8: Institutions and Growth
The popular misconception of the preindustrial world is as a cowering mass of peasants, ruled by means of violence by a cruel and brutish few, restrained by religious dogma from acting on or even stating the things they observed to be the truth. This may have been true in some societies during some times, but given the slow technological advance of the whole world for many centuries, it seems unlikely that the problems that prevented growth were so localized, temporary, or readily defined.
A central assumption of economics is that people are essentially the same everywhere in their material needs and aspirations, but behave differently for reasons of incentives. It's further argued by economists, even to the present age, that given the right incentives, growth is practically guaranteed.
This vision permeates the era in which the Wealth of Nations was written (1776, the same year America declared independence), and has been the predominate view of economists to the present day, in which the consensus among developed economies is that limited taxes, free markets, and security of property are keys to sustained prosperity.
Taxation
The notion that low taxation leads to prosperity is not at all borne out by history. In spite of folklore, rulers of previous ages took very little in taxes, the expenditures of the government being relatively modest. Some estimates suggest that only 2.2% of national income was collected. The Poll tax of 1380 collected 1% of each laborer's annual earnings.
Tithing (church taxes) are also considered: the title was theoretically one part in ten of income, but collected in full, churches may have received as much as 15% (or as little as 4%) of the agricultural income prior to 1800.
After the Glorious Revolution, government began taking on more of a role and began to take about 10% of output, "almost all for welfare" and by the 1990s, 36% of the UK national income became consumed by taxes. Consider that many of the nations of Europe in the present day (2000) levy heavy taxes on their people: Belgium 66%, Germany 65%, France 56%, Italy 53%. Netherlands 51%, etc. and the British rate of taxation is less burdensome, along the lines of the US (34%) and Japan (32%)
It's also noted that the taxes collected in previous eras were largely consumed by the ruling class, whereas in the modern era taxation is often used to provide public goods and services (highways, legal systems, national defense, education, pensions, etc.)
If taxation were a preventative force, then the inverse relationship would be expected: preindustrial societies that were taxed very little would have flourished, whereas modern societies would collapse under excessive taxation.
It's also suggested that taxes were light in agrarian societies because the ruling class held the majority of its wealth in land - and taxes were paid by the tenant farmers who produced the crops, not by the landlords who collected another share (generally about 20%) for the use of their land.
(EN: It's likely worth considering that this also brings the figures into line with one another: considering 20% of crops were paid as rent, 15% were taken as tithes, and 2% were paid as taxes, the working class of the time surrendered 37% of his income to others who contributed nothing to his production ... well in line with the 36% tax rate in modern-day Britain.)
Price Stability
Price stability is usually considered in terms of token money - that is, monetary units used in exchange but which have no intrinsic commodity value (notes and coins which are valued for reasons other than their metallic content). Since governments got into the racket of manufacturing their own moneys, inflation has become something of an additional tax - the government debases its currency, lowering its value to all the citizens who hold it, rather than collecting money directly. In the present age, as in the past, weak governments rely heavily on an inflation tasks, and many poor countries are subject to high inflation rates.
But except in certain isolated instances, inflation rates in preindustrial societies was relatively low - especially before paper money and coins made of token metal were adopted, the practice of debasing currency literally required collecting coins, melting them, and issuing coins containing more base metals. For this reason, preindustrial societies lacked the ability to debase their currency quite as readily as modern governments.
(EN: I'm not sure what the author's point is here, except maybe to suggest that inflation doesn't matter to growth - but I don't think he's made a convincing case based on the information that's been provided - nor has he really touched on real prices, just monetary values, and other economists have done more to dispute that inflation makes a real difference at all, given that prices rise, including the price of labor, to nullify inflation, such that excepting cases of the complete collapse of a currency, inflation causes at worst a temporary ripple.)
Public Debt
The author considers whether public debt is an indicator of prosperity - the notion being that a nation takes on debt because it cannot cover its expenses through domestic production. But again, an inverse relationship is found, with nations prior to 1800 incurring about 10% of GNP in debt, growing to around 40% after the industrial revolution, and 50-60% in the present day.
