Institutional Reforms Built the British Empire

Nicola Gadler/Calton Hill, Edinburgh

In 1300, few English institutions actively promoted economic growth. The vast majority of the rural population was composed of unfree peasants bonded either to feudal lords or plots of land. Urban artisans were organized in guilds that regulated who could enter trades like glassblowing, leatherwork, and blacksmithing.

The English state was in turmoil following a century of conflict between Parliament and the Crown, and though nominally strong, it was deficient in fiscal capacity and infrastructural power. The regime lacked both the will and the means to pursue national development aims: integrating domestic markets, acquiring foreign export zones, securing private property, and encouraging innovation, entrepreneurship, and investment. England resembled what has been called a “natural state,” in which violence between factions determined the character of governance. Institutions pushed the meager spoils of an impoverished land into the pockets of rentiers. 

By 1800, all this had changed. Britain’s rural life was characterized by agrarian capitalism, in which tenant farmers rented land from landowners and employed free wage labor, incentivizing investment and experimentation with new crops and methods. The preceding two centuries had seen the waning of the guilds, which now served more as organizations for social networking. Elites that had mostly earned their income by collecting taxes were now engaging in commercial enterprises themselves.

The state was now better-financed than any before in history, thanks to an effective tax administration and the ability to contract a mountain of public debt at modest interest rates. This allowed Britain to fund the world’s strongest navy to defend its interests from New York to Calcutta. The British government also intervened frequently in economic life, from enclosure acts to estate bills, and had limited its absolutist and rentier tendencies through the establishment of a strong parliament and professional bureaucracy. 

Mark Koyama called the five centuries of institutional evolution the “long transition from a natural state to a liberal economic order.” The state capacity Britain built up during this early modern period went side by side with its emergence as a major commercial power and, within a few years, the first nation to endogenously achieve modern economic growth. Twenty-first-century economists increasingly deem institutions an “ultimate cause” of industrial development. The differences between North and South Korea, for example, are not the result of geographical disparities or long-standing cultural cleavages on either side of the 38th parallel. While it’s not exactly clear which kinds of institutions cause growth, it’s pretty obvious that some sorts inhibit it, if not stifle it altogether. The story of Britain’s rise to global power, then, is also the story of a 500-year-long transformation that saw institutional changes to law, property ownership, the organization of labor, and eventually the makeup of the British elite itself.

The Origins of Parliament

In his 1982 book The Rise and Decline of Nations, Mancur Olson argued that societies are engulfed in a perpetual struggle between producers and rent-seekers. The former invent and start businesses, increasing the national income; the latter try to profit off of the producers’ hard work by lobbying for special privileges like monopolies and tax farms. In contrast to Douglass North, who emphasized the importance of secure property rights for economic growth, Olson distinguished between good and bad forms. Bad property rights entitled a specific group to subsidies or protections that imposed costs on consumers and inhibited growth—like, say, a local monopoly on woolen cloth weaving allowing a guild to suppress machinery in favor of labor-intensive hand labor, lowering productivity and output. 

Backed by its elite commercial and landed classes, the English and eventually British state came to favor the removal of the barriers to growth that had plagued most pre-modern economies. “Peace and easy taxes,” contra Smith, isn’t a sufficient condition for endogenous development, but its inverse—domestic chaos and rent-seeking—may be sufficient for its absence. But Britain’s real achievement was that its elite class, over time, began to align themselves with market liberalization. In France, by contrast, the nobility and king were constantly at odds, and the monarchy actually supported strong peasant tenures in opposition to large landowners. The pre-1914 Russian Empire would do the same thing. 

Applying Olson’s framework to the seventeenth century, what we see is a decline of “rent-seeking distributional coalitions” like guilds, which helps to explain England’s “invention” of modern economic growth. “The success of the British experiment,” write the economists Joel Mokyr and John Nye, 

was the result of the emergence of a progressive oligarchic regime that divided the surpluses generated by the new economy between the large landholders and the newly rising businessmen, and that tied both groups to a centralized government structure that promoted uniform rules and regulations at the expense of inefficient relics of an economic ancient regime.

Mokyr and Nye theorize that the state’s demand for revenues led it to strike a bargain with mercantile elites: if you pay taxes, you can use our ships and guns. This was the basis of a grand alliance between “Big Land” and “Big Commerce” who used the government as a broom to sweep away local interests. It manifested in projects like the Virginia Company, whose investors involved both the nobility and mercantile venture capitalists.

