Patrick O'Brien- Britain's Exceptional Fiscal State 2011

The nature and historical evolution of an exceptional fiscal state and its possible significance for the precocious commercialization and industrialization of the British economy from Cromwell to Nelson.Full Text Available By: O'BRIEN, PATRICK. Economic History Review, May2011, Vol. 64 Issue 2, p408-446, 39p, 3 Graphs; Historical Period: ca 1648 to ca 1815; DOI: 10.1111/j.1468-0289.2010.00538.x The nature and historical evolution of an exceptional fiscal state and its possible significance for the precocious commercialization and industrialization of the British economy from Cromwell to Nelson By PATRICK O’BRIEN Institutions that promoted or restrained early modern economic growth were estab- lished, sustained, and often destroyed by states.Yet their economic history lacks either a fundamental theory or grounded narrative for state formation in the east or the west.This survey of a library of recent research in the conjoined histories of national taxation and finance deploys a stage theory and reciprocal comparisons to explain when, how, and why England’s political elites constructed a fiscal constitution for an island state that provided the external security, internal order, and successful mer- cantilism to carry the economy to a plateau of possibilities for a precocious industrial revolution.ehr_538 408..446 ‘Revenue is the principal preoccupation of the State. Nay more it is the State’. Edmund Burke1 Modern and efficient states can be represented as sovereign authorities gov-erning successful economies that provide high, stable, and rising standards of welfare for their citizens. Such states emerged slowly and painfully over centu- ries of geopolitical rivalry and internal conflict across countries and among aris- tocracies which were competing for the status of hereditary monarchies until they came to rest upon firmer and more broadly based social, fiscal, and political foundations.2 Over a period in European history that unfolded for roughly three centuries after 1453 (when England’s armies were finally expelled from all sus- tained imperialist ventures on the mainland) no state recognized responsibility for economic growth with social welfare as anything other than matters of fiscal and political prudence.3 Their overwhelming concerns were with their own stability and formation in contexts of external threats to security, and rivalries for control over resources with warlords, aristocratic magnates, provincial and urban oligar- chies, organized religions, and other serious contenders for authority within their own vulnerable borders.4 Power prevailed over profit by large margins in the 1 Cited in Dietz, English government finance, p. 37. 2 Spruyt, Sovereign state. 3 Harriss, Shaping the nation. 4 Blockmans, History of power. Economic History Review, 64, 2 (2011), pp. 408–446 © Economic History Society 2010. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. priorities of all premodern states. The overriding objectives of emperors, popes, tsars, monarchs, princes, dukes, oligarchies, and ruling elites everywhere included: dynastic and regime survival, territorial security with colonization overland or overseas, the monopolization of internal coercion, and the integration of diverse regional, ethnic, and religious populations into polities in order to transform them into societies of compliant subjects obedient to laws promulgated, adjudicated, and enforced by a single sovereign source of hereditary authority.5 Over the centuries before 1815 which marked the beginnings of a liberal international economic order, a majority of the dynasties, elites, and oligarchies that appear more or less briefly in Europe’s historical records as recognized rulers over many now forgotten-quasi autonomous political units failed to achieve the security, stability, and sovereignty required to construct viable states. History reveals that hundreds of territories and societies of varying shapes, sizes, locations, populations, and constitutional forms were conquered and absorbed into rival empires, dominions, realms, princedoms, duchies, and republics.6 Agglomeration also altered the political map of Europe and occurred by way of prudential political agreements (cemented by marriages) among ruling houses. Incorporation as the outcome of violent conflict was more common and victorious states are recorded as those that mobilized armed forces more effectively for violent takeovers. Unfor- tunately economic theories that might help to explain the process of mergers into larger polities are ontologically irrelevant for this purpose.7 From case to case mergers could be more heuristically ascribed to such fortuitous factors as better commanders, braver soldiers, more astute diplomacy, and patriotic populations. Most economic historians looking at the long process of state formation are inclined, however, to minimize differences in ideological, diplomatic, military, or naval capabilities. Instead, they emphasize such structural capacities as: natural resources, larger populations, more extensive and productive domestic and colo- nized economies, homogeneous or compliant societies, and finally (to reach the theme explored by this survey and speculation) access by states to the very ‘sinews of power’. Attracted by possibilities for quantification, many of our tribe have honed in upon money, or upon rather centralized and viable fiscal and financial regimes, capable of providing sovereign states in formation with the resources required to sustain their security, stability, and support for territorial and eco- nomic expansion, as the best way to model their survival and success in a mer- cantilist international order that persisted for centuries before and some decades after the Treaty of Vienna.8 During that era states operated within the parameters of a geopolitical and economic world order marked by persistent bouts of warfare and virulent competition.They attempted to regulate cross-border flows of trade, labour, capital, and useful knowledge in ways that were designed to maximize benefits for one country or empire at the expense of others.9 At the same time and within their insecure borders they confronted unpredictable episodes of instability 5 Lachman, Capitalists. 6 Tilly, Coercion. 7 Alesina and Spolaore, ‘Number and size of nations’; Bolton and Roland, ‘Break-up of nations’; Alesina, Spolaore, and Wacziarg, ‘Economic integration’. 8 Bonney, ed., Economic systems. 