Why Nations Fail:
 Theory is Tidy, History is Messy

Posted in economic institutions, history of economic growth, history of trade and commerce, Industrial Revolution, political institutions, property rights, technological progress
Based on Daron Acemoglu and James A. Robinson, Why Nations Fail (Crown Business, 2012)

Acemoglu and Robinson argue persuasively that sustained growth requires inclusive political and economic institutions (here). They then go one step further, arguing that sustained growth is almost always attained in a particular way: inclusive political institutions develop first, followed by inclusive economic institutions, followed by growth. They recognize the boldness of their claim.

Any complex social phenomenon, such as the origins of the different economic and political trajectories of hundreds of polities around the world, likely has a multitude of causes, making most social scientists shun monocausal, simple, and broadly applicable theories and instead seek different explanations for seemingly similar outcomes emerging in different times and areas. Instead we’ve offered a simple theory and used it to explain the main contours of economic and political development around the world since the Neolithic Revolution.1

Acemoglu and Robinson support their claim by barnstorming through history, identifying instances where the development of inclusive institutions preceded growth and arguing for a causal connection between the two. This episodic approach to history is often insightful, but it cannot show that inclusive institutions were the primary driver of growth. Such a demonstration would require an evaluation of a broad cross-section of the available evidence, something that Acemoglu and Robinson do not attempt.

Acemoglu and Robinson’s most extensive discussion concerns the Industrial Revolution. They view the Glorious Revolution as the “turning point” at which Britain shifted away from extractive political institutions and towards inclusive ones. Economic institutions then became more inclusive, leading directly to the Industrial Revolution:

In 1688, Britain (or England, to be exact) had a revolution that transformed the politics and thus the economics of the nation. People fought for and won more political rights, and they used them to expand their economic opportunities.2

Yet, even here, Acemoglu and Robinson consider only events that support their hypothesis. Would a broader survey of the evidence be as supportive? This question is discussed below.

The Curious Case of William Lee

Acemoglu and Robinson begin their discussion of the Industrial Revolution with William Lee’s pursuit of a patent for his knitting machine:

Finally, in 1589, his “stocking frame” knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. He rented a building to set the machine up and, with the help of his local member of Parliament Richard Parkyns, met Henry Carey, Lord Hunsdon, a member of the Queen’s Privy Council. Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing, “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” Crushed, Lee moved to France to try his luck there; when he failed there, too, he returned to England where he asked James I (1603-25), Elizabeth’s successor for a patent. James I also refused, on the same grounds as Elizabeth. Both feared that the mechanization of stocking production would be politically destabilizing.3

Acemoglu and Robinson are not surprised by Lee’s failure to secure a patent. England’s institutions before the Glorious Revolution were extractive, they argue, and one characteristic of extractive institutions is that the political elite, fearing the destabilizing effects of creative destruction, suppress new technologies.

But the Queen’s words, as quoted above, are apocryphal. Neither her words nor their substance is known to us:

The story that she discouraged Lee from persisting with his frame because it would impoverish her poor subjects was a tradition among old stocking knitters whose memories went back to the early eighteenth century, and whom Gravenor Henson heard and recorded in 1831. It is not supported by any documentary evidence, and we are therefore justified in suspecting that it is a garbled version of the truth.4

It is commonly accepted that the Queen urged Lee to adapt his machine to the finer task of silk weaving, which he achieved by 1599. Lee continued in business in London until 1608, when he entered into a contract to produce silk and worsted stockings in Rouen. He moved his business to France, where he died in perhaps 1611. His brother James then returned to England, bringing with him seven operators and their frames. The operators remained in London, where they continued to weave silk. James settled in Nottinghamshire, where an apprentice who had remained in England was using the knitting frame to produce worsted stockings. Farther to the north, a third group was using the frame to produce heavy work stockings — the army was a major customer.5

All of the branches of the industry thrived. By 1644 there were 400-500 stocking frames in London and about 150 frames in Nottinghamshire. By 1700 there were 1400 stocking frames in London alone. By 1750 — the eve of the Industrial Revolution — there were 14,000 frames in England.6 The stocking frame had by that time become very sophisticated: it had more than 2000 parts and could have as many as 38 needles per inch (15 per centimeter).7

The stocking frame is a story of English success, not of English failure. The numbers above are impressive in themselves, but they almost certainly understate the frame’s importance. Its success surely caused other men to think, “If a machine can be made to knit stockings, what else can a machine be made to do?” And what machines can be made to do is the essence of the Industrial Revolution.

Growth Before the Glorious Revolution

England’s embrace of the stocking frame was not an anomaly. Exactly one century separates the destruction of the Spanish Armada from the Glorious Revolution. England achieved great commercial success during this century, and its per capita income at the end of it was higher than that of any country other than the Netherlands.

