Div Class Title History As A Laboratory To Better Understand The Formation of Institutions Div

Journal of Institutional Economics (2015), 11: 1, 69–91
C Millennium Economics Ltd 2014 doi:10.1017/S1744137414000216

First published online 22 May 2014
History as a laboratory to better

understand the formation of
institutions
BAS VAN BAVEL∗
Department of History, Utrecht University, Utrecht, the Netherlands
Abstract. A main instrument for better understanding the formation of

institutions, and explaining the differences in their long-run development between
periods and societies, would be to use history as a laboratory, allowing us to test
the hypotheses developed in the social sciences. This paper discusses the study by
Douglas Allen, The Institutional Revolution, in that context, in order to identify
some of the pitfalls in the current attempts by economists to use historical
analysis. Next, the paper places his English case into a comparative perspective,
helped by the recent insights gained by economic and social history, to see how
these pitfalls can be avoided. Based on this, I argue for comparisons at the
regional, national and global levels, and for a multidimensional view which
includes social contextualization, combined with an open eye for discontinuity in
long-run patterns, in order to avoid one-dimensional and teleological approaches
to institutional change.
1. Understanding the formation of institutions
The view that institutions are a crucial determinant of economic and social
performance has found broad acceptance in the social sciences, including in
economics. Many studies have analysed the effect of institutions, and tried to
capture the effects of institutional change, sometimes within short time frames,
but also looking at long-run changes. The latter approach is currently reflected in
a flourishing branch of economics and economic history, which aims to explain
long-run divergencies in economic and social development between regions,
countries or even parts of the globe through their institutional differences. A
prime example is the debate on the diverging fortunes of the West and the
East between the late Middle Ages and the 20th century. In the search for
explanations of this Great Divergence, varying institutional explanations have
been put forward, including differences in culture and values, legal organization
and inheritance systems, political and public organization, household formation,
market systems, and property rights (Brenner and Isett, 2002; Kuran, 2012;
Landes, 2006; Vries, 2001).
∗ Email: b.j.p.vanbavel@uu.nl
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70 BAS VAN BAVEL
Even though there is fierce and often productive debate about precisely which
sets of institutions have enabled the favourable development of the West, and
specifically of early industrializer England, many participants will agree that
institutional factors have to form a vital component of any explanation of the
long-run divergencies in development we observe between societies. The next
step will be to better chart and explain the formation and the effects of these
institutional arrangements over long time frames. Better measuring the effects –
which is not the focus of this paper – will indeed be possible. Even though
a direct measurement of transaction costs is not easy for historical periods
with their often deficient source material, other ways to measure the quality
of the institutional framework of markets have been pioneered. Among them is
the reconstruction of the long-run evolution of interest rates, and of their variance
between economies, in order to gauge the quality of property rights and the
security they offer to actors in the capital market (North, 1990: 69). Other
indirect indicators used to this end, within the framework of a comparative
analysis, are price variability, convergence of price movements, the skill premium
and urban/rural wage differentials (examples for the pre-industrial period: Van
Bavel et al., 2012: 361–366; Van Zanden, 2009: 18–31).
These indicators suggest that institutions indeed play a crucial role in the
long-run performance of economy and society. This makes it urgent also to
secure more insight into the formation of these institutions and the often diverse
form they take; the issue that is central to this paper. It requires us not only
to look at institutions as an independent variable – or as a given –, but also to
examine them as a dependent variable. How can we explain the very different
forms institutions take and the sharp differences we observe between periods and
areas? This is where our insight is still limited. Arguably the best way to achieve
progress, especially when we accept that institutional change is often a slow and
path-dependent process, is by looking at history. Even if history does not allow
for the control offered by field experiments or the laboratories of the natural
sciences, this is the main laboratory we have available in the social sciences to
analyse long-run societal developments, to test our hypotheses and to establish
causal links in our search for better understanding fundamental changes, to
which end we can use comparative analysis as a powerful tool (Diamond and
Robinson, 2010).
Entering the terrain of history and the formation of institutions, however,
requires the economist to leave his or her comfort zone. Since the relevant
institutions include social, political, cultural and religious as well as economic
ones, economists need to leave their home territory and explore an area often
left to political scientists or to cultural or political historians. These historians
do not offer much help, however. At present, most of them choose a descriptive
approach to history, often oriented to major military or political events, cultural
highlights or prominent individuals. The influence of the Annales school and
more structural approaches to history, which were dominant in the decades after
History as a laboratory to better understand the formation of institutions 71
the Second World War, has clearly waned. Social analysis at the macro level has
become rare in historical studies, and the hope, or will, to analyse or reconstruct
patterns and to identify underlying causes has also been abandoned, while post-
modernism and post-structuralism have become popular (Stone, 1991). In many
respects, history has moved away from the social sciences. In view of the necessity
to better understand how institutions take their specific forms, and the growing
interest of economists in this issue, this is highly unfortunate, both for history
and for economics, and for the social sciences and humanities more generally. It
is only more recently that economic and social history has been picking up speed
again, especially in developing a comparative and global perspective.1
Notwithstanding the current interest in institutional differences, explanations
for the long-run changes of institutions, and the divergencies in these changes,
are therefore not plentiful at present, especially as regards the institutions of
the pre-industrial period, a period more difficult to penetrate, also because of
the source problems. Traditionally, there are two contrasting approaches to the
institutions of this early period, both of them more intuitive than informed by
analysis. On the one hand, many historians are inclined to see the institutions
of the pre-industrial period, and particularly those concerning the organization
of politics, administration and public services, as instruments of exploitation
by the elites, meant to keep ordinary people ignorant, to dominate them and
to extract their surpluses. As opposed to this, there is an alternative traditional
approach, found especially among economists but also among historians, that
institutions develop more or less spontaneously because they provide a good
answer to economic needs. This notion suggests that efficient economic and
political institutions – ‘efficient’ being defined as contributing most, in a given
set of circumstances, to the welfare of society – will gradually prevail over less
efficient alternatives, as is believed to have happened in the more recent periods
and especially in the West, either as a result of deliberate design or because
they weed out the inefficient ones, by way of a kind of natural selection and
competition between societies or firms.2
These traditional approaches have recently become complemented, and
superseded, by the work of several great economists, with Douglass North
and Daron Acemoglu standing out among them (recent works: Acemoglu and
Robinson, 2012; North et al., 2009). By linking economics to history from an
institutionalist perspective, they have hugely enhanced our insight into the crucial
importance of institutions, the diversity of institutional arrangements and their
effects, and how they develop in long-run, often path-dependent processes. Their
work has become a kind of standard in looking at the long-run development of
institutions. Notwithstanding the brilliance of their work, for an economic and
1 References and a discussion of some of the tentative insights are found in section 3 below.
2 As in the tradition of Harold Demsetz and Armen Alchian, and also found in the earliest works by
Douglass North. See: Demsetz, 1967.
72 BAS VAN BAVEL
social historian focussing on the pre-industrial period there seem to be several

