The Political Economy of Property Rights: The Case of Early Modern England (1500-1700)

1. The Political Economy of Property Rights: The Case of Early Modern England (1500-1700) Andy Garin IC: Philosophy, Politics, and Economics

2. Property Rights and the Problem of Growth • Before c.1800, minimal change in GDP per capita • After 1800 rapid growth in select Western Nations (beginning with England), but continued stagnation in many other countries. Why?

3. The “Institutional” View • The “West” experience growth because countries developed secure private property rights (North and Thomas 1973)

4. Political Institutions and Property Security • “Property security” entails that an individual can expect to enjoy the benefits of ownership into the future without interference • Question: When are property rights secure?

5. Traditional Analysis of the Case of Early Modern England • Economic growth was not possible under the rule of the “absolute” monarchy pre-1640, because the “unrestrained” crown could not commit to respecting property rights • In the Civil War of 1642 and Glorious Revolution of 1688, wealthy citizens “overthrew” the monarchy and replaced it with a constitution in which Parliament, a representative body, had supreme authority (North and Weingast 1989, Acemoglu and Robinsion 2005)

6. Problem With Traditional Approach • Focus on formal authority • De jureauthority only translates into power if actors can follow through!

7. My Argument • Property rights security is not established by formal limits on authority per se • Rather, by de facto constraints on the use of decision-making authority • Focus on incentives: property rights are secure from expropriation by a given actor when the costs of expropriation are higher than the benefits • De facto power consists of the ability to expropriate costlessly or to impose costs on those who expropriate

8. Hypotheses Suggested by This Approach • Hypothesis 1: Property rights are not necessarily insecure under formal absolutism. Security depends on the distribution of de facto power. • Hypothesis 2: Increasing property rights security does not require redesigning formal structures. A change in the distribution of de facto power can improve/worsen property security for various actors even if formal structures remain the same.

9. Secure Rights Under Absolutism • Crown lacked ability to expropriate or tax those on the land (no bureaucracy) • Monarchs depended on Landlords to administer law among tenants and collect taxes • Landlords constrained Crown • Had power to threaten resistance • Since Crown depended on their support, landlords could penalize

10. Secure Rights Under Absolutism • The Crown, therefore, could not expropriate those landlords, nor could he expropriate those whom those elites did not want him to (i.e. their tenants)

11. Insecure Rights Under Absolutism • As long as landlords provided support, Crown did not need money beyond revenue from Crown lands • Control over money did not yet entail power to constrain Crown government. • Urban/Non-agrciultural actors were vulnerable, and did not constrain monarch. So subject to expropriation.

12. Peasant Rights • What about the security of the property rights of peasants from encroachment by manor lords? • The majority of peasants held “customary” rights (held under the custom of the manor as determined by manor courts) • secure, stable private holdings.

13. Peasant Rights • Renewable, inheritable, at permanently fixed rates • Why? Landlords feared a large landless population, subject to riot. • So allow Peasants to remain securely on the land.

14. Economic Consequences • Economic progress confined to agricultural sector • Rent scheme may have been a statically efficient arrangement, but agricultural self-employment lead to low technological progress, and therefore low long-term growth rates.

15. Re-examining the Case of Early Modern England • Argument 2: Property rights for capitalist entrepreneurs in all sectors became more secure during the seventeenth century not because of a formal change, but rather as a result of a change in the distribution of de facto power. However, individuals outside of the capitalist classes saw a net decline in the property security over the 17th century.

16. Change in the 1600s • Changing prices and competition in the agricultural sector allowed capitalist gentry to rise, and to come to control a majority of the land. • moneyed interest--controlling cash and seeking to actively accumulate in a way earlier “rentier” landlords had not • Controlled manors and the power to tax. • Represented by House of Commons in Parliament.

