticompetitive rules moved to suburban and rural areas, outside the guild’s reach.25 Adam Smith wrote, “If you would have your work tolerably executed, it must be done in the suburbs where the workmen, having no exclusive privileges, have nothing but their character to depend upon, and you must then smuggle it into the town as well as you can.”26

Competition from foreign producers was also a constraint on how restrictive local guilds or monopoly companies could be. In countries with long coastlines close to major towns such as England or the Netherlands, ships could bring goods quickly in bulk. If there was a sufficient gap between foreign and domestic prices, either because the guild set prices high or because it produced too little given unexpected demand, imports would flood in. The guild could collude with the mercantilist government to impose high tariffs, but with governments having limited resources with which to police borders, smuggling went on all the time to thwart such intent.27 Most entities therefore had to be somewhat competitive, and could not become overly dependent on the state for protection and profits. Along with its independent gentry, therefore, England had a number of independent merchants and craft-masters, even amidst the monarchy-sanctioned monopolies.

In the next section, we will see how the monarchy became constitutionally limited and more able to borrow directly from citizens, but once it achieved this, it had no real need to continue to privilege certain businesses, especially as it also built out a reliable revenue service to collect its taxes. Conversely, with the government more predictable and solvent, business did not need the extra protection of organizations like guilds or merchant companies. Guilds became largely toothless in the two most constitutionally limited and market-oriented European states, England and Holland, by the end of the seventeenth century. They morphed into brotherhoods and friendship societies, characterized by annual dinners full of pomp and show and plenty of alcohol, but with little actual business.28

SUSTAINABLE STATE FINANCE

Let us return to the problem of state revenues. Ideally, the state’s freedom to act would be limited to legitimate actions, not arbitrary or despotic ones, but it should have the capability to act firmly and quickly to deal with the nation’s domestic or external problems when needed. Herein lay the catch. If the king had a powerful standing army and a professional revenue service that collected substantial taxes, that is he had the capability to act, he also typically obtained the freedom to commit any act—hence the absolute monarchy of Louis XIV in France, for example. An alternative was to have a king with very modest government capability, for example one with a small army and no revenue service, as in England under the Stuarts. However, even though the weak monarchy’s capabilities were constrained by the need to raise money to fund any new action, it had not given up its freedom to act. As a result, it tussled constantly with Parliament. England needed firm prespecified boundaries on what the monarch could do so that he could be freed to roam within them.

The gentry and the increasingly independent merchants and moneylenders were a potential bulwark against the king, a force that could place these boundaries. The king had to unite the forces against him, though, for them to have enough influence. This the Stuarts unwittingly managed to do.

The Stuarts’ Errors

The Stuarts’ need for funds led them to antagonize the propertied, both landowners as well as businessmen. James I started selling knighthoods, a practice continued by his son, Charles I. When the going rate for a title declined because so many were sold, they sold higher titles and even peerages. Not only was the old aristocracy aggrieved because their status had been diluted as they were joined by the newly wealthy, even the latter were angry because the titles they had paid so much for were devalued through overissue. Businessmen were angry because customs duties were raised frequently without notice or Parliamentary approval, and when no other sources of revenue could be found, loans were extracted forcibly from the wealthy, offering little prospect of repayment. Having united powerful elements of the landed interests and rich businessmen against them, was it any surprise that the English Civil War between the Royalist supporters of the Stuarts and the Parliamentarians ended in the victory of the latter and the beheading of Charles I in 1649? Parliament and the forces it represented, when provoked, was stronger than the king.

The Stuarts got another chance. After the death of the parliamentary leader, Oliver Cromwell, the Stuarts were restored to the throne. However, what Talleyrand said of the Bourbons was true of the Stuarts too: “They had learned nothing and forgotten nothing.” The Stuarts tried to weaken Parliament once again. Matters came to a head during the reign of James II, who was suspected of having Catholic sympathies. Catholicism was associated with an absolute despotic monarchy, as exemplified by Louis XIV. 29 With the economy buoyant and customs revenues pouring in, James did not need Parliament to vote on new taxes to fund his small standing army. He increased Parliament’s sense of alarm by recruiting Catholic officers into the army, and expanding it.30 Parliament was further weakened because the king could dissolve it at his whim, and he did so repeatedly until he got one that was cooperative.

In his attempt to restore the dominance of the monarchy, as well as possibly Catholicism, James went too far and united the opposition. When James’s Catholic wife gave birth to a son who would be a Catholic successor to the throne, both the party of the landed interests, the Conservatives, and the party of the moneyed commercial interests, the Whigs, invited William of Orange and his wife Mary to take the throne of England, setting off what would be termed the Glorious Revolution of 1688. James fled England.

