Constitutions and Commitment:The Evolution of Institutional Governing Public STOR Choice in Seventeenth-Century England Douglass C.North;Barry R.Weingast The Journal of Economic History,Vol.49,No.4.(Dec.,1989),pp.803-832 Stable URL: http://links.istor.org/sici?sici=0022-0507%28198912%2949%3A4%3C803%3ACACTEO%3E2.0.CO%3B2-9 The Journal of Economic History is currently published by Economic History Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use,available at http://www.istor org/about/terms.html.JSTOR's Terms and Conditions of Use provides,in part,that unless you have obtained prior permission,you may not download an entire issue of a journal or multiple copies of articles,and you may use content in the JSTOR archive only for your personal,non-commercial use. Please contact the publisher regarding any further use of this work.Publisher contact information may be obtained at http://www.istor.org/journals/eha.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world.The Archive is supported by libraries,scholarly societies,publishers, and foundations.It is an initiative of JSTOR,a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology.For more information regarding JSTOR,please contact support@jstor.org. http://www.jstor.org Thu Oct1122:18:282007
Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England Douglass C. North; Barry R. Weingast The Journal of Economic History, Vol. 49, No. 4. (Dec., 1989), pp. 803-832. Stable URL: http://links.jstor.org/sici?sici=0022-0507%28198912%2949%3A4%3C803%3ACACTEO%3E2.0.CO%3B2-9 The Journal of Economic History is currently published by Economic History Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/about/terms.html. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/eha.html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. The JSTOR Archive is a trusted digital repository providing for long-term preservation and access to leading academic journals and scholarly literature from around the world. The Archive is supported by libraries, scholarly societies, publishers, and foundations. It is an initiative of JSTOR, a not-for-profit organization with a mission to help the scholarly community take advantage of advances in technology. For more information regarding JSTOR, please contact support@jstor.org. http://www.jstor.org Thu Oct 11 22:18:28 2007
THE JOURNAL OF ECONOMIC HISTORY VOLUME XLIX DECEMBER 1989 NUMBER 4 Constitutions and Commitment: The Evolution of Institutions Governing Public choice in Seventeenth-Century England DOUGLASS C.NORTH AND BARRY R.WEINGAST The article studies the evolution of the constitutional arrangements in seven- teenth-century England following the Glorious Revolution of 1688.It focuses on the relationship between institutions and the behavior of the government and interprets the institutional changes on the basis of the goals of the winners- secure property rights,protection of their wealth,and the elimination of confis- catory government.We argue that the new institutions allowed the government to commit credibly to upholding property rights.Their success was remarkable,as the evidence from capital markets shows. e evelnmehe le governing economic exchange,but also the institutions governing how these rules are enforced and how they may be changed.A critical political factor is the degree to which the regime or sovereign is committed to or bound by these rules.Rules the sovereign can readily revise differ significantly in their implications for performance from exactly the same rules when not subject to revision.The more likely it is that the sovereign will alter property rights for his or her own benefit, the lower the expected returns from investment and the lower in turn the incentive to invest.For economic growth to occur the sovereign or government must not merely establish the relevant set of rights,but must make a credible commitment to them. The Journal of Economic History,Vol.XLIX,No.4(Dec.1989).The Economic History Association.All rights reserved.ISSN 0022-0507. Douglass North is Luce Professor of Law and Liberty,Washington University,St.Louis,MO 63130.Barry Weingast is Senior Research Fellow,Hoover Institution,Stanford University, Stanford,CA 94305. The authors gratefully acknowledge the helpful comments of Robert Bates,Gary Cox,Paul David,Aaron Director,John Ferejohn,Jack Goldstone,Max Hartwell,Derek Hirst,Leonard Hochberg,Paul Milgrom,Glenn Nichols,Roger Noll,Alvin Rabushka,Thomas Sargent,Kenneth Shepsle,Gordon Tullock,and David Weir.They also thank Elisabeth Case for her editorial assistance.Barry Weingast thanks the National Science Foundation (grant no SES-8617516)for partial support. 803
