This is the second and last installment of the book’s overview. If you happened to miss the first part, click here. Enjoy!
The majority of what you are about to read has been “shaped” by Prof. Jacob Weisdorf from Sapienza University of Rome. His great visiting lecture back in May put a lot of my skepticism about the book into a more concrete perspective. For this, I’m very much thankful.1 I am also thankful to Prof. Carlo Ciccharelli for organizing the visiting lecture, and for teaching us many essential concepts within economic history. Both have great teaching styles and have managed to further intrigue me with the field of Economic History.
In the first part we covered some of the basic premises and conclusions the authors put forward in the book. I viewed it as a far too simplistic description. Theories do require “a wide net” in order to survive the test of time. However, much of what was presented in the book regarding the institutional aspect failed to be supplied with concrete, more modern examples. Especially the inclusive institutions part. Later, drawn conclusions were very bipolar and served to further promote modern liberal ideas for state organization. While there is nothing wrong with that, more inspection is needed to determine the starting point of global inequality. Something that the authors did cover, but misinterpreted in my opinion. And in this part we turn exactly to it.
The Great Divergence
Considered to be the start of Western Europe’s economic domination, rapid industrial growth in the 18th century was soon followed by growth in wages. European powers made big steps in quality of life and productivity, leaving behind rest of the world. It started with the First Industrial Revolution (~1750) in Great Britain, continuing well after this event with some variability in scope. Only in the last 40-some years did the world’s economies experience a shift towards convergence. Developing countries making significant gains in economic output with respect to Western powers. Their effort was not really mentioned in the book.
What is mentioned repeatedly, however, is The Glorious Revolution. This revolution from 1688 marks the start of Britain’s constitutional monarchism. The authors show it as a great shift in British society that opened many opportunities for the common folks, previously not available to them:
The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions.
Additionally, the extension of these rights created an atmosphere in which continuous progress was possible. Therefore, the First Industrial Revolution was a direct result of the new institutional framework:
These foundations decisively changed incentives for people and impelled the engines of prosperity, paving the way for the Industrial Revolution. First and foremost, the Industrial Revolution depended on major technological advances exploiting the knowledge base that had accumulated in Europe during the past centuries. It was a radical break from the past, made possible by scientific inquiry and the talents of a number of unique individuals. The full force of this revolution came from the market that created profitable opportunities for technologies to be developed and applied. It was the inclusive nature of markets that allowed people to allocate their talents to the right lines of business. It also relied on education and skills, for it was the relatively high levels of education, at least by the standards of the time, that enabled the emergence of entrepreneurs with the vision to employ new technologies for their businesses and to find workers with the skills to use them. It is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution.
I think that this kind of “inclusive” language used in the book can mislead the reader. The authors try to convince the audience, through infinite and well-connected examples, that the 1688 Revolution managed to create such a drastic change in Britain’s (world’s) development. All within a single generation. The language used is like a wide brush, trying to tie everything under the umbrella of very general personal freedoms. I really don’t want to take away from the British achievements here, and certainly don’t think the Glorious Revolution was a bad thing. However, I do find it unlikely that this formula of “rights expansion” wouldn’t just be copied all over the globe, given it was so successful. Author’s answer to this is the nature of authoritarian regimes, that rely on despotism, and private interest to guide the country’s path. Offering any middle ground would require some concessions in their institutional theory. Given this, it doesn’t look deeper into other peculiar circumstances of 18th-century Britain.
Allen’s High Wage Hypothesis
What is more likely, is that 18th-century Britain possessed some necessary requirements in terms of resources, mixed with general socioeconomic conditions. And here we come to Allen’s wage hypothesis. There, Robert C. Allen argues that extremely high wages in Britain, and low coal prices, created a big incentive for labor replacement.2 It is also possible to pinpoint the exact location based on these 2 factors alone. That location being Newcastle.
18th century Newcastle was an ambient that sought to replace high-paying labor with cheap-cost machinery. This dichotomy led local capitalists and inventors to pursue more efficient solutions. That solution turned out to be steam engines. Essentially automating many previous labor-demanding jobs. Authors of the book might point out that high wages were observed due to institutional change decades prior. However, growth trends in British real wages were obvious well before the Glorious Revolution of 1688 took place (as seen below).
It is extremely difficult to grasp just what kind of a leap steam engines were for us. Creating so much societal “noise” in the process, as well as increasing availability of many essential goods. Luddites being the best example for the former, and European Grain Invasion for the latter. It also flipped the ratio of wage and total output right on its head. Making the workers much worse off compared to the capitalists which led to Marxism later on. Prof. Weisdorf and Prof. Allen published a paper stating otherwise, making the case that the “flip” was not as substantial as previously thought. Definitely worth taking a look!
Conclusion
Reading this two-part overview of the book, you might conclude that I didn’t really enjoy it. This is far from the truth. Why Nations Fail is rich with historical examples, although it does “combat” them quite selectively. There are many peculiar events covered that increased my interest in the given area. It is also an easy read, even though it is 500 pages long. Having said that, there are many instances of repetition, making it sound like a propaganda spot for liberal statecraft. What could have helped were more counter-arguments in the second half of the story. Acknowledging some of the many shortcomings of such a wide theory, and also making it more objective in return. Nevertheless, I still think it is a good starting point for those interested in economic history/inequality. As long as you do more digging afterward.
My final rating: ⭐⭐⭐ out of 5.
All of the pictures are sourced from Prof. Weisdorf’s lecture slides. Unless stated otherwise.
Obviously, both factors are considered in international relative terms.