The Declaration of Rights

Given a second chance to restrain the monarchy with a shorter leash, Parliament was determined not to err again. An elected Convention, which later became the new Parliament, presented to William and Mary a Declaration of Rights, which listed the legal rights of the subjects that James had violated, and that the monarchy now was expected to uphold. The supremacy of Parliament over the king was established de jure, and the sovereign was now the “king in Parliament,” not the king alone.31 The monarch could no longer call or disband Parliament at whim, the monarchy’s independent sources of revenue were curtailed, and all taxes had to be approved by Parliament, which could monitor spending and veto it if necessary. Similarly, the monarch’s ability to override courts was substantially weakened, and judges were made independent by taking away the king’s power to remove them. They were liable to removal only through conviction or by vote of both Houses of Parliament.

By curtailing the arbitrary powers of the sovereign, Parliament essentially allowed the monarch to become more trustworthy. He could be permitted to acquire more capabilities without raising concerns that he would convert them into unfettered power over citizens. For instance, the government built a dedicated reliable service to collect excise taxes. Between 1690 and 1782, the number of full-time government employees in this function rose from 1211 to 4908, an over-fourfold increase.32 Similarly, standing military forces, especially the navy, were augmented substantially. England became a leading European power.

Of particular importance, the government’s access to borrowing, especially long-term funds, increased. This did not happen overnight, and England had its share of luck in its early borrowing years as we will see, but the government’s ability to raise financing cheaply, quickly, and easily from its increasingly wealthy citizens became key to England’s subsequent military prowess. For instance, because of its better ability to finance goods purchases for its ships by issuing naval bills, the English fleet could stay on the seas for a period of six months without returning to shore. This was far more than the few weeks that were possible when its finances were weaker.33 The fleet was now more effective, for instance in enforcing economic blockades of enemies. Money had indeed become the sinews of power.

Constraints and Capabilities

The Glorious Revolution changed nothing for England overnight. Indeed, the initial loans that were available to the new government were still short-term, and the first attempt at issuing long-term debt in 1693 ended in abject failure, raising just over one tenth of the desired amount.34 Subsequent attempts were more successful but the greatest share of early borrowing was not from the public but from government debt issued to an entirely more traditional source, three monopoly joint-stock companies, the East India Company, the Bank of England, and the South Sea Company.

The Revolution’s effects did manifest themselves over time. The Crown’s borrowing was no longer on the personal account of the monarch, but was the responsibility of a permanent sovereign entity, the state. Future governments would continue to bear responsibility for repayment so debt could be issued for a longer term and repayment smoothed out. With improved and more professional tax administration, tax revenues were more predictable. So debt could be assigned specific streams of revenues. Lenders had more confidence in such “funded” debt for they knew that the tax revenues that were earmarked could not be diverted elsewhere without the Parliament’s notice.

These “tripwires” were backed by an elaborate mechanism of monitoring. Many of those with savings to invest, as well as the stockholders in the three joint-stock companies, came from the landowning or business class, with a presence or influence in Parliament. So investors in government debt, through Parliamentary reports and committees, had information about government finances, and could vote to curtail or repurpose government spending if it impaired the chances of them recovering their investments. Property rights were protected by political power.

Government debt became traded in the market over time, so investors who might need money quickly could still invest in long-term government debt and sell it in the market if they had a need for funds—their loans were now liquid. Also, if they became worried about government finances, they were not locked in, and other, more optimistic, or more influential (over government) investors could buy. The availability of a liquid resale market for long-term government paper thus increased demand for it, and broke the need for investors to be tied for the long term to the government.

Even the three monopoly companies were not inconsequential in the development of the government debt market. The East India Company built a colonial empire in the East that was an important contributor to England’s fortunes. The Bank of England, with its monopoly over banking services, could issue stock easily, and the proceeds were invested in long-term government debt. It also proved reliable in funding the government’s short-term needs, which enhanced the public’s perception that the government would not run short of funds. Greater surety about the availability of funds to the government enhanced the public’s confidence that long-term government debt would be a safe investment. Over time, the Bank of England lost its banking monopoly, but it became England’s central bank and retained a monopoly over money creation.

