The California School of Economic History

In the Great Divergence, Kenneth Pomeranz states that

Much of modern social science originated in efforts by late nineteenth- and twentieth-century Europeans to understand what made the economic development path of western Europe unique; yet those efforts have yielded no consensus.

From Adam Smith's The Nature and Causes of the Wealth of Nations, to Max Weber's The Protestant Ethic and the Spirit of Capitalism, to Karl Marx's Das Kapital right down to recent books like Hernando de Soto's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else and Daron Acemoglu's and James A. Robinson's Why Nations Fail the search for the causes of European or western "exceptionalism"continues.

These works have either focussed on the development of institutions beginning with the ideal free market as per Smith's description or of superior cultural norms as per Weber's thesis, or of superior "modes of production" as in the case of Marx.

"Economists seek the 'causes' in a timeless theory of economic development, while economic historians find them in a dynamic process of historical change," wrote Robert C Allen. "Economic history has become particularly exciting in recent years since the scope of the fundamental question - 'why are some countries rich and others poor?'- has gone global. Fifty years ago, the question was 'why did the Industrial Revolution happen in England rather than France?' Research on China, India, and the Middle East has emphasized the inherent dynamism of the world's great civilizations, so today we must ask why economic growth took off in Europe rather than Asia or Africa."

Jack Goldstone has given a name to a group of fellow scholars who have for over a decade now tried to piece together the story behind the world economy as the California School of Economic History. He says that

Instead of seeing the rise of the West  as a long process of  gradual advances in Europe while the rest of the world stood still, they have turned this story around. They argue that societies in Asia and the Middle East were the world leaders in  economics; in science and technology; and in shipping, trade and exploration until about AD 1500. At the time Europe emerged from the Middle Ages and entered its Renaissance, these scholars contend, Europe was far behind many of the advanced societies elsewhere in the world and did not catch up with and surpass the leading Asian societies until about AD 1800. The rise of the West was thus relatively recent and sudden and rested to a large degree on the achievements of other civilisations and not merely on what happened in Europe. Indeed some of these scholars suggest that the rise of the West may have been a relatively short and perhaps temporary phenomenon.

The new institutional economic thinking regarding the "rise of the West" which comes from the work of Douglass North and Barry Weingast which look at the political foundations of capitalism have gained ascendancy in recent times. The World Bank and the World Economic Forum collect and produce data in the form of league tables which compare the legal, cultural and scientific institutions across the globe and rank countries based on how well they conform to western norms.

The augmented Washington Consensus espoused by the International Monetary Fund emphasises the role of
markets and institutions. This is based on the theoretical models of economists and the empirical, econometric "validation" of such theories. This leads to a sort of timeless theory which sceptics like William Easterly have deconstructed by highlighting the methodological flaws inherent in their methods.

This is why the findings of economic historians are all the more valid and significant. Allen states that

According to the California School, China's legal system was comparable to Europe's and property was secure, the Chineses family system kept the fertility rate low so that the population grew no more rapidly in China than in Europe, markets for commodities and for land, labour, and capital were as evolved as those in Europe. As a result, productivity and living standards were similar at both ends of Eurasia. The reason that the Industrial Revolution happened in Europe does not, therefore, lie in institutional or cultural differences but rather in the continent's accessible coal reserves and gains from globalization.

Peer Vries talks about its impact on the age old question as follows

The California School has changed the way we look at the economic history of the world, especially the pre-industrial world of Eurasia. It has rightly pointed at the enormous importance of Asia in the economy of the early modern world and at its very high level of development. It has done so in a couple of years. It is no longer possible to write a book on the rise of the West like the one David Landes wrote only ten years ago, with immense success. That alone is a major feat. One should not, however, thereby be tempted to confront it uncritically. The biggest compliment one can make colleagues in scholarship is to seriously engage with them.  

The glorious revolution

In my title, I am of course referring to the event in England in 1688 which unintentionally led to the Bill of Rights, rule of law, and Western capitalism as we know it. As background for those unfamiliar with it, there are two short clips at the end of this piece worth viewing.

The now classic essay by Douglass North and Barry Weingast investigates the institutional innovations that accompanied the resolution of this conflict and relate them to developments in public finance. Their thesis is that without such constitutional and political underpinnings, England would not have achieved global success both militarily and commercially in the following century.

They purposely side-step the religious element that is often cited. Greater importance was placed on the dispute that had been brewing since early in the 17th C between the Crown and Parliament. Many of the same issues in this dispute hound developing and transitional economies today.

At the core of this was the structuring of incentives to control the coercive powers of the state. Previously the divine right of kings was invoked to justify the arbitrary use of such powers resulting in the expropriation of property from the wealthy who were represented in Parliament. Despite objections, the king continued to wield his prerogative by forcing loan contracts on the elite and reneging on the debts.

This unpredictability meant that the Crown was unable to tap private credit markets. Following the revolution, the new monarch acceded to the rights of Parliament over such contractual obligations. As a sweetener, the confidence this engendered opened unprecedented access to capital at more affordable rates. This allowed England to achieve military superiority while maintaining fiscal liquidity and provided the conditions needed for the Industrial Revolution.

It is in keeping with this seminal work that much discussion circles today around the enforcement of property rights and the rule of law in developing and transitional economies. At the heart of the debate is the question whether Western notions of governance particularly legal institutions should be transplanted elsewhere. The differential experiences found in China and East Asia cast doubts on whether a "one size fits all" approach is appropriate.

