Contents
Political institutions 72 Fiscal institutions 77 Business law 82
The state and the infrastructure sector 87 Conclusion 94
Economic growth depends upon institutions (rules that constrain human behavior and their enforcement mechanisms: North, 1981; Greif, 2006).
Some of these rules arise by means of a public process, while others are privately adopted; some are explicit (written down as laws or contracts) and others implicit. Their enforcement can rely on public coercion, private third parties, or even reputation. We focus here on those institutions that are formal and publicly enforced. This is not because informal institutions waned with mod-ernization, but rather because the formal institutions were the ones that under-went the most dramatic transformation during the period we are considering.
Many polities adopted written constitutions and formal legislative organiza-tions, and recast their laws. Even Britain, where no formal constitution was set down, saw electoral reform and an explosion of legislative activity.
Economic historians have long emphasized the role of institutions in ensur-ing prosperity; after a hiatus, development economics has come to similar conclusions (see, e.g., Acemoglu et al., 2001; Engerman and Sokoloff, 1997;
Banerjee and Iyer,2005). Scholars have particularly highlighted the benefits of secure property rights. In this light, England’s early economic leadership sprang from the Glorious Revolution’s institutional settlement (North and Weingast, 1989). The great variety of political and economic, public and private institu-tions that prevailed in Europe offers tempting ground for testing this largely inductive argument based on Britain. Although the variation in institutions is extensive, and well documented in the archival record, it raises its own prob-lems: institutions, archaic or modern, are chosen. Furthermore, in the long run all institutions are sub-optimal; only change can allow growth to go forward.
Given that Britain was the most successful economy in the period it seems natural to use it as a benchmark. One should bear in mind, however, that the earlier successes of Italian city-states and Dutch provinces and Germany’s later catch-up proceeded with institutions that were hardly British. Finally, econo-mists have focused heavily on national output, neglecting regional variation.
The British institutions associated with the Industrial Revolution are equally connected to the Irish economy and the potato famine. Thus we tread gingerly.
It is also important to note that, if by 1870 the notions of state and nation had become interchangeable, this was not so in 1700. Sovereign states have long existed, but for most of European history they did not coincide with nations (some were multi-cultural and spatially dispersed, others tiny). The process of competition over territory was extraordinarily prolonged and violent. States faced the perils of external rivals and the resistance of provinces to any attempt at centralization. Moreover, although political boundaries west of the Alps and the Rhine changed relatively little after 1700, that was not the case to the east. The recombination of territories in eastern and central Europe poses obvious problems for us. While we try to consider the whole of Europe, this is not always possible.
While economic historians have often written the economic history of Europe as growth springing from the people’s liberation from oppressive rulers, in many places growth arose from the elimination of geographic fragmentation and local privileges and practices (Epstein, 2000). These local privileges endured because they served as bulwarks against rulers’ fiscal rapacity. In England, such protections were essentially inoperative because it was a small country that from 1066 enjoyed the costs and benefits of a very centralized and unified set of institutions. This chapter thus explores two questions: (i) how important were problems of sovereign expropriation relative to problems of fragmented authority? and (ii) to what extent did different parts of Europe adopt different institutions to solve similar problems in terms of property rights, infrastructure investment, and business law?
Our analysis puts far greater emphasis on international relations (i.e. war) than has been the case hitherto. Consider Alexander Gerschenkron’s (1962) classic, Economic Backwardness in Historical Perspective. There, economic innovation pushes public and private institutions to evolve while domestic political struggles may hold them back. That narrative is appealing for central Europe and Russia, where reform and industrialization came late. Even in this region, however, institutional change issued from the crucible of war (from French intervention in Italy in 1857 all the way to the war that raged at the time of the October Revolution in Russia). In the west, institutional change owes more to Napoleon’s legions than to industrialization.