problems with it. Most problematic are the notions, found there in an explicit
or implicit way, that the Industrial Revolution has been a crucial watershed in
history, that England – because it had this Industrial Revolution first – must
have possessed the relevant, ‘right’ institutions, and that there has been a kind of
unilinear development towards this situation. Also, in these works, changes in the
institutional framework allowing for these developments are often portrayed as
having been brought about from above, by political regime shifts, as most notably
the Glorious Revolution in England in 1688, and to require a centralized state.3
These notions at present exert a powerful influence in the field, and unfortunately
so, as I will argue below.
At least in part, these notions result from the weakness of the interaction
between the disciplines of economics and history. In the economists’ attempts
to explain long-run changes in institutional arrangements, this weakness likely
results in 1) unilinear reasoning and lack of historical depth; 2) a too narrow
focus on the case of nation-state and early industrializer England; and 3) a too
narrow focus on economic factors with a neglect of the social components that
are harder to capture for non-historians. These possible drawbacks are reflected
in the recent book by Douglas Allen, The Institutional Revolution (2012), that
is central to this paper. I will refrain here from fully discussing the strengths
and weaknesses of this book, since various reviews have already done so,4 but
rather use Allen’s book to discuss these three pitfalls in the current attempts by
economists to explain the pre-industrial institutions (section 2). Next, I will use
the recent insights won by economic and social history, in order to see how these
pitfalls can be avoided and further progress can be made. I will argue that this
can be done by including the earlier periods into our analysis, by strengthening
the comparative approach and extending it to various geographical levels, and
by systematically integrating the social dimension into the analysis (section 3). In
doing so, I will focus especially on the urbanized cores of pre-industrial Europe –
the Low Countries and Northern Italy – in order to counterbalance the focus on
the English experience and thus see how the experiences of these highly successful
pre-industrial societies can broaden our perspective.
2. The pitfalls in Allen’s The Institutional Revolution

In his compelling book The Institutional Revolution, economist Douglas Allen
enters the difficult terrain of explaining the formation of institutions, loosely
defined by him as the rules we live by and how life is organized. More specifically,
3 Illustrative examples are the seminal article by North and Weingast, 1989, and Acemoglu and
Robinson, 2012: ch. 7 (“How a political revolution in 1688 changed institutions in England and led to
the Industrial Revolution”).
4 As most notably the reviews by Mokyr and Espı́n-Sánchez, McCloskey and Langlois, with a rebuttal
by Allen, in the Review of Austrian Economics 26 (2013).
Allen aims to explain the specific institutional arrangement of public services,

