Chapter 6 PT 2: North & Weingast

• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  Socioeconomic growth is underpinned by political factors which include not merely the rules of economic exchange but:

  • Institutions governing the enforcement and the changing of these rules
  • more critically: The degree to which the regime or sovereign is committed or bound to these rules 


  Main argument: For economic growth to occur the sovereign must not merely establish the relevant set of rights, but make a credible commitment to them
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  Commitment of a sovereign can be established in two ways, by:

  1. Setting precedent of "responsible behaviour"
  2. Being constrained to obey the set of rules with no leeway
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  The Role of Political Institutions and the Constitution

  Critical role: To place restrictions on the state or sovereign

  • Long-run economic performances require incentives for economic and political actors
  • Regulations should thus favour the economic growth of all
  • By working with the people, they'll feel more secure and thus the state can take more
  • Anti-arbitrary rule
  • But the ruler may comply and thus the people will seek "credible commitments" won by institutions matching up incentives to cheat
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  The Role of Political Institutions and the Constitution

  Critical role: To place restrictions on the state or sovereign

  • To succeed in this role, a constitution must
  • arise from bargaining context between state and constituents so that it matches potential enforcement problems among gov and actors
  • Self-reinforcing– Gov and actors have incentive to follow it
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  The Role of Political Institutions and the Constitution

  • Reputation (repeat play) isn't enough to prevent cheating
  • Provides a role for political institutions to ensure govs won't discount the future
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  ENGLAND UNDER THE STUARTS: LIMITED CREDIBLE COMMITMENT TO RIGHTS 

  • Parliament's role was to collect and control the revenue to the crown
  • Crown had control over how and on what it was spent
  • Crown often collected revenue without parliamentary consent
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  ENGLAND UNDER THE STUARTS: LIMITED CREDIBLE COMMITMENT TO RIGHTS 

  • Crown needed more money 1600s
  • Forced(threatened) loans
  • Prevented future loan opportunities
  • Monopolized grants
  • Expansion of peerage (hereditary and non-hereditary titles like Lord or Baronet)
  • Seized property
  • Problem
  • Parliament did not want to grant money bc they wanted limits on crown
  • Crown thus looked for other ways to get money, exacerbating the problem
• ENGLAND UNDER THE STUARTS: LIMITED CREDIBLE COMMITMENT TO RIGHTS 

  • Parliament was willing to grant the Crown money if it agreed to power limitations
  • Crown had power to create laws and enforce them through higher courts
  • Rights were decreasing and less people supported the crown
  • Opposition openly challenged king(even constituents) -> Civil war -> Glorious revolution
• ENGLAND UNDER THE STUARTS: LIMITED CREDIBLE COMMITMENT TO RIGHTS 

  • Revolution of 1688 revealed
  • Removing the power of the Crown was insufficient in preventing abuse, to control the crown we must solve financial problems and find suitable constraints on the crown
  • Fiscal revolution!
  • King of parliament(now permanant) no longer king alone
  • Parliament
  • Could no longer be called or disbanded at crown's discretion
  • exclusive control over taxes
  • Veto of expenditures
  • Crown
  • Independent sources of revenue are limited
  • Judiciary was now independent
  • People
  • Political, economic, & property rights
• ENGLAND UNDER THE STUARTS: LIMITED CREDIBLE COMMITMENT TO RIGHTS 

  • Revolution of 1688 secured
  • Credible threat to Crown's future irresponsible behaviour
  • Check and Balance – Crown and Parliament both had power over each other (crown controlled how money was spent)
• THE GLORIOUS REVOLUTION AND ENGLAND'S CREDIBLE COMMITMENT TO SECURE RIGHTS 

  • This is an example of Moore's capitalist democratic path
• THE GLORIOUS REVOLUTION AND ENGLAND'S CREDIBLE COMMITMENT TO SECURE RIGHTS 

  • What paved the way for capitalist democracy
  • Embedded economic and political freedoms
  • Several actors having veto
  • Division/separation of powers
  • Private benefits at public expense required cooperation
  • Crown could only propose expenditures
  • Parliament could only authorize and appropriate funds
  • Courts can only enforce laws both agreed on
• THE GLORIOUS REVOLUTION AND ENGLAND'S CREDIBLE COMMITMENT TO SECURE RIGHTS 

  • Why didn't they go straight back to monarchy
  • Power was no longer centralized
  • Parliament and Crown was constrained from intervening with courts
  • ensured gov wouldn't mess with economic activity and make an exception of itself
  • Politically independent judiciary
  • expanded gov's credibility – ensured a commitment to rights overall
• THE GLORIOUS REVOLUTION AND ENGLAND'S CREDIBLE COMMITMENT TO SECURE RIGHTS 