In general, public debt is arbitrarily incurred by governments, more often to address unexpected circumstances than to cover normal operating expenses of state. One example is warfare, which is far more expensive in the modern era than in the medieval one, which incurs huge amounts of debt and substantially reshuffles domestic production.
It's also theorized that taking on debt is done to increase, or at least preserve, domestic productivity, such that an increase in debt corresponds with increased prosperity, and the detriment is felt when the debt is paid down afterward, according to the repayment schedule, which also has no necessary correlation to domestic productivity.
Security of Property
Fluctuations in the property values of a nation have been found to correspond to fluctuations in the economy. Growth in productivity makes land more valuable, and fear of instability causes landowners to short sell their land to gain transportable assets.
For example, the average real price (inflation adjusted) of farmland per acre in England remained stable from 1200 to 1350, an indicator that there was stability in the economy. By comparison, the author compares this to land in one region of Flanders between 1550 and 1700, which shows more dramatic variations, as the nation experienced invasions and civil wars, but also economic prosperity, at different times.
Conceded, the political climate of England involved a great deal of turbulence in the middle ages, but is reckoned that this was squabbling among noblemen and the average person felt there was no impact (whomever was lord from one day to the next, their land was their own and they'd continue to farm it).
There's also a mention of personal security - specifically, the degree to which citizens feel threatened by physical violence - and it's noted that, since the thirteenth century onward, violence was not much of a concern and "the typical Englishman died in his bed," suggesting that the stereotype of plundered, burning villages strewn with the unburied dead is likely exaggerated.
While it's conceded that violence was far more commonplace then than presently, it wasn't dramatic enough to disrupt the economy. In the thirteenth century, a person had only about a 0.02% chance of being murdered, which fell to 0.012 % the century afterward. By comparison, consider the murder rates in some vacation destinations in the present world: Trinidad (0.012%), Bahamas (0.015%), Puerto Rico (0.021%), and Brazil (0.023%)
Social Mobility
There is also a strong correlation between productivity and social mobility. In the preindustrial world where social status was determined by birth, it would seem that there was little incentive for being productive and amassing wealth - but this is yet another caricature that bears little semblance to the reality of the medieval world.
Various historical studies agree that even medieval England was a highly fluid society, in which a person could go from a landless wage laborer to a wealthy freeman (though maybe not a nobleman) and that such movement, as demonstrated by public records, was fairly frequent.
It's already been discussed how the accident of birth and inheritance created downward mobility - as inheritors carved up an estate, or when the estate went to one and the others were left to find their own way. This the son of a wealthy man might become a craftsman, merchant, or some lesser class. Meanwhile a skilled laborer could become a tenant farmer, then accumulate land, and become a wealthy landlord during the course of his lifetime. There's evidence that "a substantial fraction" of the landed aristocracy were successful as merchants and lawyers prior to purchasing estates and titles.
Markets
The author briefly considers the freedom of various markets - land, labor, and goods - to conclude that many of them were not as restricted as was previously assumed. Laborers migrated from rural towns to cities and back again, even moving among nations. Goods were shipped to where they yielded the best prices. And the transfer of land was much less restricted than it is in modern England, where the planning authorities can arbitrary change the value of an acre of land by significant amounts by restricting its use.
Intellectual Property Rights
One are of property rights the differed significantly from the medieval age to the modern one is the exclusive right to implement an idea or innovation. Once a way of doing this was known, anyone could imitate it, without restriction. And while pirating, plagiarism, and printing manuscripts without compensation their author were condemned as immoral, there's little evidence that the legal system undertook action to prevent it.
The notion of patents took hold in the fourteenth through sixteenth centuries in different parts of Europe, and were largely implemented as a method of providing security to foreign artisans with specialized production knowledge, who would refuse to emigrate without guarantees that their knowledge would be protected.
The guild system of medieval Europe was similarly established to control the flow of practical information: their practices involved sharing knowledge among a group of tradesman (while denying it to others) and making payments to inventors and innovators for sharing new techniques with the members of the guild (and not others). Guilds also stimulated progress by fostering competitions among members to discover new techniques.
The net result was that, in the medieval era, innovation was incentivized, but the spread of knowledge was inhibited, meaning they could have only a limited impact on the prosperity of the people in general.