including defence, administration, the judiciary, fiscality, and infrastructure, and
he focuses on the case of England. He divides the history of public services
in England into two parts: before the mid-19th century, when this sector was
characterized by the selling of offices, patronage, aristocratic rule and other
pre-modern phenomena, and after the mid-19th century, as professional, paid
bureaucracies made their entrance. His explanation of this specific organization
of public services, and its transition, rests on one variable: transaction costs,
which he assumes in their turn to be mainly determined by technological progress.
Allen argues that the very specific forms taken by this organization of public
services in the period prior to the mid-19th century can be understood from
the difficulties the state had in measuring the performance or ‘success rate’
of the people involved in these public services. This is still a characteristic of
public services, but for this earlier period the effects of chance and the whims of
nature were much greater, and as a result variability was very high. Moreover,
the technical tools for measuring were weaker, so that performance could be
controlled or monitored by the state to a much smaller extent or not at all.
According to Allen, time measurement, for instance, was virtually impossible
prior to the 19th century because of the absence of reliable clocks. As a result
of these problems, the transaction costs were very high, too high to allow for
a modern, professional bureaucracy to be used by the state. This only changed
as the technological fruits of the Industrial Revolution reduced variability and
made measurement possible.
In choosing this approach, Allen follows Ronald Coase, who attributes to
transaction costs a determining role in the specific form institutions take. The
societal goal in choosing certain institutions is to maximize wealth within
that situation of transaction costs (Coase, 1960). The result of this position
(elaborated by Allen in note 25 on p. 230) is that another, non-societal force
would be necessary, and sufficient, for a change in transaction costs and an
ensuing innovation of these institutions, and this is technology. Allen thus
distances himself somewhat from Douglass North (as also observed by Langlois,
2013), since North over the years has become more open to the idea that
institutions are also linked to social organization and thus can remain even
when technology or other changes would make it possible to innovate them.
Following Coase’s argument, Allen argues that the solution to the impossibility
of measuring, controlling and rewarding on the basis of performance in this
period, and the resulting impossibility of employing a professional bureaucracy,
was the choice of another system of public services, adapted to this situation
of high transaction costs. One instrument in this system was patronage, in
which reputation was primordial. Loss of reputation would mean loss of one’s
position, loss of the support of one’s patron and loss of one’s lucrative offices.
Alternatively, the office was sold. The office-holder could then treat the office
as his property, pass it on to his heirs and receive the revenues from the office
74 BAS VAN BAVEL
instead of a wage. Selling an office has a self-selecting effect: only those who
have the qualities to maximize the revenues from the office will pay the money
to buy it. There is no need for the state to measure or monitor the actions of
the office-holder, since this mechanism polices his behaviour in an indirect way.
Still, there was also a risk that the actions of the office-holder, while maximizing
his revenues, were incompatible with the goals of the state. Selling an office
was therefore mainly used in cases where this risk was limited. Still, both with
patronage and with sale, additional institutions were needed to generate loyalty
and trust, and to safeguard the interests of the state. These institutions were
obligatory for those who were qualified for an office, that is, the aristocrats, and
they increased the penalty for misbehaviour and the resulting loss of the office.
Among these rules and customs were otherwise incomprehensible ones, like the
upkeep of big country houses in remote places and the big investments made
in learning aristocratic, non-practical skills like dancing. They are all explained
by Allen from this perspective, that is, as a kind of hostage capital that makes
the costs or risks of default or underperformance for civil officers very high, and
thus forces them to perform and to be loyal to the king/state.
Allen suggests this system existed in its clearest form in England from c.
1500 to c. 1850, where it was best-developed and where – it is at least
suggested – it was most successful, militarily and economically, compared to
other European nations. The end of this system came, Allen argues, after the
Industrial Revolution. As a result of technological innovation in the period c.
1750–1850, the role of nature and luck was reduced, variability lessened, and
performance could be better measured. Steamships and trains made the speed
of transport more predictable, clocks made time measurable, and vaccination
made life and diseases less variable. As a result, transaction costs went down.
This ended the necessity for this pre-modern institutional arrangement of public
services, and made maintaining this now unnecessary organization too costly,
and it opened up the way for the modern, professional bureaucracy based on
performance, directly employed by the state and paid in wages.
The big merit of Allen’s book is that he tackles with a very clear hypothesis
an issue which historians have mostly left to description. His story is highly
coherent and compelling. He shows that historical arrangements are not strange
phenomena we can marvel at, or laugh about, or the fruit of irrational people,
but they developed in response to certain needs and they fulfilled a practical
function. Allen does not limit himself to describing these institutions, but tries
to explain them, and to understand how they develop over time, by way of
a coherent framework of interpretation. Despite its merits, however, there are
several weaknesses in the book. Some of them have already been noted by other
reviewers, who pointed at the absence of any measurement of the supposed causes
and effect in the book, for instance, and also at the absence of any substantiation
of the supposed effect of this system on private prosperity and economic growth
(McCloskey, 2013: 364–366). I will not further discuss these issues here, but
focus on three more general pitfalls, of which Allen’s book to my mind forms a
clear illustration.
First, there is the neglect of the social dimension. Allen assumes that the
arrangement of public services is mainly, or even fully, driven by economic logic
(transaction costs) and that transaction costs are determined by technology. In
these assumptions, the social context is left out as a factor, and this is a serious
omission. Even if these institutions can indeed fulfil economically useful roles,
their formation and use is always linked to the societal position of those people
and groups forming and using them.
This can be shown with regard to measurement, which plays a large part
in the argument made by Allen. Measurement is not an objective act – as he
seems to suggest –, and its development is not solely enabled and determined
by technological advancement, but is also directly linked to social relations,
authority or even dominance, as already noted by Witold Kula many decades
ago (Kula, 1986: 18–23 and 114–119). Kula, who is not even mentioned by
Allen, shows how the major European waves in standardization of measures
were all part of political unification attempts, such as by the Carolingian kings
who ordered the standardization of coins, weights and measures, and later with
the rulers of the Renaissance and the absolutist kings. Even if in some cases
this standardization of measures was carried out also for economic reasons, or
enabled by technological innovations, it was always and predominantly driven
by political goals, that is, as an instrument to subordinate others, or to equalize
them, and to determine what is measured, in what was an intensely contested
process (also: Scott, 1998: 24–33). This political impetus mostly decided whether
technological and administrative means, that often had already been available
for long, would be used to this end.
The socio-political dimension of measurement is also reflected, for instance,
in the introduction of public clocks in the 14th century. These clocks, and the
associated replacement of the unequal canonical hours by precise, regular hours,
were employed particularly for measuring and regulating the working-hours and
the times of selling in the market. They were thus introduced earliest in the towns
where labour and commodity markets were important, in Northern Italy and the
Low Countries (Dohrn van Rossum, 1987; Landes, 1983: 70–78). This process,
however, was a contested one. Especially the big entrepreneurs pushed the town
governments to install these clocks, have a bell rung at the beginning of the
working day, and to force labourers to start work at these fixed times on penalty
of a fine, as ordered in Aire-sur-Lys in Artois in 1355 (Le Goff, 1963). Rebellious
workers, on the other hand, often tried to silence the work bells, or at least to
regulate them in order to safeguard their interests. Technological innovation,
and the resulting decrease of transaction costs, can therefore not alone explain
the diffusion and use of this new technology. This diffusion also required an
economic rationale – the importance of markets and wage labour to be regulated
– and a social one – in this case: the powerful position of entrepreneurs in local
76 BAS VAN BAVEL
politics, allowing them to build and use these clocks. The process was, therefore,
not a direct result of technology alone, but intrinsically tied up with the social
and economic make-up of the localities in question and the incentives it offered
to use this technology.
The second deficit of the book is the lack of historical depth and chronological
precision, which results in incorrect assumptions about causality. Allen presses
the relevant developments into a simple mold, allowing him to tell a simple,
unilinear story. He divides history into two parts: pre-modern (16th to 19th
centuries, with its pre-modern institutions) and modern (19th century and after).
In passing, he mentions a preceding period, indicated with the label ‘feudalism’,
which would have ended in England around 1500, but is not discussed in the
book.
This chronology, with the rise of the pre-modern system of public services in
the 16th century and its disappearance in the 19th, is not convincing. Not only
is an analytical basis for the chronological starting point of the book lacking,
but when we look more closely at the relevant historical literature it is clear
that the proposed chronology is plainly wrong. This system of public services
in many parts of Europe had developed several centuries earlier, and also, as I
will elaborate below, disappeared several centuries earlier than suggested in the
book. This is not nit-picking by an historian, or at least not solely so, but has
direct implications for the proposed causality.
To start with, any explanations of the assumed rise of the pre-modern system
of public services in the 16th century are lacking. There are some vague hints
that in the military sector this rise is connected to changes in military technology
at that time, ‘which increased the white noise and made the measurement of
soldier inputs more difficult’ (p. 166). No further proof of this is offered, and
for the other segments of the public sector this issue is not discussed at all.
However, a look at the literature shows that many parts of Western Europe saw
the rise of this system some three centuries earlier. The practice of purchasing
positions in the army started in the 13th century. Also, mercenary armies are
not a new phenomenon of the 16th or later centuries, but saw their rise in the
14th century, as documented for Northern Italy (e.g., Caferro, 1998). Likewise,
the sale of public offices reached its high point in the 14th century, as in many
parts of the Low Countries and the German Rhineland most high administrative
offices were leased out, pawned or sold by the princes. They did so, as well as
pawning of tolls, taxes and revenues, in order to raise the liquid capital they
needed for wars and state building (Tewes, 1987; Kuys, 1994: 71–78 and 129–
131). In many parts of Western Europe, the ‘classical age’ of this pre-modern
institutional system was thus not the 16th to 19th centuries, but rather the 13th to
15th centuries, and the causes for its rise are therefore likely found in that and the
immediately preceding period. I will come back to this issue in the next section.
An even more fundamental chronological problem for the argument made by
Allen concerns the end, or dissolution, of the ‘pre-modern’ institutional system.
He places this end in the 19th century, and he takes great pains to argue how it
is brought about by the technological changes of the Industrial Revolution. But
many of these changes, and the disappearance of this system, actually occurred
many centuries earlier. For instance, contrary to what Allen asserts about the
impossibility of telling the time and of measuring the length of the working day,
we can see clear advances in hydraulic timekeeping and a growing emphasis on
punctuality already in the 11th and 12th centuries. This trend was followed,
especially in the towns, by a growing role of clocks and time in the 14th century,
associated with the diffusion of public clocks, noted above (Landes, 1983:
68–83). Even though clocks only slowly became more accurate, their loud and
highly visible presence allowed the urban population direct access to fairly
reliable time measurement. Allen bends the historical evidence when he says
that people had to wait another 500 years, that is, up to the start of the 19th
century, for mechanical clocks to become accurate, and that the real use of
clocks only started once they were cheap enough to be privately owned. This is
incorrect: the drive to quantify and measure, and the technical means to do so
in a fairly accurate way, had their start in the Middle Ages (see also Mokyr and
Espı́n-Sánchez, 2013: 378–379).
This earlier chronology also applies to the monitoring of public servants. The
rise of record-keeping, not really discussed by Allen, and the hiring of public
servants selected at least in part for their abilities, skill and education, may both
be considered features of ‘modern’ bureaucracies, but these developed from as
early as the 12th/13th centuries on. The use of writing, book-keeping and making
cross-records were exactly the main instruments used by the town and village
populations to monitor the actions of administrators and to control their actions
and avoid arbitrariness. It is not surprising that in the communal revolts in
13th-century Italy, northern France and the Low Countries record-keeping and
access to, and inspection of, the records was a main demand of the rebellious
populations and the rising guilds (Van Bavel, 2010: 118–119).5 In their demand
for greater control of urban finances, they were sometimes supported, as in late
13th-century Flanders, by the princes or king, who had the same desire for better
control, but also wanted to use this in order to break the rivalling power of the
urban elites and nobility. This, again, shows that measurement is not only a
technological issue but linked to political power and social relations (the point
made above).
Similarly, social-political changes, and not technological ones, were
instrumental in the disappearance of the pawning and selling of offices, taking
place in the 15th century. The princes now could turn to the capital markets,
which had developed, in order to raise the needed cash. They were stimulated
in doing so also by the growing influence exerted by the representative bodies,
the Estates, who wanted more control over the offices and disliked having them
5 For these revolts see also below, p. x.
78 BAS VAN BAVEL
pawned out (Tewes, 1987). Both elements – the growth of the market and the
growth of political representation – offer firm, alternative explanations of the
disappearance of the pre-modern system, and they sealed the end of this system
here in the 15th century, not in the 19th. This example, again, suggests that
both the chronology (much earlier) and the causality (more driven by societal
changes) are different from the ones proposed by Allen, and also that the big
geographical variances in this process do not allow for one, unilinear story in
which the Industrial Revolution plays the decisive role.
To be sure, Allen’s reasoning does not hold in the light of the experiences
of the present either. Even though technological innovation has proceeded and
even further sped up ever since the 19th century, and may have allowed the
reduction of transaction costs, the present situation in the provision of public
services does not conform to his picture. Allen presents the fact that public
services like the post, roads and policing in his period were sold and/or provided
through the market as a distinctively pre-modern situation. He considers the
full responsibility taken by the state for these services, and the dominant role
of professional, state bureaucracies, as the rational outcome of the growth
of technology and the reduction of transaction costs, and thus of modernity.
However, since the 1980’s, the state and public offices in most western countries
are rather retreating and give up many public services to semi-public or private
parties again, in roads, postal services, water, electricity but even where public
security or armed surveillance are concerned (Avant, 2005). Policy makers and
governments assume that the performance by these private parties is adequately
measured through monitoring and competition through the market, and works
better than providing these services by professional bureaucracies, state officials
or workers directly employed by the state. This development, not even mentioned
by Allen, takes place even while technology is much further advanced than in
the 19th century. Better elaborating the historical dimension would easily show
that Allen’s unilinear and technology-driven story is not correct.
A third problem is in the geographical comparison, or rather its absence, which
– again – impedes a proper search for underlying causes. The book essentializes
the English experience, without placing it in context by way of comparison
with other societies, while even a basic comparison would have shown there
are fundamental problems with the mono-causal explanation of institutional
formation offered here. For example, based on the English situation, Allen
suggests that clearly scheduled, regular transport services would be impossible
in his period. However, in the Dutch Republic already from the 15th century a
large-scale, highly organized, reliable, regular and cheap transport system was
developed, which was fully in place in the mid-17th century (De Vries, 1981).
By that date, the problems arising from unpredictability of speed and cost of
transport had largely been solved. As English travellers noted to their surprise,
there were detailed, published schedules, strict measurement with hourglasses
and high penalties for skippers failing to observe the schedule, all resulting in
the barges actually operating on time. The statement made by Allen, therefore,
is wrong, but even more relevant is the question why these regular transport
services were possible in the Dutch Republic, but apparently not in contemporary
England. Technology cannot be the sole answer. More important is the role of
the fundamentally different organization of society, with a far bigger role played
in Dutch economic life by the market, in combination with that of the local
public authorities in developing infrastructure and regulation, already from the
late Middle Ages onwards. Local authorities, using the financial markets to
raise the capital needed for investment, and skippers, who were something
between private entrepreneurs and public functionaries, together made this
complex and advanced system work. The sector was managed and supervised
by commissioners, who were not members of the elite but men chosen for their
qualities and paid a regular wage (De Vries, 1981: 102–120), again in contrast
to the picture sketched by Allen. Comparison would thus show that but the
presence of active local authorities and dynamic markets for labour and capital,
not technology, was the determining factor in the institutional organization used
here.
Comparison would also disqualify the statements made about the outcome
and effects of this institutional system. England from c. 1500 to c. 1850 is
presented by Allen as the clearest example of this system, where it was best-
developed and where it was most successful, militarily and economically. The link
to economic success is also suggested by Barry Weingast and by Gary Libecap,
in the backflap text, saying that Allen’s book ‘increases understanding of how
changes in measurement and institutions can increase trade and welfare’. Missing
in the book, however, is any reference to the private sector, which would be
essential to establish this causality (McCloskey, 2013: 365–66). No evidence
for a causal link between this institutional organization of public services and
economic success is offered. Hard figures within a full, systematic comparison
are not supplied. Such a geographical comparison would have made it hard
to sustain any claims. What about the Netherlands/the Dutch Republic, for
instance, which had a fundamentally different system of public services, but was
militarily and economically at least as successful as England in the early modern
period (De Vries and Van Der Woude, 1997)? And what about Northern Italy,
which in the late Middle Ages had a system of public services similar to the
Netherlands, organized by local authorities and bottom-up associations making
ample use of factor markets, but in the early modern period became more similar
to England, with a growing role of aristocrats, sale of offices and use of hostage
capital (Jones, 1997)? Italy, however, in this period was not at all successful and
rather saw its economic leadership turn into backwardness (Malanima, 2011).
And why did the pre-modern system last longer in England than on the European
Continent? This applied, for instance, to the purchasing of positions in the army,
a practice prohibited in France and Prussia already in the late-18th century, but
persisting in England up to c. 1870, and to many other public services, as we
80 BAS VAN BAVEL
have seen above. Was this, if we would be following the general argument of the
author, because England lagged technologically? This would turn the argument
upside down, in view of his attempt to link the English system to the precocious
industrial development in that country. A brief comparison would already suffice
to disqualify the causal links suggested here.
3. Toward a better theory of institutional change