  • Result:
  • Gov is predictable
  • Has sound financial basis for regularizing taxation
• IMPLICATIONS FOR PRIVATE CAPITAL MARKETS 

  • Thesis: credible commitment by the government to honour its financial agreements was part of a larger commitment to secure private rights 
  • English gov achieved this by
  • Gov began allocating new taxes that would support these loans
  • Parliaments limited this
  • Bank could not lend money or purchase crown lands without parliamentary consent
  • If interest was not being paid on previous loans, new loans couldn't be acquired
  • Results: Declining interest rates & more predictability
• DOUGLASS C. NORTH AND BARRY R. WEINGAST 

  Conclusions

  • Democracy and its institutions didn't arise naturally, the society was forced to rid arbitrary monarchy otherwise England wouldn't survive
  • Significant institutional changes
  • Limited crown's ability to alter rules without parliamentary consent
  • Rights protected
  • Parliament holds dominance of taxation issues
  • Parliament holds more power over the allocation of funds and monitoring spending
  • Balance between monarchy and parliament – prevents arbitrary rule
  • Multiple points of veto ensured government control
• economic growth drives political regime change

  false
• Note implication of N & W

  (Proto-democratic) institutions of limited government generate economic growth
• What is argued to be central to economic growth

  The importance of government's capacity to create, enforce, respect private property rights
• How did China - a 1-party state without constraints - generate massive economic growth?

  -Fiscal decentralization limits predatory power of China's central government (Qian and Weingast 1997)

  -Should temper our willingness to link democracy to economic growth
• What is the financial position of English markets from these new rules (3)

  1. Interest rates on loans to Crown fall from 8-14% to 3%

  2. Crown's expenditures and debts increase several-fold

  3. Parallel decline in France where absolutism and state bankruptcy reign
• Why is high debt not bad in this case

  Indicates that people are comfortable lending to the Crown
• Evidence of this system working

  Financial position of Crown and growth of English markets tell impact of new rules
• Why can't the King abolish the BOE (3 reasons)

  1. Parliament needs to agree with the King to alter BOE

  2. Parliament is a veto point

  -An actor whose agreement is necessary to secure a given outcome

  3. Parliament is elected

  -Members care more about their constituent's views than the King's
• What happens now that Kings can no longer borrow directly from Bankers (3 things)

  1. He must get loans via his agent, the Bank of England

  
  

  2. Loans are broken up in parts

  -If the King reneges on repayment of one part, the BoE does not forward him the next part

  
  

  3. Delegation of sale of King's debt to the Bank of England solves King's credible commitment problem

  - This is because Bank's incentives are not identical to the King's

  -Bank's incentive is to maintain their reputation
• How does the revolution resolve the credible commitment problem of the crown (5 ways)

  1. Abolition of Star Chamber and establishment of an independent judiciary

  2. Parliament meets annually to audit King's budget and vote (or not) new taxes

  3. Crown's own resources are limited to make King reliant on Parliament

  -Prevents Parliament from separating

  4. Crown can only borrow from Bank of England

  5. Parliament itself limited by fact that central administrative and coercive capacity destroyed by Glorious Revolution
• Credible commitment problem occurs when...

  -An actor who makes a promise today has an incentive to engage on that promise in the future

  -Power is in the hand of the actor who makes the promise, not in the hands of those expected to benefit from the promise

  -Threats do not work well to the Kings
• what does the glorious revolution (re)-model

  English institutions to facilitate credible commitment
• What happened after the kings restoration actions

  Glorious revolution and a civil war
• What happened in the restoration

  Kings went back to their old ways

  -Re-chartering and the Exclusion Crisis

  -Passing the crown around randomly
• The Protectorate coming in during the civil war made things better

  false
• The Stuart kings cared about their reputation and that was sufficient enough to constrain their behaviour

  false
• Stuart Kings were idiots

  false
• How did the kings retaliate to merchants and aristocracy fighting them in courts (4 ways)

  1. Suspending parliament

  2. Ruling by prerogative

  3. Creating star chamber

  4. Intimidating and stacking the courts
• Theft

  Returns to predatory state methods
• Forced loans

  By-passed parliament

  -Were rarely repaid
• Sale of aristocratic titles

  Undercut value of title/angered existing aristocracy
• Monopolies

  Reduced innovation and investment
• Custom duties

  Raised costs of production & living
• One-time sales of Crown lands

  Short-run windfalls for long-run decline in revenues