Credible Commitments: A Key to Economic Progress
Published July 21, 2021
England’s Glorious Revolution of 1688 underscores the need for an independent judiciary, an open market, and institutions that protect private property rights. England underwent an economic revolution when changes to the rules governing the behavior of the sovereign meant the government could no longer take private property without consequences. Yet even in modern times, not all nations have learned the lesson. To innovate and flourish, a credible commitment to protect property rights is required, and that requires institutions to check those in power.
- What caused the Glorious Revolution?
- How can nations create checks and balances that restrain the state’s power?
- Read “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” by Douglass C. North and Barry R. Weingast. Available here.
- Read “Constitutional Stability and the Deferential Court” by Sonial Mittal and Barry R. Weingast. Available here.
- Read “Legal Order: Lessons from Ancient Athens,” by Federica Carugati, Gillian K. Hadfield, and Barry R. Weingast. Available here.
People are more likely to work hard, save, and invest in the future when they have confidence they'll get to keep what they produce.
But for most of history, there was little reason for them to believe their property was secure.
Kings would establish property rights, but would quickly change their minds due to war, financial crises, or just a change of heart.
Seventeenth-century England was no exception. The Stuart Kings had immense power. They granted monopolies, forced their citizens to lend them money, and sometimes simply seized their property.
The English people would occasionally fight back. Parliament would refuse to grant additional revenue to the king. Judges would rule against the crown. Parliament even fought a Civil War with the King, ending with him being deposed and beheaded.
But only with the Glorious Revolution of 1688 were the crown’s powers permanently limited. The English replaced the last Stuart King, James II, with his Daughter Mary and his Dutch son-in-law, William of Orange. In exchange for extending the crown to William and Mary, Parliament demanded new rules and institutions. The crown could no longer disband Parliament, fire judges that ruled against it, or dispense with laws.
Dividing power between the crown and parliament made it harder for either side to violate the rights of the people. And an independent judiciary gave individuals the ability to defend themselves against unjust government actions.
For the first time in English history, the government could credibly commit to protecting property rights.
An economic revolution followed. Capital markets exploded. Reflecting the new institutions’ ability to make credible commitments, government borrowing leaped from five percent of estimated GDP to forty percent.
Private banks began to loan money, while the English increased their investments in businesses. The result was that eighteenth-century England prospered, while England’s rival France stagnated under the arbitrary rule of its kings.
Since the Glorious Revolution, other nations have adopted similar institutions. The US Constitution created checks and balances to prevent the concentration of power. It established an independent judiciary that could throw out unjust laws, and it prohibited certain actions by the government in the Bill of Rights.
But far too many nations still haven’t discovered the lesson of the Glorious Revolution. Their rulers are unconstrained by the rule of law, so people have few incentives to invest and innovate.
A credible commitment to protect the rights of the people is needed, and that requires institutions that permanently restrain those in power.