Parliament was the instrument for fulfilling the pact, issuing a raft of legislation altering local property rights to open up markets throughout the 1700s. Estate acts, for example, allowed landowners to improve, sell, and lease their plots. Statutory authorities permitted private organizations to set up turnpikes and canals, helping to unify the English market. This allowed firms to increase production, exploit economies of scale, and compete with local artisans. Enclosure acts, meanwhile, provided for the transformation of open-field farming communities, in which decisions were made at the village level, into fully private property. 

The origins of this process, however, are deeper than Mokyr and Nye suggest. The development of a national state began soon after the Norman invasion of 1066. William the Conqueror replaced the Anglo-Saxon aristocracy with a Norman one, redistributing the country’s lands to his soldiers and generating a mostly uniform feudal society. The result was a precociously unified and homogenous polity—as opposed to France, which grew by absorbing linguistically distinct territories. English kings who were seeking to fund domestic or military projects called councils with individuals, usually the great barons of the nobility, whose cooperation and money they needed. With the waxing of the late medieval “commercial revolution,” they eventually included representatives of the ports, merchants, and Jewish financiers. Kings would make “contracts” with these factions—often customary restrictions on arbitrary taxation or the granting of other privileges—in exchange for resources. These councils later became Parliament. 

A turning point for the future parliament came in 1215, military failures and civil war weakened the rule of King John. Taking advantage of his weak position, his barons pressed him into accepting the Magna Carta, limiting his ability to govern arbitrarily. While the document itself shouldn’t be treated anachronistically as a constitution, it did provide a basis for personal freedoms, universal access and subjection to a common law, and an eventually centralized legal system organized by royal courts. This was the first “Olsonian crisis” of the English state—a moment when the temporary weakness and disorganization of vested interests grants outside parties a window of opportunity in which they can set up a new institutional system.

While other countries like Italy, Spain, or Hungary made similar—sometimes even more binding—treaties at about the same time, continuous reissuances and adaptations went on in England for the rest of the century. This made the Magna Carta the ideological basis for a new body of government. The 1258 Provisions of Oxford, issued by the rebellious Baron Simon de Montfort, provided for a regular national assembly. Representatives of the towns and shires would begin to meet in 1265. The famous “Model Parliament” was convened by Edward I in 1295, under the maxim quod omnes tangit, ab omnibus tractari et approbari debet—“What touches all should be considered and approved by all.”

Parliament met 151 times in the fourteenth century, averaging 42 days per year. In 1311, it gained the prerogative over declarations of war, and then the power to grant customs revenues in 1362. Parliament and the monarchy were thus complementary from an early stage: kings got access to extraordinary revenues by closely coordinating such taxes with a legislature that met frequently, while the aristocracy gained a forum for resolving conflicts that might otherwise have resulted in war. 

Many historians, notably Douglass North and Barry Weingast, have focused on the Glorious Revolution as a “trend break” moment in which “Parliamentary supremacy” ensured limited government and the protection of property rights. But there is abundant evidence that property rights had been secure since the eleventh century, safeguarded by an independent judiciary and the common law. While Parliament’s victories over the Stuarts in the Civil War and the Glorious Revolution undoubtedly advanced its relative status, the period was more of a recidivist phase in which monarchs had gained power at the expense of an already-strong legislature than the beginning of a completely new era. Monarchs already had to ask Parliament for money, even at their most absolutist.

The Baron’s Rebellion set the foundations for a parliamentary system that would later be able to enforce changes like the enclosure acts. But one hundred years after the signature of the Magna Carta, a second, more serious Olsonian crisis would permanently upend England’s political economy.

Serfdom Abolished; Enclosure Instead 

Prior to the Black Death, most Englishmen were rural, and most rural Englishmen were serfs. A serf was a holder of “unfree” land, which meant in practice that all nearly legal issues relating to his person and property were referred to the manorial court, run by the lord who actually owned his plot. “In theory,” writes historian Mark Bailey, “serfs could be bought and sold; they could be subject to detention or corporal punishment for misdemeanours; their goods and chattels were deemed to belong to their lord; and they could be compulsorily settled on villein land.” 