This century of growth fundamentally changed the nature of the English economy. In 1588 the bulk of the nation’s wealth was land and the landowners were its economic elite. The growth of trade, manufacturing, and finance shifted economic power away from the landowners. The wealth of some merchants and industrialists came to rival that of the major landowners, and a new middle class consisting of merchants, manufacturers, and artisans emerged.

The way in which the economy operated also changed. Markets became more extensive, leading to greater gains from trade, as well as greater gains from specialization and the division of labour. Market extension occurred on three levels:

One was the local level: people bought their bread from the local baker, had their shoes repaired by the cobbler, and their roofs fixed by thatchers. They usually paid for these transactions with cash. The second was the national level: a large and increasing number of goods were traded and transported all over Britain: buckles, guns, toys, and other metalware from Birmingham, flatware from Sheffield, pottery from Staffordshire, coal from Wales and Newcastle, silk goods from Spitalfields…Third, by 1700 there was a great deal of trade at the international level, much of which had emerged since the death of Queen Elizabeth in 1601. The great geographical discoveries — as they were viewed from Europe — had created long-distance trade where there had been none before. Goods like sugar, spices, tea, tobacco, cod, indigo, rice, and cotton, to name but a few, came from thousands of miles away. Equally important, eighteenth-century Britain could rely on grains from France, the Baltic, and other parts of the Continent when its own harvests fell short…Its shipping industry depended on naval stores and timber imported from the Baltic and its textiles on imported raw wool, linen, silk, and cotton.8

A significant part of national and international commerce dealt with the consumer goods demanded by the new middle class.

Were England’s economic institutions inclusive or extractive? Neither the one nor the other. England’s growth was largely driven by independent merchants and manufacturers. They would not have been willing to invest without secure property rights, and they would not have been willing to engage in arms-length transactions without legally enforceable contracts. These two things, property rights and enforceable contracts, are key elements of inclusive institutions. As well, the emergence of a prosperous middle class is inconsistent with an economic elite that channels economic activity towards its own interests, as occurs under extractive institutions. On the other hand, monarchs did grant geographical monopolies to trading companies such as the East India Company and the Hudson’s Bay Company, steering the rewards of trade away from the many and towards the fortunate few. They also granted domestic monopolies in order to raise revenue or reward allies. These domestic and geographic monopolies are clearly extractive. As well, the monarch’s right to appoint judges meant that the courts were not unbiased when he had an interest in the case. In short, both extractive and inclusive features were present — but the extractive features did not prevent England from growing rapidly, and they did not prevent a shift of economic power away from the landowners and toward commercial interests.

England’s political institutions during this century were in transition. It is useful to separate the reigns of James I and his predecessor from the reigns of his successors.

Henry VIII had believed himself to be an absolute monarch — above the law, not subject to it — but found that Parliament could be a useful ally. Elizabeth I seems to have operated with the same discretion, as evidenced by her restraint in matters of religion. Her successor, James I, openly declared himself to rule by divine right, but nevertheless yielded to Parliament on some matters. The Statute of Monopolies (1623), for example, ended the monarch’s right to grant domestic monopolies and incorporated the patent system into statute law.

Why would avowedly absolute monarchs respect the wishes of Parliament? The first reason is money: the Crown’s continuing revenues were too small to satisfy its routine needs. The shortfall was covered in part by incurring debt. The Crown’s debt was £400,000 at the death of Elizabeth I, and it rose to more than £1,000,000 under James I. By the end of his reign, London’s bankers were unwilling to extend further credit to him.9 The only other way to cover the shortfall was to ask Parliament to impose additional taxes.10 Such requests gave Parliament leverage that it repeatedly exploited to obtain additional rights.11 The second reason is also money: the monarch’s need for revenue exploded in time of war — and English monarchs were always at war. The size and urgency of the monarch’s wartime revenue increased Parliament’s leverage. The third reason is, well, money. European nations were perpetually at war during this period, and in war, the weak perish. The monarch and Parliament had a common interest in a strong economy. It was this common interest that gave rise to mercantilism.

England’s political institutions during this period were largely extractive, although the need for Parliamentary approval of new taxes introduced an element of inclusiveness. However, these institutions were under stress. Some historians had made the claim (now known to be based on forged documents) that England was governed by an Ancient Constitution, under which Parliament represented the people and derived its powers from the people. These claims were eagerly embraced by some Parliamentarians and emphatically rejected by the King. They foreshadow the outcome of the Glorious Revolution.