The risk is that Allen’s book, despite its merits, will leave a teleological, one-
dimensional view of institutional changes, a view which lacks historical and
geographical depth and is too detached from the societal context in which these
institutions were formed and changed. Bringing the historical and social context
more into the picture would help us to better understand whether, why and
how these institutions changed, and why the geographical differences between
societies in their institutional arrangements often persisted that long. I will discuss
the three relevant elements (the historical, social and geographical dimensions)
here in turn, making use of recent insights from economic and social history,
and showing that the three are closely related to each other and that all three are
needed to arrive at a full, multi-dimensional picture.
The first point, pertaining to historical depth, is that the development towards
institutional ‘modernity’ was not a unilinear, recent one, with the Industrial
Revolution as a crucial shift, and England as the only role-model, but one with
various accelerations, and also stagnation and decline. Also, it started much
earlier than often assumed in conventional economics. Both insights, which
require us to rethink the possible causes of this process, can be demonstrated
especially by looking at two other Western European cases, those of Northern
Italy and the Low Countries. These were the two areas in Western Europe where
changes were most pronounced in the 11th to 13th centuries, as the institutional
organization of societies and their systems of exchange and allocation underwent
drastic changes. Both areas saw a wave of revolts in this period, which largely
broke feudal, aristocratic rule and opened the way for urban and rural communes
and for political representation for broad layers of society. Under the pressure
of these bottom-up movements, public offices were not sold or dominated by
aristocrats anymore, and neither were they organized or dispensed by central
government, as in the England described by Allen. Rather, public services
were mainly provided by local and regional authorities, already from the 13th
century on. Offices were held by merchants, representatives of the craft guilds,
or substantial farmers, who acted as officers in courts, aldermen or members
of water management boards (for northern Italy: Jones, 1997: 370–386 and
403–419). If officials were hired, they were often employed by local or regional
authorities, they might well be of non-aristocratic descent and were selected at
least in part for their abilities. They were held accountable to the authorities
and the representative bodies. The workers within these public sectors are, from
the 14th century on, mostly wage labourers, often hired through contractors or
entrepreneurs, as shown for infrastructural services within the town of Bruges or
for water management works in the Holland countryside, for instance (Sosson,
1977: 167–178 and 189–201; Van Dam, 2001). Crucial for this development,
just as in the sector of passenger transport described in section 2 above, were the
volume and the opportunities offered by labour and capital markets, combined
with the active role played by local authorities.
Also, in the same period, there were big changes in the institutional
organization of the private sector. Here, measurement and monitoring problems
were often as extensive as in the public sector, for instance in long-distance
trade, with its characteristic principal-agent issues and high variability caused
by the vagaries of nature, but these were solved ever more effectively (Greif,
2002). These solutions were initially often based on ethnicity, peer pressure
and reputation, but from the 13th century on increasingly on registration, legal
instruments and third-party enforcement by local and regional authorities, with
a decisive role for the governments of the urban trade centres (Gelderblom,
2013). This period also saw the emergence of larger, more durable commercial
organizations and partnerships.
Perhaps social and institutional changes were greatest in the exchange and
allocation of land, labour and capital. Up to the 13th century this exchange and
allocation was organized within families, kin, manors, communities and other
non-market systems. But from this period onward, at least in some regions,
markets started to take over this role. In contrast to the conventional view,
sometimes based on an uncritical reading of Karl Polanyi’s work, that factor
markets are a modern phenomenon and became powerful only from the 19th
century, studies in recent decades have demonstrated those in many Western
European regions were already growing in the 13th century, not only in the towns
but also in the countryside (a succinct statement: Hejeebu and McCloskey, 1999).
The next step, taken in recent years, was to better chart and measure the volume
and functioning of these markets. The resulting studies show that, by the 16th
century, most of the agricultural land in Northern Italy and the Low Countries
was regularly exchanged in the land market, with annual turnover rates at 1–3 %,
which are not dissimilar to modern rates (Van Bavel, 2010:178–181). Moreover,
large shares of the land were leased out in competitive lease markets. In many
regions, half to three-quarters of the land was leased out. Also, a substantial
part of labour was performed for wages; in the 16th century this was between
a quarter and half of all labour, with regional peaks up to 60 % (Van Bavel,
2007). At that point, most of the land, labour, capital and commodities in these
economies was exchanged and allocated through competitive markets. This also
affected the provision of public services, which by now could rely on the liquidity
offered by the capital market and the labour hired in the labour market.
The same medieval period also saw radical technological innovation and a rise
of economic complexity, most conspicuously in the areas where political changes
82 BAS VAN BAVEL
and the rise of open, accessible factor markets had been most pronounced. Both
the institutional and the physical framework for trade in areas like Northern
Italy and the Low Countries rapidly developed, including a massive wave of
building of bridges, ferries, roads, from the 11th century onward. The effects of
this medieval transport revolution on the speed, regularity and cost of transport,
and the associated rise in commercialization of the economy, division of labour
and regional specialization, were momentous. Moreover, the resulting Smithian
growth was accompanied with a rise in labour productivity as the result of heavy
investments in labour-saving technology and fixed capital goods, especially in
industries (Van Bavel, 2010: 343–371). Competition in commodity and factor
markets, and credit available through capital markets, made it necessary and
possible to implement technological innovations, especially aimed at reducing
labour inputs, as can most clearly be observed in the late medieval Low Countries.
These insights gleaned from recent research have discredited the older idea
that ‘real’ technological progress and economic growth before the Industrial
Revolution were impossible.
The effects of these structural changes of the economy are reflected by
the recent calculations of GDP per capita. The old, Malthusian view, that
assumed that before the Industrial Revolution societies were unable to generate
economic growth and were stuck at subsistence level, was already discredited
by the reconstructions of GDP per capita made by Maddison (2003: 249; 2006:
244–265). These suggest that in the pre-industrial period Western European
societies already achieved some growth. Around 1300, GDP per capita in
Western Europe, according to Maddison’s estimates, was about $ 600, that
is, about 150 percent of the bare subsistence level, and this figure gradually
rose to $ 800 around 1500, and to $ 1,000 around 1700. In recent years,
Maddison’s estimates for the pre-industrial period have been substantially revised
upward. Around 1300 most Western European economies would rather seem
to have been at GDP per capita levels of $ 800, and in Italy even higher, and
many of them witnessed quite substantial growth in the following centuries,
to levels of $ 1,000 – 1,500 in the 16th century (Broadberry et al., 2011:
table 24). Growth was even more pronounced in Holland, the western part
of the Netherlands, where GDP per capita rose from $ 800–900 around 1300,
to $ 1,500 around 1500 and no less than $ 2,500 around 1600 (Van Zanden
and Van Leeuwen, 2012).6 The rise of total factor productivity in these cases
was sustained and substantial. These calculations thus push back the start of
‘modern’ economic growth in Western Europe by several centuries, long before
the Glorious Revolution and the Industrial Revolution (van Zanden, 2009: 232–
260, thus contradicting Pomeranz, 2000, who presents the Industrial Revolution
as the decisive turning point). Also, we can now see better that this process was
6 The underlying figures were kindly provided by Bas van Leeuwen, 4 February 2013. See also: Van
Zanden, 2009: 232–266.
not uniform and unilinear, but a localized process that displayed sharp regional
differences and alternations in economic success. The economic leader of the
13th and 14th centuries, Italy, for instance, had become a laggard in the 18th
century (Malanima, 2011).
The picture becomes even more variegated, and the idea of a unilinear,
recent development towards modernity even further discredited, by broadening
our view to developments outside Europe, as economic and social history has
increasingly done over the past few years. Many of the elements we consider part
of institutional ‘modernity’ already existed much earlier in history there, and in
some pockets of development were found already in Antiquity. This applies to
the provision of public services by big bureaucracies, staffed by professionals
remunerated with money salaries and using written records extensively, but
perhaps even more conspicuously for the market as a main system for exchange
and allocation, not only of goods and products, but also of land, labour and
capital.
This picture contrasts with the noted absence or weakness of factor markets
outside Western Europe in the early modern period, as observed for areas like
India and Southeast Asia, Africa and the Ottoman empire, but also for highly-
developed societies like China and Japan.7 A more optimistic picture of factor
markets in early modern China is offered by Kenneth Pomeranz, who stresses the
favourable institutional framework of these markets (Pomeranz, 2000: 69–82;
Pomeranz, 2008). And indeed, in China, and perhaps even more in Japan, market
exchange grew in importance in the early modern period (for Japan: Saito, 2009),
but the pace of this development was much slower than in Western Europe.
Factor markets outside Europe remained weak and small almost universally in
the early modern period, up to the 19th century.
This may be true, but still recent years have seen a change of perspective,
thanks to the latest research on much earlier periods. A case in point is Iraq
in the neo-Babylonian period. The long 6th century BC, which is relatively
well-documented, showed strong demographic growth and urbanization,
monetization of exchange and the growth of land and especially labour markets,
with an associated rise of cash crop production, and of regional and occupational
specialization (Jursa, 2014). Another relevant case is Iraq in the 7th to 10th
centuries, or the early Islamic period. Sales of land were widespread then, and
leasing and later sharecropping leasing also became important. In the towns,
but to a lesser extent also in the countryside, wage labour was ubiquitous
(van Bavel et al., 2014). The rural and especially the urban economy in this
period was highly monetized and market-oriented, also induced by highly
dynamic credit and capital markets. Perhaps the Lower Yangtse delta in China
in the period between c. 1000 and 1400 is a similar case, as all kinds of
7 See the contributions by Roy (India), Austin (Africa), Pamuk (Ottoman empire), and Saito (Japan)
to the special issues of Continuity & Change edited by Van Bavel et al., 2009.
84 BAS VAN BAVEL
restrictions on market activities were removed and factor markets flourished