In 1300, only half of English peasant land was freehold, meaning that the owner could dispose of it as he pleased; the rest was held in villein tenure. The tenant of such a tenure got to keep his produce with the exception of payments to the Church and to his lord, the latter usually partly in labor services and partly in money. That said, truly arbitrary exactions by feudal lords were rare. A maze of customary restrictions prevented landowners from seizing property without good reason.

Nevertheless, serfdom and villein tenure were both highly inefficient. Bondage hamstrung labor markets, preventing peasants from choosing their most productive location; labor dues forced them into unproductive work on the lord’s demesne—his personal landand the obligation to occupy a certain plot blocked the agglomeration of holdings, and disincentivized investment and innovation.

This changed with the demographic upheaval caused by the Black death. The death of nearly half the country’s available farm labor gave peasants the opportunity to abscond. Faced with the choice between idle farms and ceding privileges, embattled landlords chose the latter. Feudal dues were first reduced and then removed altogether, as were most labor services by the end of the fourteenth century. Attempts by landlords to replicate the “seigneurial reaction” of Eastern Europe ended in failure.

By the early sixteenth century, nearly all villein tenancies had been converted into copyholds or leaseholds, giving the English commoner property rights over the land he lived on. Copyhold tenure, named after the copy of the term sheet stored at the manor, documented the tenant’s occupation of the property and could take three forms. 

The first, of inheritance, allowed the tenant to pass on his holdings to his heirs; the second allowed a tenant to maintain his plot for a set period measured in years or lives until it reverted to the landlord. The last was tenant right, under which the tenant had inheritance rights but had to pay the landlord when the land itself changed hands. All these leaseholds temporarily granted the tenant full property rights subject to a fixed annual rent. 

Leaseholds and copyholds were more like contractual tenures because the peasant wasn’t required to occupy or work the plot at all. But varying feudal customs continued to clog up rural land and labor markets. The terms of the lease reflected the balance of power between the seigneur and villein; where lords were stronger, leaseholds for life were more common because they allowed the owner to set rents and entry fines to reflect market conditions; where peasants were stronger, they pushed for copyholds of inheritance with permanently fixed rents, whose value tended to be eroded over time by inflation. 

While copyholds of inheritance were beneficial to the tenant, they were economically inefficient. The inability to liquidate the property when faced with attractive outside options led to underinvestment—a tenant wouldn’t want to spend on improvements if he’d just lose it all if he left. Tenants would also end up staying on plots that they weren’t suited to cultivate, while landlords struggled to buy them out and agglomerate holdings. Heritable copyholds were eroded gradually over time. 

One final problem in landed property was that of communal ownership. Over half of medieval England’s farmland was organized in open fields and commons; this entailed a rigid division between arable and pasture and the scattering of farmers’ plots in scattered strips around a village. These strips were grouped into larger fields that were then cultivated in a three-field crop rotation, alternating wheat and rye with barley, or oats, or beans before lying fallow. The village’s livestock were pastured on a common field. The community constrained a farmer’s ability to choose his crops and tools, since he had to conform to the broader crop rotation cycle, and stifled the agglomeration of holdings.

Economic historians have fiercely debated whether enclosures, which assigned farmers contiguous plots and divided up the commons, actually led to productivity growth in agriculture. Robert Allen famously argued against the traditional view that enclosure brought significant productivity gains. However, recent research finds that he over-generalized from his Midland sample and that substantial yield gains resulted. There is any number of plausible mechanisms here: scale economies benefited from increased farm size, or there were reduced transaction costs for adopting new arable farming techniques. For example, with the new Norfolk crop rotation, cattle were allowed to graze on clover grown on what would’ve been fallow land, fertilizing what otherwise would have been inactive soil.

Historians have highlighted changes in agrarian institutions—the fall of serfdom, the spread of leasehold and terminable copyhold, and the enclosure movement—as driving forces behind the rise of agrarian capitalism in Britain. Under this post-feudal system, large farms employed wage laborers. Many of these workers were once small-time “cottager” farmers, whose land plots had been absorbed by larger enterprises. This system was distinctively British, in contrast to the parcellized peasant properties of France’s Paris Basin, and contributed to the agricultural revolution that made British farmers Europe’s most productive by 1800.

