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THE INSTITUTIONAL REVOLUTION:

Measurement and the Economic Emergence of the Modern World

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By Douglas W. Allen

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The Montréal Review, November 2011

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"Douglas W. Allen has written a brilliant and challenging book that puts the measurement problem in the foreground to convincingly explain the logic of premodern institutions-institutions that the typical modern person, until reading Allen, views as the embodiment of chaos, inefficiency, corruption, and ineptitude. The Institutional Revolution contains a wealth of historical information that anyone with an interest in history will find interesting and often delightful."

- Thráinn Eggertsson, New York University

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Jane Austen’s Pride and Prejudice is perhaps the best known early modern novel. It tells the timeless tale of two young people along a bumpy path destined to bring them together. As one of the great love stories it has been portrayed in film, on stage, and in television. Often such performances focus just on the love story between Elizabeth Bennet and Mr. Darcy, with a suitable back-story given by the other Bennet sisters and their affairs. However, readers of the book and fans of the 1995 six episode BBC version know that the truly endearing and engaging elements stem from Austen’s effortless descriptions of institutional detail at the turn of the nineteenth century.

Austen may have been writing a modern love story, but it takes place at the end of an era. For close to 300 years Britain (and the Continent) had been organized around a set of social norms, laws, expectations, and customs that are as alien to us today as Limburger cheese is to a five year old. From beginning to end these institutions abound in the Austen story. We are introduced to the Bennet family of five girls, whose sole interest seems to be to marry well. The lives of the Bennets revolve around parties and dances. These and other leisure activities seem to occupy the time of the other aristocrats as well. No one ever seems to do anything of substance! The failure to dance by Mr. Darcy is a scandal, as is the fact that Elizabeth has an uncle who is a lawyer. There are large private “parks” everywhere to aimlessly walk about, private turnpikes to travel on, and large personified homes (called “seats”) in which the occupants must reside for most of the year. Mr. Bennet stands to lose his estate to his cousin because he does not have a male heir; he risks entering a duel with the nasty Mr. Wickham (who had purchased his way into the army) because he has shacked up with his youngest daughter; and he doesn’t have a real occupation. The world of Jane Austen was a strange one, indeed.

From approximately 1500 to 1850, England and the other European nations were organized by an unusual set of institutions. These institutions generally took on two forms: patronage and venality. Patronage was a system where a person of authority granted a valuable office to someone he could trust. Trust, was a valuable commodity in the pre-modern world and many aspects of society (like the aristocracy and dueling) were related to it. Venality was a system where an office was sold, generally to the highest bidder, and then the service was provided. The sale of office took place among services unimaginable today. Army command was up for sale, as were roads, port commissions, judicial court offices, lighthouses, and postal services.

Then, over the course of the nineteenth century, things began to change. Workers became free labourers, not servants (indentured or otherwise). Voting was extended to non-landed individuals. Commoners were allowed to participate in all civil appointments. Exams were given to bureaucrats. Truck and barter were outlawed. Patronage and venality ceased to exist as official methods to run the state. I call this sudden and radical transformation of society The Institutional Revolution.

Institutions are humanly created rules we live by. They (usually) make life better by constraining bad behavior, and encouraging good actions that create a civil society. Every society, whether our modern one or the pre-modern one of Samuel Pepys, attempts to get by as best as it can under the circumstances it faces. In this struggle societies design and/or accidently arrive at various institutional arrangements. When they work well the society performs well relative to its neighbors. Often this leads to institutional copying, other times to conquest.

The institutions of the pre-modern world worked well because the environment of the time was so different from our own. Theirs was a world of poor measurement. Not measurement over things we worry about, but over fundamental basic things like time, distance, weight, and effort. In a world where basic measurement was difficult or meaningless there were ample opportunities for bad behavior. When an employer cannot measure his worker’s effort, then less effort is exerted. When a king cannot tell if a minister’s hand is in the treasury, then revenues are likely to end up in the minister’s pocket. Without meaningful direct measurement shirking, embezzlement, theft, and hosts of other bad behaviors were ever present. To combat this, the leaders of the pre-modern world developed special institutions to accommodate the problem. Patronage, the appointment of a trusting person, was used in cases where the holder of an office often had incentives that conflicted with the interests of the Crown. The complex system of patronage policed the incentives of the office holder. Venality was used when the interests of the office holder matched those of the Crown. Here, the office holder policed himself, and in doing so benefited the state as well.

Throughout the other revolution — the Industrial one — the world changed in its ability to measure. Suddenly accurate clocks appeared. This solved the problem of determining location (especially at sea), and allowed for the accurate measure of hours. New standards for weights and distances arrived, as did consistent forms of power. Better roads, inputs, and schedules allowed products to be standardized. Changes in laws and the arrival of police allowed for new types of contracting and firm organization. On and on it went. The new ability to measure meant that the Crown could now hire workers based on merit, monitor their performance directly, and reward those who did well. The modern world of meritocracy had arrived.

This transition, in all its detail, is laid out in my new book: The Institutional Revolution. It shows how the behavior we find so odd in Pride and Prejudice is all part and parcel of the pre-modern institutional world. The actions and behaviors of the aristocratic class were taken to demonstrate their special investments to assure others they could be trusted. Every entail, every dance and Latin lesson, had a purpose. Private roads, postal services, and watchmen were methods to provide “public service” at a time when the state was simply incapable of doing so. It was not a world of “Old Corruption.” Rather it was a clever world in which the poor players managed to do the best they could in the face of incredible measurement problems.

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Douglas W. Allen is the Burnaby Mountain Professor of Economics at Simon Fraser University in Canada. He is the author of numerous books, including The Nature of the Farm: Contracts, Risk, and Organization in Agriculture.

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