The Philippines is an example of a developing country that went through a "peaceful revolution" to topple a dictator in 1986, but which is still mired in corruption and political instability. It has enshrined "people power" in its constitution as a vehicle for removing tyrannical rulers. The vibrant NGO and activist business community have proven since then how potent a threat this institution can be.

But the high transactions costs entailed in mobilising popular uprisings has taken its toll. As a result of experiments over the last decade, there is a growing demand for the rule of law in the form of restraint on the part of both the central government and civil society in expropriating public and private wealth from one another. Should a government be formed that addresses this demand, it might pave the way for greater investments in productive sectors, the same way that mutual checks in England between the Crown and Parliament did.

The Romanticism of Elections

As the election season officially commenced in the Philippines this week, it has become quite fashionable among prominent local commentators to romanticise the current Philippine presidential race of 2010 painting it in the epic proportions of a contest between the forces of good and evil. An example of this is a recent column by Mr Manolo Quezon, a former speechwriter for Pres Gloria Arroyo in which he traces the political genealogy of all presidential contenders to the traditions belonging to one of two leading protagonsists in the 1986 people power uprising, former presidents Ferdinand Marcos and Corazon Aquino.

It becomes apparent that Mr Quezon regards only one candidate, Benigno Aquino III, the only son of Corazon, worthy of claiming the mantle of democracy represented by his late great mother. All others it would seem belong to “the wrong side of history” as Pres Marcos had been in 1986. A win by any of these candidates would be “impermissible” from Mr Quezon’s perspective. The dark and ominous undertones of such a statement are evident. Either election officials conclude with an outcome consistent with History (with a capital H), or the forces under the Aquino banner might or should enforce their own will on the situation and produce the right outcome from their perspective.

I don't think it is accurate to paint this race using such a broad brush. It would be an oversimplification of what the candidates, Mr Aquino and everyone else, truly represent. I don't think for instance it is fair to associate any one candidate with the repressive authoritarian regime of Mr Marcos for instance. Not one of them is espousing a return to dictatorial rule, but anyone including Mr Aquino could be capable given the right circumstances of taking the country down a path of greater repression of civil liberties and weakening of property rights as the embattled rule of Mrs Arroyo so aptly demonstrated through her flirtations with emergency powers.

A more balanced approach would produce a nuanced view of the two leading contenders, Messrs Aquino and Manuel Villar, a self-made Fortune 500 tycoon with a rags-to-riches story. It would show the evolution of two previously flawed attempts at addressing the problem of underdevelopment in the Philippines which they, on the face of it, represent and hope to redeem.

One strand, implicitly espoused by Mr Villar, has sought to deal with the rent-seeking nature of a weak state by centralising rule-making with the chief executive and by so doing reduce the potential for petty corruption elsewhere. This is a situation which makes the office he would occupy prone to intensive lobbying, but by the same token, present an improvement on the current situation of chaotic decentralised plunder. With a more disciplined bureaucracy and a coherent strategy, rapid development as illustrated by the East Asian economies becomes possible.

This assumes of course that the chief executive himself is disciplined and capable of resisting intense pressure to collude with powerful interest groups. But even if he succumbs to such pressure, the founder of the Corruption Perception Index (transparency.org) Johann Lambsdorff has found that investors actually prefer grand corruption over petty corruption (!) presumably because of the greater predictability that the former affords.

The problem though with this strand is that in some cases corruption does serve a purpose in enabling productive sectors of society to overcome stifling regulatory hurdles in the pursuit of greater value and output within the economy. By centralising rule-making, the executive also centralises deal-making, which means that only a select group of associates and hangers-on can take advantage of the unique opportunities that abound under a crafty and entrepreneurial president as demonstrated by the past administrations of Messrs Marcos and Joseph Estrada (ousted and convicted for plunder but later pardoned by Mrs Arroyo and now placed third by many pollsters in the race to succeed her).

This lessens the amount of investments made by other players due to fears of expropriation by those closely linked with the administration, a point that is exemplified by a scandal involving Mr Villar’s commercial property ventures and two nearly identical road projects. One was publicly funded, thanks to Mr Villar’s intervention as the head of a powerful Senate finance committee, the other privately financed under a fee for use basis. The private venture eventually backed down due to competition from Mr Villar's free access road that conveniently wound through his commercial neighborhood projects.

The other strand promoted by Mr Aquino seeks to maintain the current system of decentralised rule-making and with it the petty corruption that prevails, but what it seeks to introduce is greater transparency and participation in the system. By all accounts, this is arguably the only legitimate means of prying the state loose from the clutches of special interest groups.

The challenge of course is achieving this goal with the meager resources that a third world nation can ill afford to waste given the multitude of development programs it needs to fund. If even the well resourced governments of advanced economies find it troublesome if not costly to enforce such institutions. (An eminent economist in the field, Douglas North, puts the price tag at 35-40% of GDP. What hope is there then for a cash-strapped government that can only raise a mere 14-7% at best?)

Ironically, pursuing “good government” through a costly enforcement system might in the long-run lead to greater corruption. This is a view endorsed by some leading institutional economists. And in the Philippines, it could be argued, the confiscation and sale of assets acquired illegitimately by public officials that begun under Mrs Aquino has itself become a source of corruption.

So in the end what we are left with are permutations of previously failed or flawed experiments espoused by members of the ruling elite in the hope of vindicating the competing hypotheses adopted by their predecessors in addressing the underdevelopment problem of the country. It is not that one candidate is on the right side of history and the other is not. What each party is seeking at this point is a way to carve out a place in history that would suit their own personal narratives.