An account of institutional change cannot leave aside the exchange of bullets and cannonballs any more than it can ignore theflow of ideas about political and economic institutions. Yet the interconnection of European polities did not bring about institutional convergence. Although in most countries reform led to more representation, higher taxes, legal innovation, and infrastructure investment, the mechanisms used to achieve these goals varied considerably. To some extent this is evidence of path dependence, but it was also the result of the desire of politicians to forge a national identity and thus to preserve differences between their institutions and those of their international rivals. We begin with a very broad issue, namely the evolution of political institutions. We then move through a more focused set of problems: taxation, commercial law, and infrastructure investment. While obvi-ously incomplete, these topics allow us to highlight the key analytical issues in European institutional development between 1700 and 1870.
Political institutions
Between 1700 and 1870 European political units underwent complex, pro-found, and often locally specific transformations. We focus on three broad
trends: (i) absolutism’s continued rise from the sixteenth through the eight-eenth century; (ii) its complex replacement by constitutional regimes in the nineteenth century; and (iii) the ascendance of the national state over both territorial empires and confederations of small sovereign units.
In empires a ruler or a state deploys its political and military control over multiple territorial entities, imposing different combinations of legal, eco-nomic, and cultural uniformity. Between the Roman period and World War I, there was at least one empire in Europe, and most kings aimed at becoming rulers of empires. For millennia empires were the dominant polities around the globe. Yet in Europe they succumbed to a tide of national states, which one could see rising after the Peace of Westphalia in 1648. The Habsburg and Holy Roman empires survived, but their control over territories other than their traditional bases waned. The Ottomans’ sway over their European lands also slipped, even though they maintained a stronger grip over their Asian terri-tories. Certainly by the outbreak of the War of the Spanish Succession in 1702, national states were gaining the upper hand in Europe.
Charles Tilly (1992) traces the success of national states to their absorption of the fiscal extraction system and military organizations into administrative units. Early modern European polities had largely relied on indirect (decen-tralized) rule for their coercion and extraction needs. While centralization was known to be more efficient, it was also much costlier. Gonzalez de Lara, Greif, and Jah (2008) argue that medieval potentates chose indirect rule because it was cheap, and their organizational choice proved persistent. Decentralized admin-istration also constrained the capacity of European rulers to extract resources from their subjects, wage war, and control large territories. By the turn of the eighteenth century the tide was turning. Rulers increasingly broughtfiscal and military structures into their administrative structures, thereby shedding the layers of intermediaries on which they had relied to negotiate with the elites.
Sitting representative assemblies, quite common in the precedingfive centuries, became rare;fiscal operations were wrestled from private control and subjected to central oversight; statefinance ministries increasingly substituted for bank-ers and capitalists to whom kings had often outsourced their borrowing needs;
and professional mercenaries were replaced by standing armies, composed almost exclusively of nationals of the states they belonged to (Drelichman and Voth,2008).
While not doing justice to the wide variety of European polities, this rough characterization illustrates what set the new states apart from the political structures they came to replace. The fate of the countries that did not imple-ment such reforms reveals their importance. The agrarian-based nobility of the Polish-Lithuanian Commonwealth based its power on the liberum veto, which allowed any member of parliament to nullify its acts and end the current
session. As a result there was not much of a state in Poland by 1700. The reforms begun in 1764 came too late: Poland was divided between Russia, Austria, and Prussia. A similar system in Hungary had resulted in its absorption by the Ottoman Empire in the sixteenth century. As a rule, small states incapable of fielding standing armies and dominated by traditional elites were absorbed by the greater powers, Venice’s loss of its 1,000-year independ-ence to Napoleon being the iconic example of the fate that befell commercial and aristocratic city-states across Europe. Slightly larger states like the German principalities were enfolded in the fiscal–military machines of their more powerful neighbors. The Swiss Confederation, a collection of patriciate-ruled cantons, was overrun by the Napoleonic armies, although after the Congress of Vienna it managed to re-emerge in enlarged form and having acquired a government that could call itself central in some measure. Despite its loose organization, the Swiss Confederation managed to remain independent amidst the tug of war between France and Austria, illustrating the diminishing returns to the imperial model in Europe.