9 Contamine, ed., War and competition; Magnusson, ed., Mercantilist economics. BRITAIN’S EXCEPTIONAL FISCAL STATE 409 © Economic History Society 2010 Economic History Review, 64, 2 (2011) associated with violent changes of ruling dynasties and oligarchies, internal revo- lutions, and episodes of revolt and repression.10 These familiar and enduring political features of the early modern political world explains why two public goods (external security and internal order) sup- plied by states for economies under their control were widely recognized at the time as virtually indispensable for any sustained increase, however gradual, in private investment, trade, and innovation. However, the protection of persons and their property from violence and theft both within and beyond the frontiers of established polities could not be secured (except at high cost) without minimal and predictable levels of support from states. Economically speaking the inefficient states of early modern times can be revealed as those that simply lacked the means to guarantee investors in physical and human capital or innovators searching for useful and potentially profitable knowledge with adequate protection against omnipresent risks from enemy invasions, political instability, widespread preda- tion, and barriers to trade. In general such guarantees (when effectively funded and enforced) insured wealthy elites undertaking investment against invasion, violence, and theft in an era when such risks probably formed one of the most serious and persistent obstacles to trade, capital formation, and technological progress. Latterly the significance of privately maintained institutions, rules, customs, and culturally conditioned behaviour for the promotion of long-term economic devel- opment has re-emerged as a field of enlightening research and theorizing by economists, sociologists, and political scientists.Yet the role of states in sustaining the productive as well as counter-productive institutions behind observed rates and patterns of economic growth has not yet received anything like the same attention or theoretically rigorous analysis that any serious political economy seeking explanations for long-run economic growth warrants.11 That neglect is serious. It implies that the social science for the study of institutions remains without foundations because behind the observed and contrasting institutional regimes within which private investment, innovation, and trade occurred across Europe stood an array of benign, neutral, ineffective, and malign states. Ultimately states defined and enforced property rights or failed to do so. States solved or evaded many of the legal and infrastructural problems involved in extending, integrating, and coordinating markets. States helped or hindered the reordering of religions, ideologies, and cultures of behaviour that affected such important matters for economic progress as shirking, cheating, free riding, thrift, risk, inno- vation, and entrepreneurship. There is almost no area of new institutional eco- nomics, sociology, and political science where an analysis of the constitutions and political systems surrounding commodity and factor markets could be neglected. In short the reorientation of economics and economic history to take institutions into account has always implied a serious engagement with states and with the extant and growing libraries of political history concerned with their formation, strategies, and operations.12 10 Reinhard, ed., Power; Zmora, Monarchy. 11 North, Institutions. 12 Bloch and Evans, ‘State’; Field, ‘Problem’. 410 PATRICK O’BRIEN © Economic History Society 2010 Economic History Review, 64, 2 (2011) Between the Peace of Westphalia (1648) and the Treaty of Vienna (1815) European states faced common and particular problems. Their successes and failures in creating, supporting, and sustaining institutions that promoted long- term divergence in economic development need to be understood and compared in specified historical contexts that differed widely across space and time.13 Analy- ses based either upon models of rational political choice or prior ideological commitments to free markets, laissez faire, and constitutions for liberty in this era of dynastic rivalry, mercantilism, predation, and state formation look parsimonious to the point of simplicity.These models shed more ideological heat than scholarly light on the roles that states actually played or neglected to play historically in the divergent trajectories for long-run development taken over premodern centuries by competing national and imperial economies.14 Fortunately, programmes to investigate the comparative economic histories of state formation are now underway.15 Antecedents for that discussion in the rich histories of political and economic thought are clear that some form of centralized and coordinated provision for external security and internal order were everywhere prerequisites for any kind of economic growth.16 Our parent discipline (history) has, moreover, long recognized that private institutions, designed to facilitate investment, production, skill formation, and innovation, required sponsorship, promotion, support, or at least benign neutrality from states for their successful operation and development.17 Like proverbial hedgehogs political historians know one major thing, namely that states without access to the resources required to fund the delivery of effective levels of protection to sustain institutions that fostered some semblance of congruence between the pursuit of private profit and social welfare were either taken over, or often by default (rather than malign intent) hindered rather than promoted the development of their economies.18 Further- more, historians neither seek (nor anticipate) that there could be any overarching general theory to account for the strategies and policies pursued by states that, either by design or in outcome, effected the progress of domestic and imperial economies.19 Their sense of what to emphasize in constructing a negotiable meta- narrative that somehow includes the range and variety of states that exercised power over premodern European economies is predicated on the assumption that plausible and heuristic generalizations could be grounded in a traditional and empirically rich and sophisticated historiographical discourse (already in print) that highlights constraints on the penetrative powers of rulers to cope even with serious and persistent threats to external security and internal order, let alone lend support to the construction of effective institutions for domestic trade with impe- rial expansion overland and overseas. Meanwhile libraries of political history, latterly summarized and conceptualized as historical sociology, have more or less degraded the generalizations on offer 13 Tilly, Formation of national states. 