The key point is that not all sets of institutions, when you add up the sum of the parts, are equal. There are good and bad combinations. In some sets of institutions, people can flourish freely as individuals, as families, as communities. That is because the institutions effectively incentivize us to do good things – like, for example, inventing new and more efficient ways of working, or cooperating with our neighbours rather than trying to murder them. Conversely, there are institutional frameworks that have the opposite effect: incentivizing bad behaviour like killing people who annoy us, or stealing property we covet, or idling away our time. Where bad institutions pertain, people get stuck in vicious circles of ignorance, ill health, poverty and, often, violence. Unfortunately, history suggests that there are more of these suboptimal frameworks than there are good frameworks. A really good set of institutions is hard to achieve. Bad institutions, by contrast, are easy to get stuck in. And this is why most countries have been poor for most of history, as well as illiterate, unhealthy and bloody.
I admire contemporary social scientific work that distinguishes between ‘open’ and ‘closed’sets of institutions,18 but as an historian I find that distinction too simplistic. For one of the puzzles of modern history is that successful societies – like eighteenthcentury England – often had institutions that today most people would be inclined to condemn. Already by the time of the Victorians, Hanoverian England looked shockingly corrupt in retrospect. And even in the 1850s, to Charles Dickens, England’s rule of law was still an object of derision, not admiration. Moreover, the historical approach reveals a point that is often overlooked. It is certainly desirable that societies with bad institutions should get better ones. We see that process going on today all over the world, in much of Asia, in parts of South America and even in Africa. But there is a more insidious process that is going on at the same time, whereby societies with good institutions gradually get worse ones. Why is this? Who exactly are the enemies of the rule of law, the people responsible for the marked deterioration that I detect in our institutions on both sides of the Atlantic?
My answers to these questions owe a considerable debt to a now large body of academic literature. Major influences on my thinking include Douglass North, who won the Nobel Prize for Economics for his work on institutions; the preeminent economist of modern Africa, Paul Collier, author of The Bottom Billion and Plundered Planet; Hernando de Soto, the Peruvian economist and author of The Mystery of Capital; Andrei Shleifer and his numerous coauthors, who have pioneered an economic approach to the comparative study of legal systems; and Jim Robinson and Daron Acemoglu, whose book Why Nations Fail asks similar questions to the ones that interest me. I owe these and the other scholars acknowledged in the notes a deep intellectual debt.
However, they would be the first to agree that much more attention has been paid to the question of why poor nations stay poor, as opposed to the question of why rich nations revert to poverty, a somewhat less common phenomenon. My concern here is not with economic development but rather with the opposite process of institutional degeneration. My overarching question is: what exactly has gone wrong in the Western world in our time? I answer that question in the belief that, until we understand the true nature of our degeneration, we will be wasting our time, applying quack remedies to mere symptoms. I am also actuated by the fear that, paradoxically, the economic stationary state may have dangerously dynamic political consequences.
a?On a purchasing-power parity basis, adjusting for the fact that non-tradable goods and services are much cheaper in China than in the United States. In current dollar terms, the Chinese economy will still be 60 per cent the size of the American in 2016 - compared with just 8 per cent in 1989.
1 . The Human Hive
Explaining the Great Divergence
‘Nature ... is a thynge of great myghte and efficacye,’ wrote the English humanist Richard Taverner in his Garden of Wysdome, ‘but surely institution or bringynge up, is moche mightier, whiche is hable to amende, reforme & strengthen a croked and evyll nature, and turn the same into a good nature.’1 Taverner’s words sum up what is fast becoming a compelling consensus: that institutions – in the broadest sense of the term – determine modern historical outcomes, more than natural forces like the weather, geography or even the incidence of disease.
Why, after around 1500, did Western civilization – as found in the quarrelsome petty states of Western Eurasia and their colonies of settlement in the New World – fare so much better than other civilizations? From the 1500s until the late 1970s, there was an astonishing divergence in global living standards, as Westerners became far richer than, well, Resterners. As recently as 300 years ago, the average Chinese was probably still a bit better off than the average North American. By 1978, the average American was at least twentytwo times richer than the average Chinese (see Figure 1.1).2 History’s great divergence was not just economic. It was also a divergence in terms of longevity and health. As recently as 1960, life expectancy in China was in the low forties, whereas already in the United States it had reached seventy.3 Westerners dominated the realm of science, as well as that of popular culture. To an astonishing degree they also continued to rule the world even after the demise of the dozen or so formal empires which, at their zenith, had covered nearly three-fifths of the world’s land surface and population and accounted for at least threequarters of global economic output. It was a conceit of the Cold War to refer to the Soviet empire as ‘the East’ ; in reality it was the last European empire to rule over large tracts of Asia.