And finally, the South Sea Company, which was granted the dubious monopoly of trading with the South Seas (where there was little trade), helped in putting government finances on a sustainable track in a very fortuitous way.35 The initial issuances of government debt after the Glorious Revolution were in the form of very high interest annuities that could not be redeemed by the government. The South Sea Company offered a deal to the government: It would buy the annuities from current holders and turn them over to the government in return for lower-interest government paper (and monopoly privileges). It offered its annuity holders the choice of its own stock or cash in exchange. In the meantime, both the government and company directors talked up the prospects of the South Sea Company into a full-blown stock bubble. Drawn into the frenzy, annuity holders converted to company stock at inflated prices expecting it to go up further still. Fully 85 percent of the government’s high-interest debt was converted into low-interest debt. The erstwhile comfortable annuity holders were devastated when the stock price crashed. England’s government finances benefited, stabilized in its early years by the South Sea Bubble.

More generally, all these developments meant that the high-cost short-term borrowing or bills that the government issued to fund emergencies like wars could be converted to lower-cost long-term borrowing once the war was over. Repayment would then be stretched out to smooth the burden on the taxpayer. The government’s increased capacity to borrow during those emergencies meant there was little likelihood it would invoke the specter of national emergency to expropriate money from the wealthy through extortionate taxes or forced loans. For wealthy landowners and businessmen, healthy government finances meant greater predictability about continued moderate taxation. This gave them the confidence to make larger fixed investments in canals, roads, and eventually railroads that paved England’s path to wealth, and indeed the Industrial Revolution.

Sounder government finances also meant the government no longer had to do special deals with a few favored individuals or companies to raise money. It could stay at arm’s length, become more bureaucratic in the sense of working according to a set of transparent rules, and thus create a level playing field for all its citizens. This also meant the possibility of a less-constrained, freer, and more arm’s-length market. And the drumbeat for that, as we will see in the next chapter, started increasing.

What Did the Glorious Revolution Do?

As economic historians Douglass North and Barry Weingast argue, the Glorious Revolution tethered the monarchy more effectively through Parliamentary and judicial oversight so that its freedom to go in inappropriate directions was more limited.36 What was not spelled out in any detail is what would happen if the tether was cut—for example, if some monarch turned his standing army against Parliament in violation of the unwritten constitution. This is where the previous history was relevant. Parliament had demonstrated through the Civil War, and by deposing James II in the Glorious Revolution, its ability to come together to defend its rights. Its power to have its way when provoked is what gave teeth to the Declaration of Rights and subsequent reforms.37

This point sometimes gets lost in the debate about the role of institutions in development. There is a strong correlation between the existence of “good” institutions in a country and its economic growth and prosperity, so much so that one of the more influential recent papers on the subject is titled triumphantly, “Institutions Rule.”38 While institutions matter, they rest on a bedrock of an underlying distribution of power among the constituencies in a country, which may have its sources largely elsewhere. For instance, the independent power of the gentry came from their commercial aptitude, their wealth, and their closeness to their tenants, who looked to them for sound management and good livelihoods. Unlike the landed magnates, no member of the gentry was extremely powerful on their own, hence they needed transparent rules and law to protect them, as well as a body like the House of Commons to help them coordinate their actions. At the same time, their numbers meant they could not be expropriated with the stroke of a pen or collectively accused of treason. The mistake when institutions function well is to believe that they would function similarly well elsewhere, ignoring the possibly different underlying distribution of power. The United States Constitution, when adopted by Liberia, turned out to be just a piece of paper, with none of the effective checks and balances that fill the Federalist Papers and characterize how the United States works.39

While we know a fair amount about the kinds of institutions that exist in advanced states, there has been far less study of how to create the right distribution of power. Simply distributing property does not help, because what is given can be taken back. As we will see again and again in this book, the existence of vibrant competitive markets that allow productive and independent owners to emerge is a large part of the answer—markets help constrain the state and protect property as part of the balance. As our discussion of England’s emergence as a constitutionally limited state suggests, getting the right distribution of power also involves much luck. Perhaps this is why nation-building exercises in Libya and Afghanistan have largely proved failures so far.

OTHER COUNTRIES

The transformation from feudal vassal to commercial tenant, and the resulting shift in power from the landed magnate to the more numerous and dispersed gentry, did not take place everywhere, and rarely in the same way. Nevertheless, while every modern liberal democracy had its own idiosyncratic path toward constitutionally limited government, there were generalizable elements from England’s experience. The key development, as argued in this chapter, was the transfer of large unproductive land holdings from the monasteries and aristocrats into the hands of the more commercially minded gentry. In the process of dispersing economic and political power away from the church and the aristocracy, a new independent constituency arose that benefited from a more open rule-based system.