Abolishing Guilds Enabled Industrialization

Guilds were a ubiquitous feature of European cities during the “commercial revolution” of the late Middle Ages. There were two kinds: occupational and mercantile. Both were ways that existing artisans and traders could regulate their practice to limit entry by newcomers, collect fees, train apprentices, and bargain with political potentates. While many economists have argued that the guilds were an efficient form of economic organization, upholding quality standards, transmitting human capital, and fostering innovation, recent research has upheld the traditional line—based on empirical evidence—that the guilds distorted labor markets and inhibited growth. 

Standards for the quality of goods could, theoretically, have served as a valuable way to ensure predictability in quality and price. But in reality, guild fines were too small to uphold quality standards, which in turn proved hard to enforce. The sheer frequency of violations serves as proof that enforcement wasn’t working. That’s not too surprising because excluding the tiny fines, penalties often consisted of apologies and promises to do better. In the early seventeenth century, fully 30 percent of the London Apothecaries’ and Stationers’ Companies were guilty of breaking ordinances.

The guild structure also created artificial constraints to innovation. The immense fees that guilds charged to take on apprentices limited the spread of training, capping the number of people with experience in a particular trade. Those who made it in faced quality standards that locked in the production process, preventing innovations that could lower the price of production. Price floors, in turn, prevented those who managed to improve their techniques from outselling competitors and benefiting from their innovations. Barriers to entry kept out entrepreneurs that might have brought in knowledge from other trades or fields. The typical guild-approved tradesman had to enter from the bottom and adapt to doing things as they had always been done.

But by the early modern period, the guilds started to weaken. The decline began earliest in Northwest Europe, particularly in England and the Netherlands, where industry migrated out of cities and into the countryside. These proto-industrial formations and rural artisans could then compete with the guilds, attenuating their hold on the towns themselves. In England, only a quarter of the guilds in existence in 1500 remained a century later. 

The state played an important role in this precipitous decline. During the Reformation of the 1530s and 1540s, the Crown dissolved all religious guilds and confiscated the religious property of occupational guilds. It was also increasingly reluctant to grant state charters to organizations outside London, leaving provincial guilds reliant on the circumscribed authority of borough authorities, whose authority was in turn reliant on Westminster. In 1584, for example, the guilds of York lobbied for the right to inspect and control a guild-free zone under Church control, but the town’s MPs failed to convince Parliament. Improved transportation and widespread urbanization promoted competition between urban areas, undermining local monopolies. And a grudgingly pro-market elite pressured the judiciary to reject guild restrictions or let them expire. Judges in London decided in 1598 that a rule imposed by the merchant-tailors’ guild requiring members to get half their cloth dressed by a fellow member was monopolistic, and thus illegal. In 1620, the Privy Council—the king’s advisory court—declared that guilds in provincial towns were “generally injurious” and stopped granting incorporations. 

At this point, even London’s guilds were struggling to control occupational choice, monitor their members, and suppress non-guild production in exurban enclaves. They lost their status as hierarchical structures governing labor market operation and gradually became semi-formal business networks. Assembly attendance in London’s cooper’s guild dropped from 83 percent in the 1560s to just 13.5 percent in the 1590s. Apprenticeship proved to be separable from formal organization, and offered a more flexible form of training than was available in exclusive continental European guilds. One study found that only half of a sample of 850 London merchants bothered to get municipal citizenship, a precondition for membership, and just 38 percent actually joined a company. Outside London, there was a strong inverse correlation between urban dynamism and residual guild strength. New industrial towns like Birmingham, Leeds, Sheffield, and Manchester had no guilds at all, while the old “corporate boroughs” where guilds remained—though they were eroded by 1650—lagged behind. 

Britain was truly exceptional in this regard. In Germany, France, and Spain, for example, guilds continued to successfully lobby governments for the suppression of rural artisans and to form new companies. Spain and Portugal even established the “consultados” in their overseas possessions, which survived until the nineteenth century. The enclaves where guilds hadn’t yet managed to form were islands in a stagnant sea; 85 percent of Normandy’s cotton textiles and all of its woolen, stocking, metallurgical, paper, glass, chemical, and ceramics industries were located in small, non-guild enclaves. Leiden, a leading Dutch textile region, was exceptional both for banning its guilds and for its product and process innovations during the Golden Age. English textile machinery entered Germany via the Rhineland and Saxony, where the guilds lacked the power to enforce restrictions. 