14 Ekelund and Tollison, eds., Politicized economies. 15 Teichova and Matis, eds., Nation, state, and the economy; Backhaus and Rodger, eds., Navies; Dincecco, ‘Fiscal centralization’. 16 Sonenscher, Before the deluge. 17 Reinert, ‘Role of the state’. 18 Glete, War and the state. 19 Persson and Tabellini, Economic effects, and Dincecco, ‘Fiscal centralization’, represent mathematically rigorous attempts to construct such models for modern and premodern times. BRITAIN’S EXCEPTIONAL FISCAL STATE 411 © Economic History Society 2010 Economic History Review, 64, 2 (2011) from economics on the roles, nature, and operations of early modern states.20 For example, a wave of revisionist research devoted to studying the practices of governance as distinct from the lifestyles and political pretensions of rulers, their rhetorics of absolutism and autocracy, and tendencies to predation, has probably undermined a discourse in political philosophy congenial to liberals who have for centuries maintained that the constitutions of states were everywhere and for all times closely correlated to the advance of their national economies.21 Since Mon- tesquieu, this canonical tradition of writing in political thought has maintained that the forms of government that provided for representative assemblies, for constraints on the executive powers of emperors, kings, princes, and other rulers, as well as for freedom for individual and private enterprise represent the optimal conditions for economic progress. In short it is a tradition that represents consti- tutions for liberty as optimal frameworks for higher levels of productivity and standards of living.22 In entering this major discourse in political history and thought, economic historians anticipate that investigations into and comparisons across the fiscal, financial, and monetary institutions sustained by states will display complex inter- connections to their political forms and arrangements for making and implement- ing decisions. Connections ran both ways, which implies that episodes of deplorable predation upon private property by states could arise as the outcome of political failures to secure compliance with demands for necessary and properly funded central governance.23 In short it is opportune to expose the fiscal and financial constraints underlying the capacities of various states to implement policies to fund the provision of public goods and sustain efficient private institu- tions over time.24 This recommendation for research could, however, be rejected by a long tradi- tion of neo-liberal writing in the economics of public choice that continues to favour small states, constrained by limited access to taxes and loans. Represented in recent decades by James Buchanan and his followers, the tradition continues to maintain that effective fiscal systems (even for this era of premodern state forma- tion) normally provided ubiquitous, predatory, and rent-seeking rulers of ancien political regimes with access to resources that they wasted on warfare and luxu- rious courts, or utilized for purposes that were inimical to the long-run growth of economies.25 Much of this writing is ideology predicated on ahistorical foundations. Its a priori assumption is that expenditures by governments partake of the attributes of private consumption and carry entirely limited externalities for the longer-term growth of economies. Yet over these centuries the overwhelming proportion of 20 National historical professions have been engaged with research into the formation and policies of states for more than two centuries. That literature has, with some notable exceptions, been disregarded by economists. Historical sociologists following Mann’s lead have tried to impose some order and induct some discussable generalizations from the awesome volume of historical scholarship that is in print. See Mann, Sources of social power; Hall and Schroeder, eds., Anatomy of power. 21 Relevant texts have been cited above and include seven volumes under the editorship of Blockmans and Genet, Origins. A brilliant short synthesis was published by Epstein, Freedom and growth. 22 Macfarlane, Riddle. 23 Bonney, ed., Rise of the fiscal state. 24 Krasner, Sovereignty; Grapperhaus, Taxes; Sonenscher, Before the deluge. 25 Ekeland and Tollison, eds., Politicized economies; Nye, War, wine, and taxes. 412 PATRICK O’BRIEN © Economic History Society 2010 Economic History Review, 64, 2 (2011) expenditures by states was on armed forces mobilized to preserve external security and internal order, and to expand the territory, assets, and human resources under central control. Residual proportions of tax revenues and domain income were allocated to royal or imperial courts—long regarded as habitats for ‘wasteful expenditures’ of all kinds. Courts varied, however, across polities. Some propor- tion of their activities has been plausibly represented as functional for the main- tenance of internal stability and for the efficiency of centralized governance operating under primitive technologies for communication and coordination. Elias has convinced historians that many royal, ecclesiastical, and aristocratic courts patronized forms of cultural activity that reordered the behaviours of elites in directions that curtailed violence, embodied support for innovations, and gener- ated longer-term benefits for stability and for society as a whole.26 In any case, overwhelming proportions of the revenues that reached central governments were allocated to their armed services. Of course, waste was endemic to geopolitical conflicts and coercion to maintain stability, but the proportions of these allocations that can be realistically depicted either as avoidable or as rents (in the sense that the services supplied by armies and navies could conceivably have been obtained at significantly lower costs) have never been specified, let alone measured. All this history of repression, violence, and mercantilism added up, as Adam Smith and his French predecessors eloquently maintained, to a deplorably waste- ful political and geopolitical economic order.27 Unlike his neo-Smithian followers, Smith realized, however, that it was the context and order in which Eurasian states had perforce to operate. Nevertheless, some managed to rule societies and promote economic development more effectively and at lower costs than others. For the early modern period successful states can be recognized as those that raised sufficient re