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December 2, 2019 - May 7, 2022
The Industrial Revolution created a transformative critical juncture for the whole world during the nineteenth century and beyond: those societies that allowed and incentivized their citizens to invest in new technologies could grow rapidly. But many around the world failed to do so—or explicitly chose not to do so.
Inclusive political and economic institutions necessitate some degree of political centralization so that the state can enforce law and order, uphold property rights, and encourage economic activity when necessary by investing in public services.
the usual pattern of interaction between a critical juncture and existing institutional differences leading to further institutional and economic divergence played out again in the nineteenth century, and this time with an even bigger bang and more fundamental effects on the prosperity and poverty of nations.
The
But as in the Moluccas, Dutch colonialism fundamentally changed their economic and political development. The people in Southeast Asia stopped trading, turned inward, and became more absolutist. In the next two centuries, they would be in no position to take advantage of the innovations that would spring up in the Industrial Revolution. And ultimately their retreat from trade would not save them from Europeans; by the end of the eighteenth century, nearly all were part of European colonial empires.
this expansion sowed the seeds of underdevelopment in many diverse corners of the world by imposing, or further strengthening existing, extractive institutions. These either directly or indirectly destroyed nascent commercial and industrial activity throughout the globe or they perpetuated institutions that stopped industrialization. As a result, as industrialization was spreading in some parts of the world, places that were part of European colonial empires stood no chance of benefiting from these new technologies.
Dutch example explains why aren't all the colonies of England rich today. They created an environment in these colonies that had no chance of catching up with industrial revolution.
In the same period as the Dutch East India Company was expanding, a very different sort of trade was intensifying in Africa: the slave trade.
Adding the figures up over periods and parts of Africa, well over 10,000,000 Africans were shipped out of the continent as slaves.
The sudden appearance of Europeans all around the coast of Western and Central Africa eager to buy slaves could not but have a transformative impact on African societies.
The increase in warfare was fueled by huge imports of guns and ammunition, which the Europeans exchanged for slaves. By 1730 about 180,000 guns were being imported every year just along the West African coast, and between 1750 and the early nineteenth century, the British alone sold between 283,000 and 394,000 guns a year. Between 1750 and 1807, the British sold an extraordinary 22,000 tons of gunpowder, making an average of about 384,000 kilograms annually, along with 91,000 kilograms of lead per year.
All this warfare and conflict not only caused major loss of life and human suffering but also put in motion a particular path of institutional development in Africa.
The slave trade initiated two adverse political processes. First, many polities initially became more absolutist, organized around a single objective: to enslave and sell others to European slavers. Second, as a consequence but, paradoxically, in opposition to the first process, warring and slaving ultimately destroyed whatever order and legitimate state authority existed in sub-Saharan Africa.
Institutions, even religious ones, became perverted by the desire to capture and sell slaves.
This process in which all laws and customs were distorted and broken to capture slaves and more slaves had devastating effects on political centralization, though in some places it did lead to the rise of powerful states whose main raison d’être was raiding and slaving.
Though the end of the slave trade after 1807 did reduce the external demand for slaves from Africa, this did not mean that slavery’s impact on African societies and institutions would magically melt away. Many African states had become organized around slaving, and the British putting an end to the trade did not change this reality. Moreover, slavery had become much more prevalent within Africa itself. These factors would ultimately shape the path of development in Africa not only before but also after 1807.
Given the extractive economic and political institutions based on the slave trade, industrialization did not spread to sub-Saharan Africa, which stagnated or even experienced economic retardation as other parts of the world were transforming their economies.
For generations of development economists building on Lewis’s insights, the “problem of development” has come to mean moving people and resources out of the traditional sector, agriculture and the countryside, and into the modern sector, industry and cities. In 1979 Lewis received the Nobel Prize for his work on economic development.