Two polities stood at the vanguard of change. Britain distinguished itself from the European norm with the construct of the Crown-in-Parliament and the other institutional innovations of the Glorious Revolution. The grand bargain of 1689 began a process whereby the kingdom acquired a representa-tive assembly, a strong execurepresenta-tive, a professional bureaucracy, and financial institutions designed to cater to the needs of the state; these “sinews of power” proved to be remarkably efficient in the consolidation of the state and the projection of military power (North and Weingast,1989; Brewer, 1989).
Many of these innovations were in fact imported or adapted from the Netherlands, the most successful of the handful of republics that survived in Europe. In the Dutch case, however, the process of change stalled, andfiscal centralization, though long debated, did not become a reality until the French forced changes after 1795.
While representative bodies with actual power survived, most polities shifted to direct absolute rule. One of the main dimensions along which absolute monarchies can be classified is their elimination of alternative political forces – especially the Church, the nobility, tax farmers, local and regional courts, and assemblies consenting to taxes (Finer, 1997). Traditional stakeholders’ loss of power varied widely, and was by no means irreversible. The elimination of intermediaries, a part of the Enlightenment program, took root with the most vigor in Prussia, Russia, and Austria. These three countries were still in the early stages of state-building when they became absolute monarchies, and their central governments encountered relatively little resistance. Reforming rulers also pre-vailed in Spain (Charles III and his minister Campomanes), Portugal (with the reforms pushed forward by chief minister Pombal), and Sweden (Gustav III).
Their reforms, however, were largely reversed by their successors. France made some strides under Louis XIV, who succeeded in co-opting the nobility and reducing the power of the parlements to block royal edicts. The venal French system, however, blocked deeper reform. Offices were not only private and, by the eighteenth century, largely hereditary property; they also constituted one of the main forms of government debt. Reform was impossible without an alter-native source offinance. In the face of the resistance of the nobility to accept new taxes, France lacked the means to issue new debt. This handicap eventually determined its mounting losses on the battlefields, and prompted the search for more radical reforms (Bordo and White,1991; Brewer,1989; Ertman,1997).
The French Ancien Régime was the classic example of what Ertman (1997) has called“patrimonial absolutism,” where the different bodies that constitute the state are the private property of individual elites. After Louis XIV’s death the elites used their control of state institutions, most notably the parlements, to defend their special interests against the several attempts at enlightened reform.
The confrontation between the Crown and the elites over the distribution of the tax burden would eventually lead to the French Revolution and radical change in political andfiscal institutions.
History has witnessed few moments of creative destruction so encompassing as the French Revolution. From its very outset the National Assembly sought to eliminate the intermediary bodies of the Ancien Régime. Parlements were dismissed; local assemblies (Etats) were abolished along with all feudal priv-ilege; the Church was dispossessed of its wealth; and almost all guilds were dissolved. The National Assembly’s plan for improving administration focused on central bureaucracies staffed by civil servants. The revolutionaries, however, were soonfighting for their lives, and their reforming zeal waxed and waned with the fortunes of French armies. The forces that had so completely wiped out all vestiges of the patrimonial regime eventually found themselves unable to give France a stable political order, a task that fell to Napoleon and that involved the reemergence of an autocratic empire in Europe.
Napoleon’s most lasting institutional innovation was the codification of civil law. Reform was necessary to uphold the Revolution’s commitment to central-ization and tofill the void created by the elimination of provincial and local legal privileges. Carried by French armies across Europe, codified law was also the Revolution’s most significant export (to which we shall return below).
While restoration returned most of their power to the absolute monarchs who had been deposed by Napoleon, only the most recalcitrant ones, such as Ferdinand VII of Spain, went to the trouble of completely reversing the legal innovations brought on by the French.
Napoleon was, above all, a brilliant military commander who harnessed the power of citizen armies. These human tidal waves were almost immediately
embraced by all the major powers. The diffusion of conscription on a large scale completed the state’s integration of the military. As with many military innovations, citizen armies came at a price and eventually forced bureauc-racies and administrations to evolve. The new type of conflict also carried a much larger cost in terms of lives. The Napoleonic wars caused almost as many deaths as the Thirty Years War in less than half the time; if the casualties of the French revolutionary war are added to the tally, the dead mount to two and a half million, one third of the lives lost in World War I (Tilly,1992, pp. 165–166).