Evidence for the retarding influence of the guilds and serfdom has suggested that Napoleon’s invasion of Germany is a natural example of how radical Enlightenment reforms altered regional economic growth. Parts of the Rhineland still practiced grundherrschaft, a serfdom-lite regime that limited freedom of movement. Guilds were ubiquitous, and their effects on technological change could be severe; the guilds of Cologne and Aachen, for example, banded together to block the adoption of spinning and weaving machines. The invading Napoleonic armies abolished the guilds, suppressed both the remnants of feudalism and aristocratic privilege, and established a civil legal code. Occupied areas ended up experiencing more urbanization during the latter half of the nineteenth century. 

It took the sweeping Napoleonic reforms to promote institutional convergence and bring continental markets up to the standard set nearly two centuries earlier in Britain. Convergence in economic growth was swift, though Britain’s first-mover advantage remained. 

England’s precociously flexible factor markets were underwritten by its powerful and centralized state. The Crown played a pivotal role in the rise of agrarian capitalism and the decline of the guilds, but was just part of a broad, long-term trend toward a unified political economy that increasingly sacrificed local particularist interests to national aims.

Nationalized Rent-Seeking Removed Barriers to Growth 

Britain’s precocious—if slow—institutional development depended upon the cooptation of urban and rural elites into a relatively pro-commercial program. This evolution received external impetus from the financial pressures of war and the political-economic consequences of foreign trade; the former forced the Crown to build a fiscal-military state around a revenue-granting Parliament, while the latter shifted the balance of power in favor of more commerce-friendly elites. The new consensus encouraged economic development by giving the British state the authority to remove property rights that only benefited rent-seekers. 

Britain successfully brought many rent-seekers into the national development project by transitioning from a patchwork of local privileges to a national—though still somewhat protectionist—system that allowed for domestic competition. This made critical changes like the abolition of serfdom, the waning of feudal tenure, and the suppression of the guilds easier to push through. Britain’s nobility was hardly mercantile or entrepreneurial; nevertheless, they found opportunities to profit from the progressive commercialization of British society. This weakened support for preserving barriers to growth. 

By the late sixteenth century, the English elite was acquiring commercial interests under the impetus of the Atlantic economy. The Dissolution of the Monasteries during the 1530s allowed the gentry—a class of marginally more entrepreneurial farmers—to buy up old Church land. Since land was the key to status and many of the gentry came from mercantile or professional backgrounds, the Dissolution infused new commercial blood into the elite. MPs were increasingly likely to be selected as representatives if they were merchants involved in trade with Africa and the Americas rather than “old guard” European traders, especially in boroughs exposed to foreign commerce.

Whereas the trades with Europe and the Levant had been monopolized by established companies like the Merchant Adventurers, which regulated the status of its members and took aristocratic funding, the risky western traders drew on a “middling sort” of lesser gentry, yeomen, and commercial families with a more entrepreneurial vision. These men generally supported freer trade and thus opposed the restrictive Crown monopolies bestowed on the older eastern traders, especially the East India Company’s. 

The early modern evolution of the English elite assisted in the “nationalization” of rent-seeking. Practically speaking, this meant the replacement of particular monopolies with national policies of industrial and agricultural protection. Landed and mercantile capitalists were deriving greater gains from the commercialization of English society. Indeed, landowners benefited from rising land values during the eighteenth century and shouldered little of the growing tax burden, which fell on the middle-class consumers of traded goods through customs and the excise. The Corn Laws paid a handsome bounty to grain exporters until 1815. 

That being said, Great Britain was hardly a developmental state at the end of the Napoleonic Wars. Rent-seeking at the national level could still be economically damaging, and most British aristocrats couldn’t have been mistaken for entrepreneurs in a smudged mirror. But by the late eighteenth century, many of the institutional barriers that could have halted growth entirely had been removed by an elite that stood to gain from domestic commercialization and foreign trade. This combination of secure property rights—to use and transfer—with a strong national state willing and able to remove blockages was something unique in European political history. Its advantages here enabled it to create the largest empire in history.

Davis Kedrosky is a student at the University of California, Berkeley and the author of the Great Transformations newsletter. You can follow him on Twitter at @dkedrosky.