(Shiba, 1969: 127–130). Relevant to the chronological issue under consideration
here is also that in all these cases after a few centuries these developments
were reversed. In Iraq, for instance, after the 9th century the factor markets
increasingly became skewed, and they shrank, elements of unfreedom became
stronger and professional bureaucracies and fiscal systems made way for the
sale of offices and the leasing out of tax-rights. This reverse development,
again, makes it impossible to see the rise of professional bureaucracies and
markets as a unilinear or irreversible process. Rather than assuming a path
towards modernity, each institutional formation should be carefully placed in its
historical context, while allowing for diversity and regression. It also shows that
in institutional development there is not a single underlying cause, and certainly
it is not technology, and the Industrial Revolution thus does not form the single
watershed.
The second dimension needed is the societal one. Institutional arrangements,
even when having a clear economic function, are fully embedded in society as
a whole, and often fulfil multiple functions, of which the economic one does
not need to be the one that wholly determines the form of that institution.
In this sense, the recent book by North et al. (2009) is more comprehensive
than Coase’s, Allen’s or North’s earlier work, by bringing the whole of society
into the picture. This enables them to include the effects of societal changes on
institutional arrangements and to link institutions to the whole logic of society.
They discern two varieties: the natural or limited access societies and the open
access societies, with the latter ones in essence being the modern, Western ones,
which they assume to have developed over the past two centuries. This is a
more fruitful, holistic approach to institutional formation, although it possesses
a teleological undertone and their chronology places the relevant changes too
late in time (see the point made above).
Further disentangling the role of societal formation, and analysing institutions
as the outcome of contention between social groups, would be a next step
(Acemoglu et al., 2005: esp. 427–439; Ogilvie, 2007: 662–665). Such analyses
will likely show, and have shown, that, even though some institutions were in
part shaped in response to economic challenges, they were also formed by social
bargaining, and dictated by the interests and preferences of persons and social
groups, because of their distributional effects. In order to explain institutional
change, we thus have to analyse what social groups are involved in the formation
and use of the institutions under study, and what their position is in society, as
defined by their grip on resources, revenues and political leverage. This can be
done most effectively through an empirical test within a comparative framework.
An example is the recent investigation of the differences in the institutions
regulating the accessibility of common wastelands in early modern Northwestern
Europe. These rules, in part informal ones, and their use, are shown to have been
shaped according to the different degrees of equity of bargaining power within
the rural communities in question. Where a broader group of stakeholders, and a

