Importance of Institutions: Critical Junctures

Critical junctures are described in Daron Acemoglu and James Robinsons book, How Nations Fail, as “major events that disrupt the existing political and economic balance in one or many societies.” These events depart countries down their corresponding dependent paths. The directions nations take after critical junctions can be similar or drastically different depending on their early conditions. After critical junctions the nation is set on a pathway and cannot change paths until another critical junction occurs. The topic in my previous post was about institutions and how extractive and authoritarian institutions were inferior to inclusive and pluralistic institutions for promoting growth in an economy.

It could be argued which critical junctures in history has been most important to the development of nations and the income distribution across the globe, but I have to agree with both the authors of the book and my economic professor, Dr. Scotese, that it was the Industrial Revolution that made the biggest impact. The Industrial Revolution allowed for nations with the most inclusive economic institutions to advance to a higher civilized level than others, mainly England, but also in Western Europe and English offshoots. In order to understand why the Industrial Revolution took off in England so successfully we must first look at what enabled England to ride the wave.

via https://en.wikipedia.org/wiki/Industrial_Revolution
via https://en.wikipedia.org/wiki/Industrial_Revolution

Prior to the Black Death, life wasn’t really enjoyable for the working and poor classes in Europe. The political institutions were extremely authoritarian which promoted exceedingly extractive economic institutions. When the Bubonic Plague hit England, about half of the population departed. Because the majority of the population was from the poor class, there was a power shift away from the crown and its lords towards the deprived citizens. After the plague, numerous institutional changes occurred. The political institutions transitioned from authoritarian to more pluralistic, which lead to a change from extractive to inclusive economic institutions.

via http://hhh.gavilan.edu/mturetzky/PoliticsinGreatBritainHistoryandPoliticalInstitutions.htm
via http://hhh.gavilan.edu/mturetzky/PoliticsinGreatBritainHistoryandPoliticalInstitutions.htm

The new economic institutions enforced property rights incentivizing investment, trade and innovation. England’s institutions laid the wood for an economic boom during the Industrial Revolution. The power English Parliament wielded was used to help the majority of the country, not just the upper echelon. If an invention helped increase the standard of living or efficiency of a worker, it was encouraged to be mass-produced, not abolished.

Small changes like these in society allowed the Industrial Revolution to hit the ground running in England. But Eastern Europe, China, the Middle East and Northern Africa were not able to take advantage of the era. These other civilizations did not have the inclusive economic institutions to promote the innovations that took place during this time. While England embraced new technological advancements, the rest of Europe feared the creative destruction and the movement away from the status quo. It is possible that if mainland Europe was as open to new idea formation and had more inclusive economic institutions, it could have gone down a similar path as Europe during the Industrial Revolution instead of getting left in the dust.

 

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