North & Weingast (1989)

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Return to BPP Field Exam Papers 2012

Theory Questions:

What is the author's topic and hypothesis?

The author believes that England was able to develop its economy and dominate the world because of successfull evolution of instututional forms that permitted economic growth to take place in early modern England.

These instutional changes did not arise naturally; in fact, they were forced often violently on the crown.

The Glorious Revolution led to 5 significant instatutional changes:

1. It removed the undrlying source of expediencey and archaic fiscal system, and its associated fiscal crisis.
2. Limited the crown's ability to alter rules for its benifit after the fact without parlimentary concent.
3. Parlimentary interests reasserted their dominance of taxation issues
4. Parliment asserted a role in allocating funds and monitoring their own expenditure
5. A System of checks and balences where the crown and parliment were on equal footing, as opposed to eliminating the crown as was previously done.

The key threat to the property rights system was the monarchy -- who was unable to credibly commit upholding property rights. In particular, wars would frequently starve the monarchy of revenue -- thus tempting the monarch to violate property rights and expropriate money from the population (mainly the nobility).

The authors show that the Glorious Revolution introduced an institutional arrangement that strengthened property rights. The key institutional feature was the Parliament, which provided a veto point against the monarch. These institutional changes limited the crown's ability to reneg on promises and legislate unilaterally.

Parliament was able to make this commitment credible by:

• Credibly showing its ability to remove the monarch if necessary (which was shown by the Glorious Revolution).
• In exchange for its new power, putting the government on more secure financial footing by agreeing to higher taxes. This removed a major driver of arbitrary violations of property rights.

How does the author test the hypothesis?

The authors compare the growth of England to countries in continental Europe who do not have separation of powers and where there was no veto-check on the monarchy. In these countries, growth and property rights were hindered by the lack of a check against the monarch. Spain and France are examples where the authors claims this was happening.

The authors also point to the grown in English capital markets and particularly markets in private/public debt as evidence that the glorious revolution strengthened private property rights.

Further evidence presented included a constant and sustained decrese in interest rates and lending property rights became more established and lending less risky.

How does the author rule out alternative hypotheses?

The author very breifly mentioned simultaneous rises in protestant religious institutions. Additionally, England is unique from its neigbors as it was the only country to guentee basic rights of citizens via the magna carta. This raises the question that the institutions created during the glorious revloution are only nessisary not sufficent requisets for economics growth.

How might these tests be run if one had quantitative evidence?

If the Glorious Revolution was indeed about establishing property rights, one might expect that in months where Parliament's army was winning, we would see greater levels of investment by private individuals -- in anticipation of an eventual Parliamentary victory that would secure their investment from the monarch. Investors might have the opposite reaction to the Monarch's victories.

What problems might arise in this quantitative analysis?

Its unlikely that the type of high frequency data necessary to test investors' response to battlefield outcomes exists.

The more general problem is that the Glorious Revolution happened only in one place at one time, and was an endogenous outcome.