In the United States in the early nineteenth century, settlers poured into the newly surveyed and auctioned lands in the West. Land was widely owned, and those who could not make a go of it sold quickly to those who could, so it was also productively held. The exception was the South, where both corruption and climate conspired to create large, concentrated plantations run on the backs of slave labor.40 Studies show wider distribution of land, especially when also efficient, helped improve local governance. Rodney Ramcharan of the University of Southern California finds that US counties where there were large farms and concentrated land holdings (because of the kind of crops favored by rainfall patterns) tended to have less spending on education, a key measure of the democratic responsiveness of the government to public need.41 In a joint study, Rodney and I found that such counties had far fewer banks per capita in the early twentieth century, a measure of broad-based economic opportunity.42 We traced such differences to the nature of governance in those areas. Therefore, even within a developed large country not so long ago, land distribution affected local governance, and thence economic opportunities.

As economic historians Stanley Engerman and Kenneth Sokoloff have argued, there is a more general pattern here. For example, countries in Latin America that started out with more plantation-based agriculture, and thus large concentrated land holdings, tend to have less broad-based political and social institutions today.43 The lesson is not simply that land holdings concentrated among the few are bad for democracy—a point made forcibly by political sociologist Barrington Moore—but that substantial wealth held by a few with close ties to government reduces the possibility of the state working for the many. Such lessons apply even today. It is one reason we should be concerned about the rise of megacorporations dependent on intellectual property, as I will argue later in the book.

Market forces also do not always work to weaken the politically powerful. The precise circumstances matter. As Barrington Moore argues, the boom in prices as well as the expanding market for grain exports in the sixteenth century in northeast Germany had the effect of strengthening, not weakening, the power of the landed nobility.44 With labor scarce, the landed nobility could have moved to paying peasants market wages, and commuting feudal obligations. Instead, by common arrangement, they increased the labor obligations of the peasants, eliminated their ability to sell or bequeath property, and reduced their ability to marry, or even move, off the manorial estate.

What was different in northeast Germany (and Eastern Europe more generally) from England was that the peasant did not have much market choice himself. Central authority was weak and there were no royal courts that might have protected his rights against the nobility. Moreover, even though it was a common feudal practice that a serf who escaped the manor and lived in a town for a year and one day became free, towns had declined in size and prosperity in northeast Germany, and there were not enough of them to hide him or give him a livelihood, unlike in more urbanized England. In Poland, the land market was suppressed because of laws that prevented ownership from passing outside nobility.45 As a result, rich businessmen, lawyers, and merchants could not buy land, put it to more efficient use, and put pressure on feudal arrangements. With few checks on the power of the landed nobility, market pressures increased peasant oppression and feudal obligations rather than diminishing them. Even today, perhaps because it stayed feudal much longer, much of northeast Germany is less prosperous than southern Germany.

CONCLUSION

The absolute monarchy symbolized by the Tudors and attempted by the Stuarts gave way to a state that obtained more capabilities after giving up its power to be arbitrary. Such a state enjoyed broader legitimacy among the propertied because of the widespread belief that it would continue to adhere to a social contract with its wealthier citizens and investors. This also assured it of access to finance from the wealthy. With the confidence that it had few domestic challenges to its legitimacy, and that it could borrow the money to meet external challenges when that necessity arose, the state did not need to favor a select few. It could operate at greater arm’s length from the market. Cronyism steadily gave way to a more open business environment, which in turn created many more competitive independent entities that could check state power. The state and markets supported each other’s expansion.

As England became militarily powerful on the basis of its strong state finances, and economically powerful based on its competitive markets (which positioned it well for the Industrial Revolution), other European countries took note. They did not want to lose out in the great European quest for supremacy. It would be too much to claim there was only one way to a constitutionally limited state. France went through a bloody revolution, followed by war and empire before it eventually became a constitutional republic (barring a few short relapses). Germany went through unification, empire, war, democracy, fascism, and war again before it too became a constitutional republic. The United States, despite inheriting a very English governance ethos and becoming an independent republic, went through a civil war to suppress its own Southern landed interests.46 Nevertheless, many of these countries reached similar points—a constitutionally limited state with generally competitive markets.

The recognition of private property in land, and the emergence of a market for produce and land, also left many behind as the feudal community declined. While independent private property owners could coordinate through Parliament or Congress to influence the state, the peasant and increasingly the worker in manufacturing establishments, dislodged from their traditional communities, had no explicit rights and no say in their own governance. In the next chapter, we will track the final steps toward liberal democracy as industrialization picked up. The demand for a voice came especially from workers in the growing cities, whose squalid filthy communities needed public services. As we will see in the next chapter, once they obtained a democratic voice, communities organized to get the political establishment to pay attention to their demands, especially that unbridled crony capitalism be controlled. The third pillar grew in strength once again.