THE JOURNAL OF ECONOMIC HISTORY VOLUME XLIX DECEMBER 1989 NUMBER 4 Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England The article studies the evolution of the constitutional arrangements in seventeenth-century England following the Glorious Revolution of 1688. It focuses on the relationship between institutions and the behavior of the government and interprets the institutional changes on the basis of the goals of the winnerssecure property rights, protection of their wealth, and the elimination of confiscatory government. We argue that the new institutions allowed the government to commit credibly to upholding property rights. Their success was remarkable, as the evidence from capital markets shows. This article focuses on the political factors underpinning economic growth and the development of markets-not simply the rules governing economic exchange, but also the institutions governing how these rules are enforced and how they may be changed. A critical political factor is the degree to which the regime or sovereign is committed to or bound by these rules. Rules the sovereign can readily revise differ significantly in their implications for performance from exactly the same rules when not subject to revision. The more likely it is that the sovereign will alter property rights for his or her own benefit, the lower the expected returns from investment and the lower in turn the incentive to invest. For economic growth to occur the sovereign or government must not merely establish the relevant set of rights, but must make a credible commitment to them. The Journal of Economic History, Vol. XLIX, No. 4 (Dec. 1989). O The Economic History Association. All rights reserved. ISSN 0022-0507. Douglass North is Luce Professor of Law and Liberty, Washington University, St. Louis, MO 63130. Barry Weingast is Senior Research Fellow, Hoover Institution, Stanford University, Stanford, CA 94305. The authors gratefully acknowledge the helpful comments of Robert Bates, Gary Cox, Paul David, Aaron Director, John Ferejohn, Jack Goldstone, Max Hartwell, Derek Hirst, Leonard Hochberg, Paul Milgrom, Glenn Nichols, Roger Noll, Alvin Rabushka, Thomas Sargent, Kenneth Shepsle, Gordon Tullock, and David Weir. They also thank Elisabeth Case for her editorial assistance. Barry Weingast thanks the National Science Foundation (grant no SES-8617516) for partial support
804 North and Weingast A ruler can establish such commitment in two ways.One is by setting a precedent of"responsible behavior,"appearing to be committed to a set of rules that he or she will consistently enforce.The second is by being constrained to obey a set of rules that do not permit leeway for violating commitments.We have very seldom observed the former,in good part because the pressures and continual strain of fiscal necessity eventually led rulers to "irresponsible behavior''and the violation of agreements.The latter story is,however,the one we tell. We attempt to explain the evolution of political institutions in seventeenth-century England,focusing on the fundamental institutions of representative government emerging out of the Glorious Revolution of 1688-a Parliament with a central role alongside the Crown and a judiciary independent of the Crown.In the early seventeenth century fiscal needs led to increased levels of"arbitrary''government,that is, to expropriation of wealth through redefinition of rights in the sover- eign's favor.This led,ultimately,to civil war.Several failed experi- ments with alternative political institutions in turn ushered in the restoration of the monarchy in 1660.This too failed,resulting in the Glorious Revolution of 1688 and its fundamental redesign of the fiscal and governmental institutions. To explain the changes following the Glorious Revolution we first characterize the problem that the designers of the new institutions sought to solve,namely,control over the exercise of arbitrary and confiscatory power by the Crown.We then show how,given the means,motives,and behavior of the king during this century,the institutional changes altered the incentives of governmental actors in a manner desired by the winners of the Revolution.These changes reflected an explicit attempt to make credible the government's ability to honor its commitments.Explicit limits on the Crown's ability unilaterally to alter the terms of its agreements played a key role here, for after the Glorious Revolution the Crown had to obtain Parliamentary assent to changes in its agreements.As Parliament represented wealth holders,its increased role markedly reduced the king's ability to renege. Moreover,the institutional structure that evolved after 1688 did not provide incentives for Parliament to replace the Crown and itself engage in similar"irresponsible"behavior.As a consequence the new institu- tions produced a marked increase in the security of private rights. As evidence in favor of our thesis,we study the remarkable changes in capital markets over this period.After the first few years of the Stuarts'reign,the Crown was not able systematically to raise funds.By 1 Our discussion of the events prior to the Glorious Revolution(1603 to 1688)simply character- izes this period;it does not model or explain it.Moreover,since our history emphasizes the problems the winners (the Whigs)sought to solve,it necessarily contains strong elements of "Whig"history
