Why both McCloskey and her institutionalist opponents are wrong

It is impossible to establish priority between institutions and ideas — and not even necessary

I long wanted to write a short post on the debate between Deirdre McCloskey and Douglas North — style institutionalists on the origins of the Industrial Revolution. In short, as the title suggests, I believe that both are confused, and I explain why below.

  1. McCloskey rightly criticizes North-style institutionalists for mechanistic analysis of how humans make choices. To them, incentives act deterministically in that once they are changed, they make it inevitable that agents will change their behavior in the way implied by the new incentive configuration. In this spirit, North has claimed that the institutional changes that came with the Glorious Revolution of 1689 made Industrial Revolution inevitable because they lowered transaction costs. She rightly notes that there were several major examples in world history, including the early Roman Empire, where transaction costs were probably fairly low, yet, an industrial revolution failed to materialize.
  2. However, having correctly dismantled the (mechanistic) institutionalist narrative, McCloskey commits an error that is very similar to the one her opponents make. She chooses a single factor — namely, the change in rhetoric towards admitting and valorizing the virtues of entrepreneurs and innovators by the late 18th century — and argues that it is sufficient to explain the Great Enrichment that followed. However, if McCloskey had not chosen to focus on the same major institutional change that North did, she would have had to deal with crucial events that took place in England before 1689. Perhaps, the most important of them was the 1624 Statute of Monopolies which essentially abolished all kinds of feudal monopolies and priviliges that stifled private productive initiative. If this change had not happened, the change in rhetoric that McCloskey emphasizes would not have transpired. Vibrant entrepreneurial activity would not have been there to be praised.
  3. We can, however, continue asking questions in the same vein. Why was the Statute of Monopolies adopted when it was? Perhaps, because of the ideas powerfully expressed by Sir. Edward Coke. But the latter also appealed to the narrative of the ancient rule of law created by Magna Carta. Which, although it did not actually established the rule of law in the modern sense, was an important first step in its direction. But Coke was also profoundly influenced by thinkers from the Antiquity, especially Cicero. But Cicero himself would have been unthinkable without even older Greek philosophers, in particular Aristotle. And then, Aristotle could not have lived and worked in the polity of Sparta.
  4. It should be clear by now where this line of reasoning leads. There is no way to establish a stand-alone institutional or ideological (rhetorical) change that is the unique factor that brought about everything that came after, give or take some unexpected exogenous events. Nor is it really necessary to search for such a factor to make sense of history. McCloskey’s contribution is not tainted by the fact that a long line of interconnected institutional and ideological changes had to happen before the reevaluation of entrepreneurship could play its role. That reevaluation is still fascinating and worthy of study.

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