Parliament and the King struggled for power during the period from Charles I’s succession in 1625 to the Glorious Revolution in 1688. Here is a very brief history of this time:

Charles believed that he was an absolute monarch and intended to rule like one. He took actions that violated what the English took to be their rights, including property rights and equality under the law. Parliament refused to provide the revenue needed to fund wars in Spain, France and Scotland until the rights of the English people were acknowledged by the king. Tensions escalated, leading to civil war. Parliament captured and executed Charles. Cromwell ruled England as the head of a republic; after his death, his son ruled briefly. Many were unhappy with the republican experiment, so Parliament invited Charles’s son to rule as Charles II. The new king largely abided by the limits imposed by the Restoration Settlement, but his successor, James II, again attempted to rule as an absolute monarch. He was again opposed by Parliament. A revolution — the Glorious Revolution — drove him from the country and replaced him with a Dutch nobleman, who ruled as William III. The king’s powers were constrained by Parliament, and he and his successors accepted these constraints. Parliament, by twice removing a king deemed to be working against the interests of the people, had demonstrated that it, not the king, was supreme.

The events of this period are consistent with Acemoglu and Robinson’s static argument. The economic institutions were largely inclusive, leading to rapid growth and the emergence of a new economic elite. The political institutions were largely extractive and under the control of an older elite. The combination of extractive political institutions and inclusive economic institutions is unstable: something had to give way.

The century as a whole, however, is not consistent with their dynamic argument, as inclusive economic institutions largely preceded inclusive political institutions.

Growth After the Glorious Revolution

The Bill of Rights was passed by Parliament in 1689, setting out the rights of English citizens and the limits of the king’s power over them. It declared, for example, that the king could not levy taxes or suspend laws or keep a standing army without the prior consent of Parliament. It declared that Parliamentarians should be freely elected, that Parliament should meet frequently, and that speech within Parliament could not be restrained or punished by the courts or any other entity. Kings had previously acquiesced to legislation that limited their power, the Petition of Right (1628) for example, and then openly breached it. What was different in 1689 was that Parliament had shown that it was willing and able to make and unmake kings. Power had shifted decisively away from the monarch and toward Parliament.

This shift of power did not in itself make England’s political institutions inclusive. The House of Commons and the House of Lords continued to be dominated by wealthy landowners. Suffrage remained very limited. Even after the Reform Act of 1832, only about one in seven men — and no women — were entitled to vote. Acemoglu and Robinson argue, however, that government became more inclusive because citizens had the right to petition Parliament.

Anybody could petition Parliament, and petition they did. Significantly, when people petitioned, Parliament listened. It is this more than anything that reflects the defeat of absolutism, the empowerment of a fairly broad segment of society, and the rise of pluralism in England after 1688.12

Parliament used its power to make the economic institutions more inclusive. Acemoglu and Robinson highlight the formation of the Bank of England (which initially lent money to industry, and only much later became an agency of the British government), the redistribution of the tax burden, the reorganization of property rights over land, and the protection of the textile industry. The Industrial Revolution followed.

By 1760 the combination of all these factors — improved and new property rights, improved infrastructure, a changed fiscal regime, greater access to finance, and aggressive protection of traders and manufacturers — was beginning to have an effect. After this date, there was a jump in the number of patented inventions, and the great flowering of technological change that was to be at the heart of the Industrial Revolution began to be evident. Innovations took place on many fronts, reflecting the improved institutional environment.13

The Industrial Revolution was manifested in every aspect of the English economy. There were major improvements in transportation, metallurgy, and steam power. But the most significant area of innovation was the mechanization of textile production and the development of factories to produce these manufactured textiles. This dynamic process was unleashed by the institutional changes that flowed from the Glorious Revolution. This was not just about the abolition of domestic monopolies, which had been achieved by 1640, or about different taxes or access to finance. It was about a fundamental reorganization of economic institutions in favor of innovators and entrepreneurs, based on the emergence of more secure and efficient property rights.14

These events, Acemoglu and Robinson argue, are an illustration of their dynamics: inclusive political institutions develop first, followed by inclusive economic institutions, followed by growth. Some aspects of their argument require closer inspection.

Petitions

There is no doubt that petitioners had an impact on Parliament. In the years between 1688 and 1800, between two-thirds and three-quarters of the legislation enacted by Parliament dealt with particular places or institutions,15 and most of this legislation was doubtless in response to local representations. On the other hand, it is not at all evident that this legislation made the economy more efficient. The petitioners’ intent was to advance their own interests, often at the expense of other members of society, and Parliament was often willing to assist them.