North and Weingast A ruler can establish such commitment in two ways. One is by setting a precedent of "responsible behavior," appearing to be committed to a set of rules that he or she will consistently enforce. The second is by being constrained to obey a set of rules that do not permit leeway for violating commitments. We have very seldom observed the former, in good part because the pressures and continual strain of fiscal necessity eventually led rulers to "irresponsible behavior" and the violation of agreements. The latter story is, however, the one we tell. We attempt to explain the evolution of political institutions in seventeenth-century England, focusing on the fundamental institutions of representative government emerging out of the Glorious Revolution of 1688-a Parliament with a central role alongside the Crown and a judiciary independent of the Crown. In the early seventeenth century fiscal needs led to increased levels of "arbitrary" government, that is, to expropriation of wealth through redefinition of rights in the sovereign's favor. This led, ultimately, to civil war. Several failed experiments with alternative political institutions in turn ushered in the restoration of the monarchy in 1660. This too failed, resulting in the Glorious Revolution of 1688 and its fundamental redesign of the fiscal and governmental institutions. To explain the changes following the Glorious Revolution we first characterize the problem that the designers of the new institutions sought to solve, namely, control over the exercise of arbitrary and confiscatory power by the Crown.' We then show how, given the means, motives, and behavior of the king during this century, the institutional changes altered the incentives of governmental actors in a manner desired by the winners of the Revolution. These changes reflected an explicit attempt to make credible the government's ability to honor its commitments. Explicit limits on the Crown's ability unilaterally to alter the terms of its agreements played a key role here, for after the Glorious Revolution the Crown had to obtain Parliamentary assent to changes in its agreements. As Parliament represented wealth holders, its increased role markedly reduced the king's ability to renege. Moreover, the institutional structure that evolved after 1688 did not provide incentives for Parliament to replace the Crown and itself engage in similar "irresponsible" behavior. As a consequence the new institutions produced a marked increase in the security of private rights. As evidence in favor of our thesis, we study the remarkable changes in capital markets over this period. After the first few years of the Stuarts' reign, the Crown was not able systematically to raise funds. By Our discussion of the events prior to the Glorious Revolution (1603 to 1688) simply characterizes this period; it does not model or explain it. Moreover, since our history emphasizes the problems the winners (the Whigs) sought to solve, it necessarily contains strong elements of "Whig" history
English Institutional Evolution 805 the second decade of the seventeenth century,under mounting fiscal pressure,the Crown resorted to a series of"forced loans,'indicating that it could not raise funds at rates it was willing to pay.Following the Glorious Revolution,however,not only did the government become financially solvent,but it gained access to an unprecedented level of funds.In just nine years (from 1688 to 1697),government borrowing increased by more than an order of magnitude.This sharp change in the willingness of lenders to supply funds must reflect a substantial increase in the perceived commitment by the government to honor its agree- ments.The evidence shows that these expectations were borne out,and that this pattern extends well into the next century. Since we focus on the evolution and impact of the political institu- tions,of necessity we slight the larger economic and religious context, even though in many specific instances these larger religious and economic issues were proximate sources of actions and policies that we describe.Indeed,no history of the seventeenth century is complete that does not describe both the growing markets and the evolving organiza- tions that accompanied economic expansion as well as the persistent religious tensions,particularly between Catholic and Protestant.A more thorough study,one far too big for this essay,would attempt to integrate the change in opportunity costs of both the economic and religious actors as they intermingled with the immediate political issues on which we concentrate.But having said that,it is important to stress that our central thesis is a key part of the whole process by which an institutional framework evolved in England.We contend that while the English economy had been expanding and its markets growing,in order for economic development to continue the constraints described below had to be altered. This essay proceeds as follows.Section