bigger variety, was involved in political decision-making, these institutions were
more inclusive (De Keyzer, 2013).
As this example shows, the relevant processes were not only found within the
pinnacles of centralized states, and relevant groups were not always operating
from above, as seems to be suggested in the accounts by Acemoglu and
North, but also at the local and regional level and operating from below.
The most conspicuous examples for these bottom-up processes in the pre-
industrial period are found in the towns, as in Northern Italy, starting in the
10th century, and later in the Low Countries, where merchants and middling
groups successfully revolted against aristocratic rule (Violante, 1974: 173 ff.; De
Moor, 2008). One of the main aims of the insurgents was the removal of all
feudal arbitrariness, and changes thus often went along with the introduction
of new forms of administration, financial control and accountability (Jones,
1997:103–120). Likewise, the merchants from the 12th century proved highly
successful in developing their own institutional framework for long-distance
trade and solving principal-agent problems, resolving conflicts and increasing
contract enforceability, often in concert with local authorities (Gelderblom,
2013: 102–140). In the towns of Italy and the Low Countries, where these
merchants often became politically dominant, their rules and methods were also
used in the organization of the political domain and public services, which in its
turn further sped up economic growth, as analyzed for the trade metropolis of
Genoa around 1200 (Greif, 1994).
This intertwining of social and institutional structures displayed geographical
patterns with sharp differences. For instance, in the late medieval period there
was a stark contrast between Central England, with a dominance of aristocrats,
who held by far most of the land – the most important factor of production - and
Holland, where a free peasantry with full control over the land predominated,
and Northern Italy, with its powerful urban elites and the political grip they
held over the surrounding countryside. These societies offered radically different
incentives, opportunities and obstacles, for instance, for the organization of
markets for land, labour and capital and thus for their development, volume and
degree of dynamism, with the absence of lordly restrictions in Holland allowing
for a high degree of openness and accessibility and a high level of integration
of factor markets there (Van Bavel et al., 2012). This social context, and the
development of markets it allowed, or disallowed, in its turn also determined the
options available for the institutional organization of public services.
Including the social dimension also helps to better understand the seemingly
inefficient nature of some institutions, or their lack of change, even if more
efficient, ‘modern’ alternatives were available. The peasants in the sandy, infertile
Dutch region of Drenthe who succeeded up to the 19th century in defending
their common rights and communal forms of agriculture against privatization
and the switch to absolute, exclusive property in private hands, and against
86 BAS VAN BAVEL
the associated commercialization of agricultural land use, were not irrational or