Parliament was the target of innumerable petitions for some special legislation to be passed or rescinded, taxes and regulations to be lifted, and customs duty to be adjusted. These lobbies informed and persuaded through subtle contact with influential legislators, constrained by the often arcane rules of Parliament. The political process of lobbying legislators was in itself neither good nor bad. It all depended on what was successfully lobbied for. Insofar as legislation sought to redistribute resources in favor of vested interests that wanted protection or to maintain exclusionary rents, successful lobbying was costly and impeded economic growth. But when lobbies tried to abolish regulations, establish free markets, and encourage and reward innovation, their effects could be salutary.16

The Fire Engine Act (1775) is an example of harmful legislation triggered by a petition. It extended Boulton and Watt’s patent on the separate condensor for an unprecedented twenty-five years, enriching Boulton and Watt at the expense of other engineers. It also significantly delayed the development of the steam engine. Jonathan Hornblower built the first compound steam engine in 1781. Boulton and Watt argued that the engine’s low-pressure cylinder was essentially a separate condenser and therefore an infringement of their patent, forcing Hornblower to abandon the concept. The compound engine was not resurrected until the early years of the nineteenth century, after Boulton and Watt’s patent had finally lapsed. Compound engines proved to be very efficient, and their low fuel consumption made them instrumental to the transition from sail to steam.

Many petitions had beneficial outcomes, although even then they often had a substantial redistributive component. Petitions that dealt with infrastructure often fell into this category. Turnpike acts were a solution to a common property problem. Communities were responsible for maintaining the roads that ran through them. Much of the damage to the roads was caused by “through traffic” that contributed nothing to the maintenance costs. Each community, finding itself bearing all of the costs of the road but gaining only a part of its benefits, underinvested in road maintenance. A turnpike act — there was a separate act for each community — allowed a community to charge for the use of the road, with the revenue going to road maintenance. A canal act set out the conditions under which a proposed canal could be built and operated. A canal act generally forced the sale of land along the canal’s projected route. The sellers were compensated; but the act prevented nimbyism, as well as the bargaining problem that arises when every seller effectively has “veto power” on the project. Enclosure acts rationalized the property rights on agriculture land. Early land enclosures occurred without Parliamentary involvement: enclosure produced economic gains, so there were bargains that made everyone better off. An enclosure act, which was initiated by a petition from the major landowners in a community, did away with the bargaining and imposed a settlement devised by a government agent.

Parliament passed a great deal of legislation, both good and bad, in the aftermath of the Glorious Revolution. Giving Parliamentarians power didn’t automatically make them wise in its use, and in the first few decades they were simply dealmakers unguided by overarching principles. Mokyr sums up their performance in this way:

The British state in the eighteenth century was a mechanism of rent-seeking in which powerful groups and members of the political elite used the power of the state in their own interest to gain certain privileges and exclusionary rights, such as monopolies, import prohibitions, and other regulations whose purpose it was to generate income for a few at the expense of the many.17

It was not until the second half of the eighteenth century that the notion of a public interest established itself among Parliamentarians. The ideas of Enlightenment thinkers such as John Locke, David Hume and Adam Smith were influential only in the last decades of the century. Much of the legislation that cleared away market impediments came still later, in the first half of the nineteenth century. These things might have amplified the Industrial Revolution, but they happened too late to have caused it.

Growth Versus Innovation

Acemoglu and Robinson argue that by 1760, Parliament’s reforms were beginning to change the economy’s performance. What was the nature of this change? The reforms — redistribution of the tax burden, new financing, new infrastructure, and so on — might be expected to lead to an increase in the rate of growth of per capita output, but this expectation is not confirmed by the data. There was no substantial increase in the growth rate of per capita output or per capita industrial production until the nineteenth century.18

Historians who specialize in the Industrial Revolution argue that what marked the onset of the Industrial Revolution was not faster growth but the appearance, for the first time in history, of continuing technological progress. As the quotes above show, Acemoglu and Robinson agree with them. The difficulty is that none of the reforms that they highlight have a significant connection to invention. James Watt, for example, had no more interest in taxes than any other businessman, no particular interest in roads and canals, and no interest in enclosures. Banks were more willing to offer loans to merchants and manufacturers, but only because merchants and manufacturers could repay their loans on schedule. This kind of loan was not available to inventors. Watt, like other inventors of his time, had to obtain his financing by entering into partnerships (first with John Roebuck and then with Matthew Boulton). There is no reason to believe that protecting a market induces innovation; indeed, David Hume argued that England’s openness to trade had been the source of its technological achievements.19 The absence of any clear causal connection between the reforms highlighted by Acemoglu and Robinson and the subsequent innovations is a major problem for their hypothesis.