I develops the importance of political institutions and the constitution and their relevance for the sections that follow.Sections II and III develop the narrative of the period,focusing respectively on England under the Stuarts and on the evolution of new institutions and secure rights following the Glorious Revolution.Section IV contains the central part of our analysis and reveals why these institutions made credible the government's commit- ment to honoring its agreements.Sections V and VI present our evidence from public and private capital markets. I.THE ROLE OF POLITICAL INSTITUTIONS AND THE CONSTITUTION The control of coercive power by the state for social ends has been a central dilemma throughout history.A critical role of the constitution and other political institutions is to place restrictions on the state or sovereign.These institutions in part determine whether the state produces rules and regulations that benefit a small elite and so provide
English Institutional Evolution 805 the second decade of the seventeenth century, under mounting fiscal pressure, the Crown resorted to a series of "forced loans," indicating that it could not raise funds at rates it was willing to pay. Following the Glorious Revolution, however, not only did the government become financially solvent, but it gained access to an unprecedented level of funds. In just nine years (from 1688 to 1697), government borrowing increased by more than an order of magnitude. This sharp change in the willingness of lenders to supply funds must reflect a substantial increase in the perceived commitment by the government to honor its agreements. The evidence shows that these expectations were borne out, and that this pattern extends well into the next century. Since we focus on the evolution and impact of the political institutions, of necessity we slight the larger economic and religious context, even though in many specific instances these larger religious and economic issues were proximate sources of actions and policies that we describe. Indeed, no history of the seventeenth century is complete that does not describe both the growing markets and the evolving organizations that accompanied economic expansion as well as the persistent religious tensions, particularly between Catholic and Protestant. A more thorough study, one far too big for this essay, would attempt to integrate the change in opportunity costs of both the economic and religious actors as they intermingled with the immediate political issues on which we concentrate. But having said that, it is important to stress that our central thesis is a key part of the whole process by which an institutional framework evolved in England. We contend that while the English economy had been expanding and its markets growing, in order for economic development to continue the constraints described below had to be altered. This essay proceeds as follows. Section I develops the importance of political institutions and the constitution and their relevance for the sections that follow. Sections I1 and 111 develop the narrative of the period, focusing respectively on England under the Stuarts and on the evolution of new institutions and secure rights following the Glorious Revolution. Section IV contains the central part of our analysis and reveals why these institutions made credible the government's commitment to honoring its agreements. Sections V and V1 present our evidence from public and private capital markets. I. THE ROLE OF POLITICAL INSTITUTIONS AND THE CONSTITUTION The control of coercive power by the state for social ends has been a central dilemma throughout history. A critical role of the constitution and other political institutions is to place restrictions on the state or sovereign. These institutions in part determine whether the state produces rules and regulations that benefit a small elite and so provide
806 North and Weingast little prospect for long-run growth,or whether it produces rules that foster long-term growth.Put simply,successful long-run economic performance requires appropriate incentives not only for economic actors but for political actors as well. Because the state has a comparative advantage in coercion,what prevents it from using violence to extract all the surplus?2 Clearly it is not always in the ruler's interests to use power arbitrarily or indiscrim- inately;by striking a bargain with constituents that provides them some security,the state can often increase its revenue.But this alone is insufficient to guarantee consistent behavior on the part of the ruler. The literature on transactions costs and institutions emphasizes that while parties may have strong incentives to strike a bargain,their incentives after the fact are not always compatible with maintaining the agreement:compliance is always a potential problem.This literature also notes that when ex post problems are anticipated ex ante,parties will attempt to alter incentives,devising institutions or constitutions