Figure 1.1
Source: Angus Maddison, ‘Historical Statistics of the World Economy:1~2008 ad’ : http://www.ggdc.net/MADDISON/oriindex.htm .
How are we to explain this, the ultimate global imbalance, which placed a minority of mankind – at most a fifth – in such a position of material and political superiority over the rest? It seems implausible that it was due to some innate superiority of Europeans, as the racial theorists of the nineteenth and twentieth centuries often argued. The gene pool was surely not so different in the year 500, when the western end of Eurasia was entering a period of nearly a thousand years of relative stagnation. Likewise, the climate, topography and natural resources of Europe were much the same in 1500 as they had been in 500 . Throughout the Dark Ages and medieval period, European civilization showed no obvious sign of outperforming the great Oriental empires. With all due respect to Jared Diamond, geography and its agricultural consequences may explain why Eurasia did better than other parts of the world; but it can’ t explain why the western end of Eurasia did so much better than the eastern end after 1500.4
Nor can we explain the great divergence in terms of imperialism; the other civilizations did plenty of that before Europeans began crossing oceans and conquering. For the historian Kenneth Pomeranz, who coined the phrase ‘the great divergence’, it was really just a matter of luck.
Europeans were fortunate enough to stumble on the socalled ‘ghost acres’ of the Caribbean, which were soon providing the peoples of the Atlantic metropoles with abundant sugar, a compact source of calories unavailable to most Asians. Europeans were also fortunate to have more readily accessible deposits of coal.5 Yet this argument leaves unanswered the questions of why the Chinese were not as assiduous as Europeans in the search for colonial ghost acres overseas; and why they were unable to solve the technical challenges of mining coal the way the British did.
I believe the best answers to the question of what caused the great divergence focus on the role of institutions. For example, Douglass North, John Wallis and Barry Weingast distinguish between two phases or patterns of human organization.6 The first is what they call the natural state or ‘limited access pattern’, characterized by:
? a slowgrowing economy;
? relatively few nonstate organizations;
? a small and quite centralized government, operating without the consent of the governed; and
? social relationships organized along personal and dynastic lines.
? The second is the ‘open access pattern’, characterized by:
? a fastergrowing economy;
? a rich and vibrant civil society with lots of organizations;
? a bigger, more decentralized government; and
? social relationships governed by impersonal forces like the rule of law, involving secure property rights, fairness, and (at least in theory) equality.
In their account, West European states – led by England – were the first to make the transition from ‘limited access’ to ‘open access’. In order to do this, a country has to ‘develop institutional arrangements that enable elites to create the possibility of impersonal intraelite relationships’ and then to ‘create and sustain new incentives for elites to successfully open access within the elite’. At this point, ‘Elites transform their personal privileges into impersonal rights. All elites are given the right to form organizations ... at that point, the logic ... has changed from the natural state logic of rentcreation through privileges to the open access logic of renterosion through entry.’
Between the Conquest and the Glorious Revolution, England went from being a ‘fragile’ natural state to being a.‘basic’ one and then a ‘mature one’, characterized by an.‘extensive set of institutions governing, regulating, and enforcing property rights in land capable of supporting impersonal exchange among elites’. The rule of law for elites was one of the three ‘doorstep conditions’, prior to the transition to an openaccess system, the others being the emergence of perpetually lived organizations in the public [and] private sphere[s]’ and the ‘consolidated control of the military’. For North, Wallis and Weingast, the decisive breakthrough to open access came with the American and French Revolutions, which saw the spread of incorporation in various forms, and the legitimation of open competition in both the economic and political spheres. At each stage of the argument, then, their emphasis is on institutions, beginning with changes in English land law after the eleventh century, and culminating with changes in the legal treatment of corporate entities in the nineteenth century.