There are two competing hypotheses that do provide cogent explanations for the transition to continuous technological progress. One is Joel Mokyr’s argument (here) that the Industrial Revolution was the result of the intellectual revolutions of the seventeenth and eighteenth century. The other is Robert Allen’s contention (here) that the Industrial Revolution is explained by relative prices.

Mokyr’s argument suggests that the Industrial Revolution occurred almost as soon as it could occur. Newton’s Principia (1687) is often taken to be the culmination of the Scientific Revolution. Its use of mathematics, data, and induction made it an exemplar for the engineers and technicians of the eighteenth century, and it was carefully studied by many of them. But its publication does not mark a moment at which people turned away from medieval notions and adopted modern ones. Newton himself was keenly interested in alchemy and numerology; Kepler firmly believed in astrology. There was simply too little firm knowledge of the workings of the world to allow even well-educated people to separate strange but true ideas like gravity, from strange and false ideas like alchemy. The adoption of a scientific mindset was a process, not an event, and it continued well into the eighteenth century. It is therefore difficult to imagine that the technical achievements of the eighteenth century could have occurred even a few decades earlier. For example, Thomas Newcomen’s first commercial steam engine dates to 1712, just forty years after Otto von Guericke demonstrated that the atmosphere could be made to perform work.

Mokyr argues that the Scientific Revolution and the Enlightenment were pan-European phenomena, so that the Industrial Revolution would have occurred elsewhere in Europe if it hadn’t occurred in Britain. This assertion begs the question, why did the Scientific Revolution occur in Europe and not elsewhere? Toby Huff’s answer has been discussed elsewhere (here and here), but it is interesting to reappraise it in light of Acemoglu and Robinson’s ideas. The descriptors “extractive” and “inclusive” can easily be adapted to scientific institutions. Huff’s argument, in a nutshell, is that science failed to flourish in China and the Islamic world because their scientific institutions were extractive, and that it flourished in Europe because its scientific institutions were inclusive.

The assumption that Europeans were capable of technical innovation is implicit in Allen’s argument. He only asks, what triggered the British to do the things that they were (newly) capable of doing? His answer is that Britiain’s factor prices made it profitable for British entrepreneurs to adopt technologies that substituted capital and energy for labour, which made it profitable for British innovators to devise that kind of technology. The Continent lagged behind Britain because the factor prices there did not encourage the same substitution.

These three hypotheses are not mutually exclusive, and each one adds something interesting to the discussion. Historians avoid monocausal explanations for good reasons.

Patents

Acemoglu and Robinson barely mention patents in their chapter on the Industrial Revolution. After opening the chapter with the story of Lee’s inability to patent the stocking frame, they mention patents only three more times: twice to acknowledge that particular devices had been patented, and once to tacitly approve of a judge’s refusal to enforce Arkwright’s “overly broad” patent. Since patents — property rights over ideas — could have provided a much-needed link between institutional reform and the subsequent innovation, Acemoglu and Robinson’s decision to downplay them is at first surprising. A closer look at the history of patents, however, shows them to be less closely linked to innovation than is sometimes imagined.

The Early History of Patents

The “letter patent” (open letter, written by the monarch to the people) was a tool for encouraging industry that was first used by Edward III in the fourteenth century. The letter patent was initially little more than a passport, awarded to foreigners who were willing to come to England to teach their crafts to English apprentices. In the sixteenth century the letter patent began to offer foreign manufacturers a monopoly for their product, for a limited time, again with the expectation that the manufacturers would teach their methods to the English. These letters were offered only to those foreigners who made goods that were not available in England, or who made goods using new processes. Their issuance was a royal prerogative, not a right of the patentee, and disputes over letters patent were handled by the Privy Council, not the law courts.20

Inventors could also be issued letters patent, because they were deemed to be equivalent to foreign manufacturers: they brought new goods or new processes to England. They had no natural right to a letter patent, and some significant inventions — Lee’s stocking frame and Harrington’s water closet among them — were not awarded patents.

Elizabeth I recognized no bounds on her right to issue patents, and over the course of her reign, patents became less a means of expanding the English economy and more a means of rewarding her allies. She issued 35 patents between 1561 and 1580. Nineteen of them went to foreigners for products such as glass and dredging machines, or for processes such as the tempering of iron and the extraction of vegetable oils. Between 1581 and 1603 she issued 20 patents, with only two of them going to foreigners.21

The use of patents as rewards circumvented Parliament’s right to set taxes, and it did a great deal of harm to the people. David Hume describes this practice in his History of England:

The active reign of Elizabeth had enabled many persons to distinguish themselves in civil and military employments; and the queen, who was not able, from her revenue, to give them any rewards proportioned to their services, had made use of an expedient which had been employed by her predecessor, but which had never been carried to such an extreme as under her administration. She granted her servants and courtiers patents for monopolies; and these patents they sold to others, who were thereby enabled to raise commodities to what price they pleased, and who put invincible restraints upon all commerce, industry, and emulation in the arts…These monopolists were so exorbitant in their demands, that in some places they raised the price of salt from sixteen-pence a bushel, to fourteen or fifteen shillings. Such high profits naturally begat intruders upon their commerce; and in order to secure themselves against encroachments, the patentees were armed with high and arbitrary powers from the council, by which they were enabled to oppress the people at pleasure, and to exact money from such as they thought proper to accuse of interfering with their patent. The patentees of saltpetre having the power of entering into every house, and of committing what havoc they pleased in stables, cellars, or wherever they suspected saltpetre might be gathered, commonly extorted money from those who desired to free themselves from this damage or trouble.22

Parliament tabled a bill to end this abuse in 1601. Hume vividly conveys the courtiers’ assertion of royal prerogative, the confused Parliamentary debates that followed, the Queen’s concession, Parliament’s joy and relief that conflict had been averted, and its rewarding of that concession with cash.

A bill was now introduced into the lower house, abolishing all these monopolies; and as the former application had been unsuccessful, a law was insisted on as the only certain expedient for correcting these abuses. The courtiers, on the other hand, maintained that this matter regarded the prerogative, and that the commons could never hope for success if they did not make application, in the most humble and respectful manner, to the queen’s goodness and beneficence. The topics which were advanced in the house, and which came equally from the courtiers and the country gentlemen, and were admitted by both, will appear the most extraordinary to such as are prepossessed with an idea of the privileges enjoyed by the people during that age, and of the liberty possessed under the administration of Elizabeth. It was asserted, that the queen inherited both an enlarging and a restraining power; by her prerogative she might set at liberty what was restrained by statute or otherwise, and by her prerogative she might restrain what was otherwise at liberty: that the royal prerogative was not to be canvassed, nor disputed, nor examined; and did not even admit of any limitation: that absolute princes, such as the sovereigns of England, were a species of divinity: that it was in vain to attempt tying the queen’s hands by laws or statutes; since, by means of her dispensing power, she could loosen herself at pleasure: and that even if a clause should be annexed to a statute, excluding her dispensing power, she could first dispense with that clause, and then with the statute. After all this discourse, more worthy of a Turkish divan than of an English house of commons, according to our present idea of this assembly, the queen, who perceived how odious monopolies had become, and what heats were likely to arise, sent for the speaker, and desired him to acquaint the house, that she would immediately cancel the most grievous and oppressive of these patents. The house was struck with astonishment, and admiration, and gratitude, at this extraordinary instance of the queen’s goodness and condescension…The commons granted her a supply quite unprecedented, of four subsidies and eight fifteenths; and they were so dutiful as to vote this supply before they received any satisfaction in the business of monopolies, which they justly considered as of the utmost importance to the interest and happiness of the nation.23

Elizabeth I was followed by James I, who made promises of restraint that he did not keep.

The first common law decisions dealing with patents were made in the early sixteenth century, in the cases Darcy v. Allen (1603) and The Clothworkers of Ipswich Case (1615). The courts did not question the royal prerogative, but restated the conditions under which a patent could be awarded. The decision in the latter case included this passage:

[The King] cannot make a monopoly for that is to take away free-trade, which is the birthright of every subject…. But if a man hath brought in a new invention and a new trade within the kingdom, in peril of his life, and consumption of his estate or stock, &c. or if a man hath made a new discovery of any thing, in such cases the King of his grace and favour, in recompence of his costs and travail, may grant by charter unto him, that he only shall use such a trade or trafique for a certain time, because at first the people of the kingdom are ignorant, and have not the knowledge or skill to use it: but when that patent is expired, the King cannot make a new grant thereof: for when the trade is become common, and others have been bound apprentices in the same trade, there is no reason that such should be forbidden to use it.

There are three matters of note here. First, the product or process must be a new one, since a monopoly would otherwise “take away free-trade, which is the birthright of every subject.” Second, although the King awards patents “of his grace and favour,” a patent on a new invention is given as compensation for the labor and expense of bringing a product or process into existence. The recognition that the inventor is deserving of compensation will, eventually, imply that he has a right to a patent. Third, patents are understood to be a trade: the inventor gets a temporary monopoly in return for sharing his knowledge. The idea of the patent as a contract between the inventor and the King is fading away, to be replaced by the idea that it is a contract between the inventor and society.