According to this perspective, then, economic development should simply be about ensuring that the Transkei eventually turns into Natal. This perspective has much truth to it but misses the entire logic of how the dual economy came into existence and its relationship to the modern economy. The backwardness of the Transkei is not just a historic remnant of the natural backwardness of Africa. The dual economy between the Transkei and Natal is in fact quite recent, and is anything but natural. It was created by the South African white elites in order to produce a reservoir of cheap labor for
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The European part of the economy was urban and educated, and used modern technology. The Homelands were poor, rural, and backward; labor there was very unproductive; people, uneducated. It seemed to be the essence of timeless, backward Africa. Except that the dual economy was not natural or inevitable. It had been created by European colonialism. Yes, the Homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out
But even in these circumstances, couldn’t black Africans have made their way in the European, modern economy, started a business, or have become educated and begun a career? The government made sure these things could not happen. No African was allowed to own property or start a business in the European part of the economy—the 87 percent of the land.
It is not surprising that black Africans were uneducated; the South African state not only removed the possibility of Africans benefiting economically from an education but also refused to invest in black schools and discouraged black education.
In South Africa the dual economy was not an inevitable outcome of the process of development. It was created by the state.
On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers.
In fact, the black workers were purposefully kept unskilled and were barred from high-skill occupations so that skilled white workers would not face competition and could enjoy high wages.
Technological change is only one of the engines of prosperity, but it is perhaps the most critical one. The countries that did not take advantage of new technologies did not benefit from the other engines of prosperity, either.
As we have shown in this and the previous chapter, this failure was due to their extractive institutions, either a consequence of the persistence of their absolutist regimes or because they lacked centralized states.
In fact, the profitability of European colonial empires was often built on the destruction of independent polities and indigenous economies around the world, or on the creation of extractive institutions essentially from the ground up, as in the Caribbean islands, where, following the almost total collapse of the native populations, Europeans imported African slaves and set up plantation systems.
Soon, instead of producing textiles, Indians were buying them from Britain and growing opium for the East India Company to sell in China.
Many African states were turned into war machines intent on capturing and selling slaves to Europeans. As conflict between different polities and states grew into continuous warfare, state institutions, which in many cases had not yet achieved much political centralization in any case, crumbled in large parts of Africa, paving the way for persistent extractive institutions and the failed states of today that we will study later.
EIGHTEENTH-CENTURY ENGLAND—or more appropriately, Great Britain after the 1707 union of England, Wales, and Scotland—had a simple solution for dealing with criminals: out of sight, out of mind, or at least out of trouble. They transported many to penal colonies in the empire. Before the War of Independence, the convicted criminals, convicts, were primarily sent to the American colonies. After 1783 the independent United States of America was no longer so welcoming to British convicts, and the authorities in Britain had to find another home for them. They first thought about West Africa. But
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This part is about Australian institutions being created by convicts. They wouldn't have many rights if they were in England since they were convicted of crimes but they were far away from home. They were "free" to create their own new polity. They created a entrepreneurial environment in which inclusive economical and politial instituions coulf flourish.
It gives a story of convicts whose personal rights were found legitimate by the Australian jury making them proper citizens with rights.
Initially the convicts had no pay. They were given only food in return for the labor they performed. The guards kept what they produced. But this system, like the ones with which the Virginia Company experimented in Jamestown, did not work very well, because convicts did not have the incentives to work hard or do good work.
since neither banishing nor lashing worked, the alternative was to give them incentives. This was not a natural idea to the soldiers and guards. Convicts were convicts, and they were not supposed to sell their labor or own property. But in Australia there was nobody else to do the work.
There were of course Aboriginals, possibly as many as one million at the time of the founding of New South Wales. But they were spread out over a vast continent, and their density in New South Wales was insufficient for the creation of an economy based on their exploitation. There was no Latin American option in Australia. The guards thus embarked on a path that would ultimately lead to institutions that were even more inclusive than those back in Britain. Convicts were given a set of tasks to do, and if they had extra time, they could work for themselves and sell what they produced.
It was sheep heaven. Macarthur was soon the richest man in Australia, and he and his fellow sheep magnates became known as the Squatters, since the land on which they grazed their sheep was not theirs. It was owned by the British government. But at first this was a small detail. The Squatters were the elite of Australia, or, more appropriately, the Squattocracy. Even with a squattocracy, New South Wales did not look anything like the absolutist regimes of Eastern Europe or of the South American colonies. There were no serfs as in Austria-Hungary and Russia, and no large indigenous populations
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This passage exlains itself.