In a similar vein, Francis Fukuyama’s Origins of Political Order defines ‘the three components of a modern political order’ as ‘a strong and capable state, the state’s subordination to a rule of law and government accountability to all citizens’.7 These three components came together for the first time in Western Europe, with England once again the trailblazer (though Fukuyama gives credit to the Netherlands, Denmark and Sweden for not being far behind). Why Europe and not Asia? Because, says Fukuyama, the idiosyncratic development of Western Christendom tended to undercut the importance of extended families or clans.
In their book Why Nations Fail, too, Daron Acemoglu and Jim Robinson make a striking comparison between Egypt today and England in the late seventeenth century:
The reason that Britain is richer than Egypt is because in 1688 ... England ... had a revolution that transformed the politics and thus the economics of the nation. People fought for and won more political rights and used them to expand their economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution.8
In their terms, England was the first country to move to having ‘inclusive’ or ‘pluralistic’ rather than ‘extractive’ political institutions. Note that other West European societies – for instance, Spain – failed to do this. As a result, the outcomes of European colonization in North and South America were radically different. The English exported inclusive institutions; the Spaniards were content to superimpose their extractive ones on top of those they took over from the Aztecs and Incas.
The imperial context also reveals the diff erence between the institutional argument and the older cultural interpretation.– first formulated by Max Weber, later revived by David Landes – that there was some link between Protestantism and the ‘spirit of capitalism’. Unlike the Nazi in Hanns Johst’s play Schlageter, I do not reach for my revolver when I hear the world culture, but I do issue a polite health warning. It is very tempting to attribute historical agency to an amalgam of ideas and norms.– Greek philosophy, the Hebrew Commandments, Roman law, Christ’s ethics, the doctrine of Luther and Calvin – called something like ‘JudaeoChristian culture’. But there is a real risk of cherrypicking here. Somehow no really terrible Western ideas like, say, witchburning or communism ever get mentioned, though they seem just as plausibly the products of Judaeo Christian culture as the spirit of capitalism. In any case, while culture may instil norms, institutions create incentives. Britons versed in much the same culture behaved very diff erently depending on whether they emigrated to New England or joined the East India Company. In the former case we find inclusive institutions, in the latter extractive ones.
Glorious Institutions
The debate about the causes of the great divergence is of more than merely historical interest. Understanding Western success helps us to frame some rather more urgent questions about the recent past, the present and possible futures. One reason the institutional argument is so compelling is that it also seems to offer a good explanation for the failure of most nonWestern countries, until the later twentieth century, to achieve sustained economic growth. Acemoglu and Robinson illustrate the power of institutions relative to geography and culture by describing the city of Nogales, which is bisected by the US–Mexican border. The difference in living standards between the two halves is shocking.9 The same point can be made with regard to the two great experiments run during the Cold War. Essentially, we took two peoples – the Koreans and the Germans – and we divided them in two. South Koreans and West Germans got essentially capitalist institutions; North Koreans and East Germans got communist ones. The divergence that occurred in the space of just a few decades was enormous. Their analysis makes Acemoglu and Robinson sceptical that China has yet made the decisive breakthrough to sustainable growth. In their view, Chinese market reforms remain subject to the decisions of an exclusive and extractive elite, which continues to determine the allocation of key resources.
Development economists – notably Paul Collier – have been thinking in these terms for some time.10 The case of Botswana seems to illustrate the point that even a subSaharan African economy can achieve sustained growth if its people are not plagued by chronic corruption and/or civil war like, say, the Democratic Republic of Congo. Unlike most postcolonial African states, Botswana succeeded in establishing inclusive not extractive institutions when it gained its independence. The Peruvian economist Hernando de Soto is another who has been arguing for years that institutions are what matter.11 By slogging away in the shanty towns of Lima, PortauPrince, Cairo and Manila, he and his researchers established that, though their incomes are low, the poor of the world have a surprisingly large amount of property. The problem is that this property is not legally recognized as theirs. It is nearly all held ‘extralegally’. This is not because the poor are taxdodgers. As de Soto makes clear, the black economy has its own kind of taxation – protection rackets and the like – which make legality positively attractive. It is just that getting legal title to a house or a workshop is wellnigh impossible.