ignorant people who failed to recognize the economic growth to be generated
by this switch. Rather, the peasant holders of family-sized holdings, who were
the dominant segment of this society, clearly understood that they would be the
ones who would lose out in this switch (van Zanden, 1999). The technology
to make this switch economically worthwhile had long been available in many
cases, but its precise timing and location depended on the power balances in
the region in question, or the shifts in these, such as the growing power of
large landholders who were able to push through the division of the commons.
In order to understand institutional changes, or the lack thereof, and the big
regional differences in the timing and form of institutional changes, that occurred
even if available technology was more or less similar, we therefore have to
include an assessment of the structural characteristics of that society, and most
notably of the distribution of property and decision-making power within that
society.
A third point to be included in the research into the formation of institutions
is the awareness of the sharp geographical diversity in these developments.
Connected to the unilinear views of history is the idea of convergence,
where different institutions or societies will sooner or later converge towards
the better, or more rational and efficient ones. These are mostly assumed
to be the ‘modern’ institutions we know in the Western societies (a view
implicit in the work by Douglass North, Douglas Allen and many others).
However, the recent studies in economic and social history show us that
divergence is as prominent as convergence. Even under growing political and
economic integration and interaction, the divergences between societies and their
institutional arrangements can persist or even increase. This is related to the
previous point. Since societies and the make-up of groups within them are very
different, their choices, goals and interests are also different, resulting in different
or even divergent paths of development.
In pre-industrial history, these divergent paths can most clearly be observed
at the regional level. I have tried to demonstrate this by way of a long-run,
comparative analysis of the social and economic development of the twenty or
so regions in the Low Countries, from c. 500 to 1600, used as a testing ground
to this end (van Bavel, 2010). Contrary to what one would expect in more
unilinear accounts of history, the sharp differences between these regions were
not eradicated by the late medieval emergence of markets, industrialization,
and political unification. Rather, the extent to which regions responded to
growing markets, for instance, varied according to the social context. Small- or
medium-scale peasant producers, such as those in Drenthe, who possessed viable,
alternative systems of exchange and allocation, such as associations, commons
and families, were often less inclined to enter the market, as observed above.
As opposed to this, tenant farmers in regions dominated by leased out large
landholdings, such as the Dutch river area, were compelled to orient themselves
towards the market and to commercialize their production, because they needed
to maximize profits in order to remain successful in obtaining land in the highly
competitive lease markets.
Growing inter-regional trade even sharpened the regional distinctness in
economic development. Trade, by integrating regions within one economic
market system, rather stimulated regional divergence, with each region using
its comparative advantages, in part geographical and in part social-institutional
ones. The growing complementarity of regions did not flatten out institutional
differences, except in a few sectors. In long-distance trade, for instance, with
a high mobility of traders, flexibility of trade streams and numerous potential
centres of trade, there was institutional convergence (Gelderblom, 2013: 200–
203). On the other hand, institutional arrangements in most spheres, including
the organization of landownership, leasing, labour markets, marriage and family,
and public services, instead showed persisting or sometimes even widening
differences, even in the face of growing economic integration.
The medieval history of the Low Countries is a clear example of how great the
degree of path dependency in socio-institutional structures at the regional level
was. As such, these structures also determined the paths of industrialization in
the early modern period. Even as trade and technology improved, and capital
flows and trade in raw materials grew, industrial development still remained
a regional phenomenon and specializations assumed a regional character. This
can be observed most clearly in the process of proto-industrialization, which
was tied in with the formulation and distribution of rights to land, with the
prevailing household patterns and with the social-institutional make-up of the
region more generally, and this even applied to the ensuing Industrial Revolution
(Hudson, 1989). The region thus remains the most relevant geographical unit for
investigating and understanding economic and social history, and the formation
of institutions, perhaps into the 19th century.
From the 16th century onwards, however, and even more clearly with the
formation of nation-states in the 19th century, social-institutional differences
at the national level came ever more clearly to the fore. Differences in societal
organisation between England, the Netherlands/Dutch Republic and northern
Italy were striking, as observed above, and can be assumed to have contributed
greatly to the economic divergence between these areas in the early modern and
modern periods (for this economic divergence: Allen, 2001). This observation,
in combination with the more obvious political role of the nation-state in the
modern era, has made the national level the favoured arena for investigating
path-dependent developments (as reflected, for instance, in Acemoglu et al.,
2005). Still, this focus on the nation-state may contribute to a teleological
view and lead to anachronistic reasoning. For long periods in history, and
even in the modern period, the region is probably more relevant as the unit
of analysis. Strikingly, and perhaps also induced by the present, weakening role
of nation-states within Europe, in economic geography the region as the unit in
88 BAS VAN BAVEL
investigating developmental paths is fully back again, as reflected by a growing

