Liberty Matters

Ethics Founds Institutions

These are all my dear friends, and so I am not going to adopt the convention of referring to them as Professors X and Y.  They are Don, Joel, and John to me, close allies in most of our scientific projects, and in many of our personal ones, too.  When my replies to them are sharp, it is because we can all rely here on mutual love and respect regardless of our minor disagreements.  Only a seminar based on love can flourish, because it can get down to the disagreements frankly and quickly, improving everyone’s evidence and logic in the end—a point I have been trying to get across to my colleagues for decades.
I entirely agree with Joel (I say) that “Without the ideas of Enlightenment philosophers, the growth-enhancing institutions established in the young American Republic [for example] are unthinkable.”  I say so at length in the third and final volume of the trilogy The Bourgeois Era, Bourgeois Equality: How Betterment Became Ethical, 1600-1948, and Then Suspect (forthcoming 2015).  Joel and Jack Goldstone and Peg Jacob and a few others—maybe John Nye in some moods—constitute a tiny group of economic historians (we joyfully welcome Don Boudreaux to the group) who believe that ideas mattered greatly.  Joel, for example, has emphasized that the idea of scientific progress for practical fruit promulgated by (the hideously corrupt) Francis Bacon inspirited Western scientists for centuries.  If we are correct in our ideational idea, economics and history will need to be rewritten, massively, to acknowledge the role of ideology in human affairs.  Language will come to be seen as decisive, not as mere cheap talk derivable from interest in the style of Friedrich Engels or George Stigler.  Creativity will undermine the routine predictabilities of Samuelsonian and Marxist economics. 
But even for the young American republic, to recur to Joel’s opening claim here,  it was not the “institutions” that mattered, but an ethic of republican duty among Federalists and an ethic of popular sovereignty among Democrats.  The ethics were themselves fruits of the ideas of the Enlightenment—especially, I would emphasize, the Scottish one.  It is through the (Scottish) Enlightenment, out of Dutch-English Locke, that the Founding Brothers came to believe, as Adam Smith put it, in “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice” (Wealth of Nation, 1776, Bk. IV, Chp. ix, p. 664).  Believing it, and willing to pledge their lives, fortunes, and sacred honor in aid of the project, little hung on whether Congress was unicameral or the Senate elected by direct vote.
I am disappointed, therefore, that one of my little group of colleagues in the ideational view wants to defend the World Bank orthodoxy about institutions, derived from Doug North (whom we all love, but with whom some of us disagree).  I devote four chapters in Bourgeois Dignity to criticism of the Northian orthodoxy, going far beyond the potted summary of the criticism that Joel gives in two sentences.  Joel wants the argument to be simple, wham, bam.  But it’s not.  The deep and illiberal errors in the neo-institutional approach are not summarizable in one simple point about the history of English law.  More broadly, as I argue at length in the book, institutions are reducible to ethical commitments, themselves not to be seen as “constraints” (as the Samuelsonian is required always to say) but as a human dance of meaning.  “O body swayed to music, O brightening glance,/ How can we know the dancer from the dance?”[26]
Observe while we’re at it, though, that Joel does not reply to the historical point in question, namely, that property rights were very good in England many centuries before the Industrial Revolution or the Great Enrichment, a point that Boudreaux emphasizes.  Nor does Joel drop the other historical shoe, namely, that that property rights were good in a great many societies—for example in technologically advanced China.  But about North and Acemoglu and Greif there are 20 or so shoes to be dropped.
The Northians regularly save their hypothesis by extending it at the level of abstract definition to All Human Action.  That’s the burden of Joel’s opening complaint that I am speaking as though “formal institutions” were what was at issue.  Thus the North/Acemoglu theory says that All Human Action is influenced, some, by All Human Action.  Startling.
But having raised their theory to the level of a tautology (similar to tautological definitions in Samuelsonian economics of “rationality” or in Marxist economics of “class interest”), when push comes to shove the neo-institutionalists descend quickly to what Joel immediately describes as “a huge matrix of incentives.”  We are back to North’s original definition of “the rules of the game,” and Samuelsonian “incentives.”  Neo-institutionalism is Samuelsonian economics in historical drag.
Let’s test it.  Joel proposes English apprenticeship as an institution crucial for the Industrial Revolution.  But wait.  Apprenticeship was Europe-wide—not universal, but lively in Italy, say, and extremely lively in Germany.  Joel writes, following his student Avner Greif down this blind alley, “In the small artisanal communities of England’s provincial towns people knew one another.”  As long as we are being cute and snappy in reply to complicated scientific arguments, I say: And they didn’t in Germany?