Citizens who laid their lives at the feet of the state needed good reason to do so. Pension systems for the maimed and the families of the dead thus had to be set up, and rulers could not turn a completely deaf ear to increasing demands for representation in government. The second and third quarters of the nine-teenth century were thus characterized by what Finer (1997) has called the
“constitutionalization” of Europe. Constitutions that survived more than a few years were overwhelmingly granted by sovereigns rather than proclaimed by revolutionary assemblies. Sweden led the way in 1809 (although, strictly speak-ing, it was reviving the 1772 charter of Gustav III), followed by Norway and a handful of German states in 1814–19 and 1830–34. After the fall of Napoleon new restrictive constitutions were enacted in France and the Netherlands.
Following the revolutions of 1848, many countries enacted liberal constitu-tions; most were later revoked or modified to reduce popular representation.
S. E. Finer characterizes four types of constitutions. Neo-absolutist charters left most of the power in the hands of the ruler, although some maintained rump legislatures, often tilted towards the nobility and the landed elites. Spain (with the exception of its liberal periods), Holland under William I, Naples, Greece between 1843 and 1848, and a number of German states all fall under this category. The two other important types were constitutional monarchies, in which power was delegated to ministers answerable to the king (e.g. Austria, Piedmont); and parliamentary monarchies, where ministers responded to elected legislatures (e.g. Britain). The dividing line here is less defined, as most states started as constitutional monarchies and later morphed into parlia-mentary monarchies. For example, Austria was ruled with an iron hand by Metternich, who answered to the emperor alone; the revolutions of 1848 fatally weakened this system and eventually resulted in the introduction of a parlia-mentary system in 1867. France oscillated between the two systems, with parliamentary rule between 1830 and 1848, reverting to authoritarianism under the Second Empire, increasing again the role of the legislature towards the end of the 1860s, andfinally becoming a parliamentary republic, the fourth type of constitutional state. By 1870 only Russia and the Ottoman Empire maintained absolute governments without constitutions.
European polities also provided a wide array of political and economic freedoms. While long before 1700 there were many polities where some (male) residents had political rights, nearly everywhere much of the population was not only disenfranchised but also bound in either slavery, serfdom, or other labor arrangements that severely limited its freedom to accumulate wealth or migrate. By 1870 all areas of Europe save the Ottoman Empire had abolished slavery and serfdom, even where the political franchise remained non-existent or very constricted (Bush,1996). The increase in economic freedom, however, should not be overstated, because for several decades after emancipation work-ers in many parts of the economy had their mobility restricted by systems of passports that gave much bargaining power to employers. The evolution of individual freedoms resulted from the diverse interactions of constitutional processes, centralized states, and the emergence of citizen armies. Out of the tensions between the individual and the public sphere the phenomenon of nationalism in its myriad forms emerged, to play a defining role in the fortunes of the continent to this day.
Fiscal institutions
In the eighteenth century European states raised revenue tofight wars. Whether they wanted to expand their dominion, or merely defend them, rulers had to pay for their military (Brewer,1989; Hoffman and Rosenthal,1997). Europe’s most powerful states– France, England, Prussia, and Austria in particular – funded either large standing armies or navies and sometimes both. They did so through a combination of taxation, wartime borrowing, and an ever growing public debt. Poor governments could only ally themselves to the great powers or pursue neutrality instead. Thus Spain and the Dutch Republic had to settle for playing secondfiddle in European politics for lack of financial might (van Zanden and van Riel,2004; Tortella and Comín,2001).
Rulers knew that international competition was expensive, and that in turn colored all domestic political processes. In summer 1764 the French foreign minister, the Duke of Praslin, queried his ambassadors for information about thefiscal system in the countries where they were serving (Hartmann,1979). At
Rulers knew that international competition was expensive, and that in turn colored all domestic political processes. In summer 1764 the French foreign minister, the Duke of Praslin, queried his ambassadors for information about thefiscal system in the countries where they were serving (Hartmann,1979). At