Parliament, tiring of the abuses of James I, passed the Statute of Monopolies in 1623. This act eliminated many monopolies, and gave the force of statute law to the conditions for granting a monopoly that were set out in the 1615 common law decision. It specifically allowed limited-term monopolies to be awarded to inventors, insisting that such patents be given to the “first and true inventor.”

A patent dispute in 1663 gave rise to the requirement that anyone applying for a patent must specify the nature of the innovation well enough for others to determine whether or not it is new. This requirement gave rise to a number of cases in which patents were awarded to the “true inventors” and a number of cases in which patents were voided when the patent holder was determined not to be the true inventor. Originality had become the central criterion for the awarding of a patent. There were then no significant reforms of the patent laws, or of the byzantine process through which patents were acquired, until the 1850s.

Patents during the Industrial Revolution

Patents were issued much more frequently after the onset of the Industrial Revolution. The average number of patents issued each year was 9 during the 1740s and 1750s; it rose to 22 during the 1760s and 51 during the 1780s.24 Nevertheless, many inventors chose not to patent their inventions. Patents were costly and the application process was cumbersome. The judges’ antipathy toward monopolies often made them reluctant to enforce patents, leading some observers to argue that the value of a patent could not be known until it was tested in court. Taken together, these factors meant that patents had high costs and uncertain benefits.

The frequency with which inventions were not patented is difficult to determine, but Petra Moser’s study of the inventions displayed at the Crystal Palace exhibition of 1851 provides some interesting evidence.25 Mokyr summarizes this evidence as follows:

The exhibitors were hardly a representative sample of the population of inventors, but it seems plausible that theirs represented the best and most promising inventions, so that their propensity to patent would be an upper bound on the population. The 6,377 inventions that were selected for the exhibition were successful ideas, the best that Britain felt it had to show to the world. Of those, only 11.1 percent were patented. Of exhibited inventions that won awards, only 15.6 percent were patented. These figures mask a great deal of variation. On the whole machinery tended to be patented more often than chemicals and food processing, presumably because machinery was easier to reverse engineer while processes that involved biological or chemical reactions were easier to keep secret.26

Inventors might have been behaving strategically in deciding not to patent. The specification in a patent provides information that might help competitors to develop related products. Inventors might sometimes have decided to forgo the patent so as not to reveal their hard-won knowledge.

Even if patents were not essential for innovation, the prospect of patent protection might have significantly encouraged it. Certainly, many successful industrialists — Watt, Arkwright, Wedgwood — benefited from the system and advocated its improvement.

Perhaps the central question about patents is whether they encouraged innovation or discouraged it. The award of a patent increased an inventor’s profits once he had developed a new product, but the patents already in place made its development more difficult or more expensive. Greater profits encourage innovation but greater costs discourage it, so the impact of the patent system is not clear. Michele Boldrin and David Levine, in Against Intellectual Monopoly, argue that society would be better off without patents. For them, the Industrial Revolution provides ample proof of patents’ harmful effects. In the case of the steam engine alone, patents inhibited Newcomen’s development of the atmospheric engine, Hornblower’s development of the compound engine, and Watt’s development of rotary motion.

Patents and Innovation

To return to the original question, why did Acemoglu and Robinson not make a link between patents and innovation? There are three parts to the answer. First, there were no significant changes to the patent system for almost one hundred years — four generations — before the Industrial Revolution, so a causal link between improvements in the patent system and the innovations of the Industrial Revolution is not plausible. Second, the frequency with which successful inventors did not patent their inventions suggests that patents were not crucial to their success. Third, there is uncertainty as to whether a patent system encourages or discourages innovation.

An Evaluation

The “inclusive” and “extractive” descriptors are a useful way of categorizing institutions. Acemoglu and Robinson apply them to both political and economic institutions, and they could provide the basis for a useful interpretation of Toby Huff’s earlier work27 on scientific institutions. They can be applied at a moment in time, and they can be used to understand the changes in institutions over time.

The problem with these concepts is that institutions are seldom purely inclusive or purely extractive: they are almost always a mixture of the two. Attempts to classify institutions as one or the other inevitably reflect the beliefs and judgments of the classifier. This factor makes Acemoglu and Robinson’s dynamic proposition effectively unfalsifiable — it is always possible to “save the phenomenon” by pointing to this or that aspect of a country’s institutions. Boldrin, Levine and Modica explain:

Lacking an axiomatic definition of what is “inclusive” and what is “extractive” that is independent from actual outcomes, the classification of historical institutions as belonging to one or the other group can end up being based on ex-post evaluations of the outcomes themselves, thereby making the argument circular and subject to a selection bias. As a consequence, while many examples fit their theory well, others are more difficult and the discussion of those examples in the book is sometimes strained.28

Duncan Green’s discussion of the same issue is more trenchant:

This is a book written almost entirely in the rear view
mirror.29

Acemoglu and Robinson’s shaping of history can be seen in the way that they compress the timeline of English institutional change around the year 1688. They downplay all of the evidence of inclusive economic and political institutions before the Glorious Revolution. England became the second richest country in the world, a new economic elite rose to challenge the old one, a substantial middle class emerged: all of these things are imagined to have somehow occurred under extractive economic institutions. Acemoglu and Robinson then argue that political institutions quickly became inclusive after the Glorious Revolution. This claim has little evidential basis. It is true that anyone could petition, but who actually did? The first canal act (1759) enabled the Duke of Bridgewater to build a canal to connect his colliery to Manchester: plus ça change, plus c’est la même chose. Moreover, the causal connection between the highlighted economic reforms and the innovations that followed them is weak.

Acemoglu and Robinson’s dynamic rule does not comfortably fit the Industrial Revolution. I suspect that it is simply too mechanical, better suited to Settlers of the Catan than to the anthill of human history.

  1. Daron Acemoglu and James A. Robinson, Why Nations Fail, p. 429. ↩
  2. Daron Acemoglu and James A. Robinson, Why Nations Fail, p. 4. ↩
  3. Daron Acemoglu and James A. Robinson, Why Nations Fail, p. 182-3. ↩
  4. Joan Thirsk, The Rural Economy of England (Hambledon Press, 1984), p. 253. ↩
  5. Joan Thirsk, The Rural Economy of England (Hambledon Press, 1984), pp. 253-6. ↩
  6. D. M. Smith, “The British Hosiery Industry in the Middle of the Nineteenth Century,” Transactions and Papers, Institute of British Geographers (1963), pp. 128-9. ↩
  7. Peta Lewis, “William Lee’s Stocking Frame: Technical Evolution and Economic Viability, 1589-1750,” Textile History (1986), p. 129. ↩
  8. Joel Mokyr, The Enlightened Economy, p. 18. ↩
  9. Robert Bucholz and Newton Key, Early Modern England, 1485-1714, p. 223 and p. 227. ↩
  10. The Crown did not have a bureaucracy capable of collecting broadly based taxes, so these taxes were instead collected by local officials. The position of the officials was that the only legitimate tax was one that had been passed by Parliament. ↩
  11. This kind of horse trading began with the Magna Carta (1215) and continued into the seventeenth century. For details, see Douglass North and Robert Thomas, The Rise of the Western World, pp. 83-4. ↩
  12. Acemoglu and Robinson, Why Nations Fail, p. 193. ↩
  13. Acemoglu and Robinson, Why Nations Fail, p. 202. ↩
  14. Acemoglu and Robinson, Why Nations Fail, p. 197. ↩
  15. Joel Mokyr. The Enlightened Economy, p. 417. His source is Julian Hoppit, “Patterns of Parliamentary Legislation, 1660-1800, The Historical Journal (1996), p. 117. ↩
  16. Joel Mokyr. The Enlightened Economy, p. 416. ↩
  17. Joel Mokyr, The Enlightened Economy, p. 392. ↩
  18. This table is a condensed version of Table 1.1 in Joel Mokyr, “Editor’s Introduction” in The British Industrial Revolution: An Economic Perspective (Westview Press, 1993). ↩
  19. David Hume, “Of the Jealousy of Trade” (1752). ↩
  20. The primary source for this section was Adam Mossoff, “Rethinking the Development of Patents: An Intellectual History, 1550-1800,” Hastings Law Journal (2001). ↩
  21. The data are from Adam Mossoff, “Rethinking the Development of Patents: An Intellectual History, 1550-1800,” Hastings Law Journal (2001), p. 1261 and p. 1265. ↩
  22. David Hume, The History of England, from the Invasion of Julius Caesar, to the Revolution of 1688 (published in parts, 1754-61). ↩
  23. David Hume, The History of England, from the Invasion of Julius Caesar, to the Revolution of 1688. ↩
  24. Joel Mokyr, The Enlightened Economy, p. 84. His source is B. R. Mitchell, European Historical Statistics, 1750-1970 (1975). ↩
  25. Petra Moser, “How Do Patent Laws Influence Innovation,” American Economic Review (2005). ↩
  26. Joel Mokyr, The Enlightened Economy, pp. 407-8. ↩
  27. Toby Huff, The Rise of Early Modern Science (Cambridge University Press, 1993). ↩
  28. Michele Boldrin, David Levine and Salvatore Modica, “A Review of Acemoglu and Robinson’s Why Nations Fail.” ↩
  29. Duncan Green, “Why ‘Why Nations Fail’ Fails (Mostly).”