I agree that English (not Scottish?) mechanics after their apprenticeships (really?  Formal apprenticeships, and not mere experience on the factory floor?) were famously competent, something that Peg Jacob, Jane Humphries, and Joel have made us aware of.  But isn’t this a result, not a cause?  The English apprentices were not judged especially competent at machines in the 17th century, not at all.  It was Dutch engineers in those days, and in theorizing, the French and even the Germans.  Wasn’t the flourishing of mechanical invention the cause, not the consequence of men skilled out of their apprenticeships?  One could hardly have new machines for making, say, screws in great numbers without some man like Henry Maudslay (1771-1831) already educated in making machines.  But where did such an elite of mechanics come from?  In Holland and Britain and the United States it came from ordinary people—that being the only way to achieve a sufficient mass of technically literate folk, oriented not towards the production of rare luxuries or military victories but the production of ordinary goods for ordinary people.  The problem in, say, France (as Jacob has argued persuasively in her latest book) was that the engineers came from the younger sons of its large nobility, such as Napoleon, educated for military careers (Jacob 2014).[27]  In Britain by contrast a promising working-class lad would become a bourgeois master of new machines and new institutions.  The bourgeois career in Britain, like Napoleon’s army or Nelson’s navy, was open to talent.  Maudslay, two years younger than Napoleon and 13 younger than Nelson, began work at 12 years old filling cartridges at the Royal Arsenal, becoming then a blacksmith, and by age 18 a locksmith, and more.  Joel is taking as given a structure that in fact had a vibrant modern history, driven by the new and bizarre ethic of human equality of liberty and dignity, in law and in esteem.  The new equality let the ordinary, and the extraordinary, have a go.  (The “having a go” is a British idiom, used in this application by the economic historian Peter Mathias.)  The having-a-go then produced in the Great Enrichment of the 19 century a veritable idea-explosion—an explosion of ideas for example about nitroglycerine, dynamite, gelignite, TNT, and C-4. 
The “spontaneous, self-enforcing contracts” that Joel speaks of as crucial for the institution of apprenticeship depend on ethics.  The point is that the ethics goes far beyond the Prudence-Only view retailed by Joel in Samuelsonian style: “Opportunistic or immoral behavior toward one’s apprentices would be punished, not only by drying up the supply of would-be youngsters, but through a bad reputation that could spill over to creditors, customers, suppliers, and so on.”  Yes, true.  But these are humans we are construing, not rats or pigeons, and humans care about their ethical standing.  It is built into us by evolution, in contrast to other great apes.  To stop at incentives, as the Northians do, reminds me of the courses on business ethics that say, “Be good because it is profitable.”  That’s not ethics, and it’s not human, and it’s far short of what institutions depend on.
The ethical foundations on which Joel’s “institutions” rely are well illustrated by his own example of corruption.  On being corrupt I am fond of pointing out that my city, Chicago, was appallingly so when in the late 19th century it was the fastest growing city in the world.  It still in 2014 beats Des Moines and Minneapolis hands down.  Joel surrenders without realizing it to the ethical case when he notes that “If the ruling ideology is that corruption is morally unacceptable and if people who believe so know that this belief is widely shared, there will be little corruption (think: the Netherlands).”  (At any rate the Netherlands in 2014.  I am not so sure that the Netherlands in the Golden Age was so very free of corruption in building contracts.)  Referring to the Sherlock Holmes story, Joel remarks, “Corruption is the institutional dog that did not bark.”  No it isn’t.  The dog is ethical, and as he himself affirms, it did bark, against the Old Corruption.
It won’t suffice, in other words, as the World Bank nowadays recommends, to add institutions and stir.  You can set up British-like courts of law, and even provide the barristers with wigs, but if the judges are venal and the barrister have no professional pride and if the public disdains them, the introduction of such an institution will fail to improve the rule of law. 
Acemoglu and Robinson report on an attempt to curb absenteeism among nurses in India by introducing the institution of time clocks.[28]  The economists in charge of the experiment were sure that the bare incentives of the “right institutions” would work.  They didn’t.  The Indian nurses conspired with their bosses to continue not showing up for work.  Acemoglu and Robinson draw the moral that “the institutional structure that creates market failures” is what went wrong (Acemoglu and Robinson 2012, p. 450).  But the continuing absenteeism was not about “institutions” or incentives.  These had been confidently applied by the economists relying on the World Bank orthodoxy, yet had miserably failed.  The failure was rather about a lack of an ethic of professionalism among the nurses, of a sort that, say, Filipino nurses do have, which is why they are in demand worldwide. 
Acemoglu and Robinson do not see that what failed was the new theory of the economics profession of add-institutions-and-stir.  “The root cause of the problem,” they conclude, was “extractive institutions.”  On the contrary, the root was ethical failure, in the presence of which no set of incentives will work well, and under which extractions will persist.  The institutions—the time clocks and management practices— and the “incentives” they are said to provide, as though to rats in a maze—were not the problem.  Defects in ethics and in the Impartial Spectator and in the professionalism of the nurses were. 
The crux of the Industrial Revolution and the Great Enrichment is ideological change bringing a new Impartial Spectator into the habits of heart.  Institutions are mere frosting if they lack the cake of ethical custom, from the bus driver taking professional responsibility for the plans and the lives of the 60 people under his care, to the politician resisting the well-placed bribe from a highway construction firm.  New egalitarian ideas, in which bus drivers and politicians, professors and housewives, felt themselves in northwestern Europe empowered to be equally responsible, broke the old cake of custom.  Surprisingly, treating people as free and honorable made us all immensely wealthy.  We already had the institutions.
[26.] W.B. Yeats, "Among School Children" (from The Tower, 1928).
[27.] Jacob, Margaret S.  2014.  The First Knowledge Economy: Human Capital and the European Economy, 1750-1850.  New York: Cambridge University Press.
[28.] Acemoglu, Daron and James Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty.New York: Crown Business.