that promote compliance with bargains after the fact.Oliver Williamson says: Transactions that are subject to ex post opportunism will benefit if appropriate actions can be devised ex ante.Rather than reply to opportunism in kind,the wise [bargaining party]is one who seeks both to give and receive "credible commitments.'Incentives may be realigned and/or superior governance structures within which to organize transactions may be devised.3 Problems of compliance can be reduced or eliminated when the institu- tions are carefully chosen so as to match the anticipated incentive problems.Under these circumstances,parties are more likely to enter into and maintain complex bargains that prevent abuse of political control by the state. To succeed in this role,a constitution must arise from the bargaining context between the state and constituents such that its provisions carefully match the potential enforcement problems among the relevant parties.The constitution must be self-enforcing in the sense that the major parties to the bargain must have an incentive to abide by the bargain after it is made.4 2 Throughout late medieval and early modern times,if rulers did not maintain a comparative advantage in coercion,they soon failed to be rulers.See William McNeill,Pursuir of Power (Chicago,1983);Douglass North,Structure and Change in Economic History (New York,1981); and Gordon Tullock,Autocracy (Dordrecht;1987). 3 Oliver Williamson,Economic Institutions of Capitalism (New York,1985),pp.48-49 4 Our formulation of the problem draws on the"new economics of organization."Application of this approach to political problems-and especially to the problem of providing institutions to enforce bargains over time-is just beginning.See,however,Barry R.Weingast and William Marshall,"The Industrial Organization of Congress;or Why Legislatures,Like Firms,Are Not Organized as Markets,"Journal of Political Economy,96(Feb.1988),pp.132-63;and Terry Moe
North and Weingast little prospect for long-run growth, or whether it produces rules that foster long-term growth. Put simply, successful long-run economic performance requires appropriate incentives not only for economic actors but for political actors as well. Because the state has a comparative advantage in coercion, what prevents it from using violence to extract all the s~rplus?~ Clearly it is not always in the ruler's interests to use power arbitrarily or indiscriminately; by striking a bargain with constituents that provides them some security, the state can often increase its revenue. But this alone is insufficient to guarantee consistent behavior on the part of the ruler. The literature on transactions costs and institutions emphasizes that while parties may have strong incentives to strike a bargain, their incentives after the fact are not always compatible with maintaining the agreement: compliance is always a potential problem. This literature also notes that when ex post problems are anticipated ex ante, parties will attempt to alter incentives, devising institutions or constitutions that promote compliance with bargains after the fact. Oliver Williamson says: Transactions that are subject to ex post opportunism will benefit if appropriate actions can be devised ex ante. Rather than reply to opportunism in kind, the wise [bargaining party] is one who seeks both to give and receive "credible commitments." Incentives may be realigned and/or superior governance structures within which to organize transactions may be de~ised.~ Problems of compliance can be reduced or eliminated when the institutions are carefully chosen so as to match the anticipated incentive problems. Under these circumstances, parties are more likely to enter into and maintain complex bargains that prevent abuse of political control by the state. To succeed in this role, a constitution must arise from the bargaining context between the state and constituents such that its provisions carefully match the potential enforcement problems among the relevant parties. The constitution must be self-enforcing in the sense that the major parties to the bargain must have an incentive to abide by the bargain after it is made.4 Throughout late medieval and early modern times, if rulers did not maintain a comparative advantage in coercion, they soon failed to be rulers. See William McNeill, Pursuit of Power (Chicago, 1983); Douglass North, Structure and Change in Economic History (New York, 1981); and Gordon Tullock, Autocracy (Dordrecht; 1987). Oliver Williamson, Economic Institutions of Capitalism (New York, 1985), pp. 4849. Our formulation of the problem draws on the "new economics of organization." Application of this approach to political problems-and especially to the problem of providing institutions to enforce bargains over time-is just beginning. See, however, Barry R. Weingast and William Marshall, "The Industrial Organization of Congress; or Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy, 96 (Feb. 1988), pp. 132-63; and Terry Moe