Convicts were soon allowed to become entrepreneurs and hire other convicts. More notably, they were even given land after completing their sentences, and they had all their rights restored. Some of them started to get rich, even the illiterate Henry Cable.
The next conflict in New South Wales would be between the elite and the rest of the society, made up of convicts, ex-convicts, and their families.
Most of the property was still in the hands of the elite, and the ex-convicts and their descendants wanted an end to transportation, the opportunity of trial by a jury of their peers, and access to free land. The elite wanted none of these. Their main concern was to establish legal title to the lands they squatted on. The situation was again similar to the events that had transpired in North America more than two centuries earlier.
The British government was again on the side of the elite, though they also feared that one day Macarthur and the Squatters might be tempted to declare independence. The British government dispatched John Bigge to the colony in 1819 to head a commission of inquiry into the developments there. Bigge was shocked by the rights that the convicts enjoyed and surprised by the fundamentally inclusive nature of the economic institutions of this penal colony. He recommended a radical overhaul: convicts could not own land, nobody should be allowed to pay convicts wages anymore, pardons were to be
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The initial circumstances in Sydney, New South Wales, were very similar to those in Jamestown, Virginia, 181 years earlier, though the settlers at Jamestown were mostly indentured laborers, rather than convicts. In both cases the initial circumstances did not allow for the creation of extractive colonial institutions. Neither colony had dense populations of indigenous peoples to exploit, ready access to precious metals such as gold or silver, or soil and crops that would make slave plantations economically viable. The slave trade was still vibrant in the 1780s, and New South Wales could have
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AUSTRALIA, LIKE THE UNITED STATES, experienced a different path to inclusive institutions than the one taken by England. The same revolutions that shook England during the Civil War and then the Glorious Revolution were not needed in the United States or Australia because of the very different circumstances in which those countries were founded—though this of course does not mean that inclusive institutions were established without any conflict, and, in the process, the United States had to throw off British colonialism. In England there was a long history of absolutist rule that was deeply
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The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich. The path these countries took wa...
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There were still other paths to inclusive institutions. Large parts of Western Europe took yet a third path to inclusive institutions under the impetus of the French Revolution, which overthrew absolutism in France and then generated a series of interstate conflicts that spread institutional reform across much of Western Europe. The economic consequence of these reforms was the emergence of inc...
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French society was divided into three segments, the so-called estates. The aristocrats (the nobility) made up the First Estate, the clergy the Second Estate, and everybody else the Third Estate. Different estates were subject to different laws, and the first two estates had rights that the rest of the population did not. The nobility and the clergy did not pay taxes, while the citizens had to pay several different taxes, as we would expect from a regime that was largely extractive.
The National Assembly hereby completely abolishes the feudal system. It decrees that, among the existing rights and dues, both feudal and censuel, all those originating in or representing real or personal serfdom shall be abolished without indemnification.
Pecuniary privileges, personal or real, in the payment of taxes are abolished forever. Taxes shall be collected from all the citizens, and from all property, in the same manner and in the same form. Plans shall be considered by which the taxes shall be paid proportionally by all, even for the last six months of the current year.
All citizens, without distinction of birth, are eligible to any office or dignity, whether ecclesiastical, civil, or military; and no profession shall imply any derogation.
These reforms were a first step toward ending the reign of the absolutist French monarchs. Several decades of instability and war followed the declarations of August 4. But an irreversible step was taken away from absolutism and extractive institutions and toward inclusive political and economic institutions.
The French Revolution created much violence, suffering, instability, and war. Nevertheless, thanks to it, the French did not get trapped with extractive institutions blocking economic growth and prosperity, as did absolutist regimes of Eastern Europe such as Austria-Hungary and Russia.
Even more remarkable than the storming of the Bastille were the dynamics of the National Constituent Assembly, which on August 4, 1789, with its newfound confidence, passed the new constitution, abolishing feudalism and the special privileges of the First and Second Estates. But this radicalization led to fractionalization within the Assembly, since there were many conflicting views about the shape that society should take.
The National Constituent Assembly passed the final version of the constitution on September 29, 1791, turning France into a constitutional monarchy, with equality of rights for all men, no feudal obligations or dues, and an end to all trading restrictions imposed by guilds. France was still a monarchy, but the king now had little role and, in fact, not even his freedom.