number of regional studies (Henning et al., 2013; an early example: Storper,
1997). Progress is also made in the other direction, looking at units at a bigger
geographical scale. It is becoming clear how aggregating socio-institutional
characteristics for even larger areas can offer striking insights and help us better
understand long-run divergencies at the global level, such as those between China
and Western Europe, as in the above-mentioned Great Divergence debate, or
between North America and Latin America (Acemoglu and Robinson, 2012:
7–44). Future comparative analysis should thus encompass three geographical
levels: the regional, the national and the global, without favouring one because
at present it seems to be the dominant one.
Comparative analysis and a multidimensional, not economically deterministic
view, combined with an open eye for long-run patterns, will help us in the
coming years to better understand and explain the formation and evolution of
institutions. Along these lines, and using the insights of recent economic and
social history, we could thus retain some of the strengths of Allen’s book –
most notably the clarity of its hypothesis, the clear conceptual framework and
the boldness of its approach – while making the research less teleological and
one-dimensional, more analytical and more testable. Thus, we would be able to
use the full potential of history as the laboratory of the social sciences, including
economics.
Acknowledgements
I should like to thank Ewout Frankema, Oscar Gelderblom, Erik Stam, Jan
Luiten van Zanden, and the members of the Dutch reading group of economic
and social historians for their comments and suggestions.
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Journal of Institutional Economics (2015), 11: 1, 69–91

C Millennium Economics Ltd 2014 doi:10.1017/S1744137414000216

History as a laboratory to better

Abstract. A main instrument for better understanding the formation of

1. Understanding the formation of institutions

social historian focussing on the pre-industrial period there seem to be several

2. The pitfalls in Allen’s The Institutional Revolution

Allen aims to explain the specific institutional arrangement of public services,

5 For these revolts see also below, p. x.

3. Toward a better theory of institutional change

restrictions on market activities were removed and factor markets flourished

the rural communities in question. Where a broader group of stakeholders, and a

the associated commercialization of agricultural land use, were not irrational or

investigating developmental paths is fully back again, as reflected by a growing

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