The Institutional Revolution: Measurement and the Economic Emergence of the Modern World

Published by EH.Net (February 2012)

Douglas W. Allen, The Institutional Revolution: Measurement and the Economic Emergence of the Modern World. Chicago: University of Chicago Press, 2011.? xiv + 267 pp. $30 (cloth), ISBN: 978-0-226-01474-6.

Reviewed for EH.Net by Mark Koyama, Department of Economics, George Mason University.

In this astute and elegantly written book, Douglas Allen argues that the industrial revolution was accompanied by an institutional revolution. This institutional revolution replaced many seemingly archaic institutions such as the practice of restricting some offices in government to aristocrats while selling others (including army commissions and the right to collect taxes). The revolution substituted public for private provision in areas such as the building of roads and lighthouses and led to the rise of a professional bureaucracy and police force.? Allen’s point is not that these early pre-modern institutions were inefficient or wasteful. On the contrary, in his account, they were adapted for their environment: the high variance, high measurement cost, early modern world.

Institutions in Allen’s view minimize transaction costs, where transaction costs include the costs associated with opportunistic behavior.? Transaction costs precluded ?first-best? institutions from developing in the pre-industrial world.? Instead, apparently inefficient institutions such as tax farming, the sale of offices, and the aristocratic dominance of politics persisted for centuries.? Allen argues that these apparently inefficient institutions were, in fact, efficient given the existing configuration of transaction costs.? This insight, which builds on the ideas of Yoram Barzel, provides a powerful hypothesis for studying institutional change.? Allen places particular emphasis on the importance of measurement. In the high variance pre-modern world, measurement was costly or impossible and consequently bureaucrats, soldiers, sailors, and policemen could not be paid on the basis of observable inputs. Alternative institutions had to emerge to deter opportunism and reward effort. These institutions were often elaborate, and sometimes strange; they involved making the bureaucrats, soldiers, or tax collectors residual claimants of some sort.? The story of how these institutions disappeared and were replaced by modern institutions is The Institutional Revolution.

The institutional revolution Allen proposes is linked to the industrial revolution because technological change drove institutional change by reducing measurement costs. Standardization reduced variance. This reduction in variance lessened the possibilities for opportunistic behavior and enabled institutions based around the idea of rewarding individuals for their marginal contribution to emerge.? Not only this, institutional change also drove technological change.? Economic historians have shown that growth during the industrial revolution was slow.? Allen can account for this delay between the industrial revolution and the onset of sustained economic growth that only really began after 1850 by arguing that the transition from pre-modern to modern institutions delayed society’s ability to fully benefit from the new technologies of the first industrial revolution. This is the thesis that Allen lays out in the first two chapters of the book.

Each of the remaining chapters of The Institutional Revolution illustrate and expand upon this argument.? These chapters are largely based on papers that have appeared in journals such as Explorations in Economic History, the Journal of Law, Economics, and Organization, and the Journal of Legal Studies.? However, the book is written in such a way that one would hardly realize this, as each chapter follows smoothly from the last.?

Chapter Three provides a theory of the European aristocracy in the early modern period. In Allen?s theory, high offices were restricted to aristocrats (or those who could live like aristocrats) because monitoring the performance of officeholders was extremely difficult.? The rewards associated with behaving corruptly were high and the possibility of being caught very low.? The only individuals who could be entrusted with positions of authority were those individuals with sufficient ?hostage capital? that ensured they could be meaningfully punished if caught cheating.?? According to Allen this ?hostage capital? effectively comprised the secluded and very expensive lifestyle of an English aristocrat. Members of the middle classes were excluded from public office unless they adopted this lifestyle because they did not have enough to lose and therefore could not be trusted not to act opportunistically.?

Chapter Four extends this idea by proposing a rational choice explanation of duels for honor among the aristocracy. Duels were for aristocrats only and were characterized by a complex set of rules designed to both limit bloodshed and to reward specialized training.? Allen argues that the duel developed as a way of screening for individuals to see if they had made a costly investment in aristocratic ?honor.?? If they passed this test they could rise up the ladder of government.? Once measurement costs declined during the nineteenth-century institutional revolution, dueling disappeared and the civil service was thrown open to the middle classes.

Chapter Five considers the unique set of incentives facing officers in the Royal Navy.? Naval officers were rewarded for aggression and severely punished for cowardliness.? Specifically, the Articles of War demanded that a British ship always engage an enemy vessel and did not allow any excuse for inaction.? This tactical rigidity was inefficient from the point of view of the first-best but it overcame the most pressing incentive that captains faced, which was to shirk.? Allen shows how lucrative prize money and a system whereby captains and admirals were monitored by their inferiors, worked in conjunction with the Articles of War to ensure that the Royal Navy was the most aggressive and most successful navy throughout the eighteenth and early nineteenth centuries.?

Chapter Six examines the practice of purchasing army commissions. Allen convincingly argues that the sale of army commissions led to the self-selection of high-ability individuals into the officer class, i.e., individuals who expected to earn the highest returns from private plunder, and aligned their incentives with those of the Crown as profits came from engaging the enemy and from victory.? Chapter Seven looks at the private provision of lighthouses, roads and tax collection.? Chapter Eight examines how a professional police force replaced a system of private prosecutions in the first part of the nineteenth century. Chapter Nine concludes.

I greatly enjoyed this book and was particularly won over by the chapters on the aristocracy, dueling, the navy and the army.? Each of these chapters provides analytical narratives that illustrate Allen?s principle points with historical evidence and telling anecdotes.? The historical content is drawn from the secondary literature and Allen is keen to point out that he is not a historian ?or even an economic historian? (p. ix).? In general, this is a very well done book and Allen is adept at summarizing the relevant historical evidence, while picking out examples that are relevant or supportive of his theoretical framework.? Indeed, this adeptness is both an important strength and perhaps the only real weakness of this book.

It is an important strength in that it allows the author to keep the level of historical detail down to a manageable level and ensures that the book is extremely readable and will hopefully increase its sales among a more general audience.? However, brevity and conciseness at times preclude Allen from seriously considering alternative explanations of the institutions that he studies.? For example, in Chapter Eight Allen argues that a private system of prosecutions may have been optimal in a world where goods were individual and idiosyncratic, as the owners of stolen goods were the lowest-cost enforcers of the law, but that standardization reduced this advantage and thereby led to the rise of a professional police force.?? The theory is ingenious but there is little direct evidence for it.? Against this hypothesis, the prominence of horse theft in contemporary advertisements and newspapers suggests that standardization was not the only factor causing problems for the old criminal justice system.[1]? Other important factors are also missing from this analysis such as the virulent opposition to a public police force that existed up until the 1820s.? A fuller analytical narrative of this process would attempt to account for these factors as they were seen as significant by contemporaries. Economic historians and scholars of institutional change may find this shortcoming frustrating and I suspect it will ensure that the arguments of The Institutional Revolution will be viewed as a set of insightful and intriguing hypotheses rather than as the definitive or authoritative explanation of the institutions Allen considers.

Note:

1. John Styles (1989), ?Print and Policing: Crime Advertising in Eighteenth-Century Provincial England,? in Police and Prosecution in Britain in the Eighteenth and Nineteenth Centuries, Oxford University Press, Oxford, pp. 55?111.

Mark Koyama is an assistant professor at George Mason University and a senior scholar at the Mercatus Center. His recent work includes ?Prosecution Associations in Industrial Revolution England: Private Providers of Public Goods?? forthcoming in the Journal of Legal Studies.

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