17. Change in the 1600s • Meanwhile, the Crown reached the point of true financial crisis during Stuart rule (James I, Charles I) • Costs were rising: war technology, navy; costs of maintaining court; perquisites for powerful lords to keep them close • Finances were depleted: Monarchy had sold off most of Crown land for short-term revenue by 1600

18. Change in the 1600s • Importantly, became unreliable as a borrower. • Debt is important for the survival of governments during short-term crunches • Ran out of lenders willing to offer loans

19. Change in the 1600s • In short term, crown attempted to subsist through expropriating non-agricultural actors: monopoly sales, forced loans, customs farming, outright theft at points • Not sustainable in long-run: Crown incapable of efficient expropriation; discouraged wealth creation in sectors it was expropriating

20. Change in the 1600s • Key point: Crown could not survive with only administrative support of landlords. The crown now also needed cash. • Money had become de facto power capable of constraining King a way it had not been before.

21. Change in the 1600s • In order to persist, the monarchy would have to be financed by Parliament, which entailed completely deferring to Parliament and the property rights security it demanded. • James I and Charles I were defiant. As a result, the monarchy collapsed.

22. Change in the 1600s • Fifty years of turmoil beginning with the Civil War and Glorious Revolution established what was what. • Formal structures had not changed, rather, conflict had made known the consequences of defiance by the monarchy.

23. Change in the 1600s • The result: by 1690, the English monarchy (and government as a whole) could commit to security of property for capitalist entrepreneurs in all sectors • Given “Parliamentary supremacy,” Parliamentary interests willing to provide tax revenue (tax consumption and land, but not capital gains) and establish Bank of England to provide loans • Stabilized government

24. Change in the 1600s • If the new property rights regime was based on the equation “money=power,” the poor had little to celebrate about this development. • Peasants and poor saw property security decline over period

25. Change in the 1600s • Consumption tax (Excise) falls primarily on poor • Customary rights (secure private holding) replaced with leasehold (tied to market rates). Peasant farmers faced with market rates: lost security in land, often had to sell out. • Enclosure: commons had been important for surviving during bad seasons. Peasant farming no longer viable. Also, landlords skimmed much off the top.

26. Change in the 1600s • Why were landlords less afraid of peasant uprising? • Increased financial resources and strategic innovation allowed elites to better control the mob and prevent uprising.

27. Change in the 1600s New modes of control: • Better ability to put down revolts • Careful use of law to create a sense of justice • Above all, Poor Law. Use carrot and stick of poor relief to keep landless poor under control. Difficult for poor to coordinate in collective action when incentives from poor relief divided them.

28. Change in the 1600s • Given restrictions on landless labor, the fact that so many peasants were being squeezed off the land meant many were losing their rights over their own labor. • Bottom line: the vast majority of people in England saw no improvement in property security over the century, and many experienced a decline.

29. Conclusions • History of England 1500-1700 supports both hypotheses • Political Economy approach to considering property rights institutions employed is of significant value

30. Conclusions • If property rights do matter for growth, than what is important are not formal structures such as “democracy” or “judicial review,” but rather the informal institutional equilibrium arrangement that shows how formal authority is used. • Economic growth does not require “security of property rights and relatively equal access to economic resources to a broad cross-section of society.” (AR 2005)

31. Conclusions • Key to growth may not have been better property rights for everyone, but that property rights forced labor out of subsistence agriculture into wage labor, where it was employed by the small class of encouraged capitalists who now had incentives to invest in productivity. Even if only employers had better rights, still higher output per worker.

32. Conclusions • Result would have been shift to sustained growth, but highly egalitarian at first. (Explains first half of Kuznets curve). • Dilemma: Is growth desirable if it requires worsening the position of a substantial portion of the population for several generations?

33. Conclusions Implications for contemporary policy: • There is no one form of government or social organization such as “democracy” or “separation of powers” which will be equally pro-development in any society. any choice of formal political structures during the “restructuring” of stagnant economies must be made with specific reference to the social composition of the country. • Note that, in the current economic crisis in the US, the government has been very much unable to curtail private organizations that are “too big to fail,” and therefore can leverage a great deal of power on the government. This is in many ways consistent with our framework, though in this case “property security” may be dangerous to the overall economy.

34. Conclusions Future Research: • Mechanism design will increase our understanding of political structures • This approach limited by focus on narrow materialistic self-interest. Political economy would benefit from a better understanding of other human motivations.

35. Acknowledgements • I want to thank my advisors Professor Galor and Professor Krause • I also want to thank Dean Krahulik, Janet Peters, and everyone involved in the IC program for making my IC possible and fruitful.