Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England

Summary What institutions are needed to create incentives to invest? The authors try to answer that question by analyzing the effects of the evolution of institutions after the Glorious Revolution in 1688 on the capital market. In addition to institutions establishing private property rights, institutions showing credible commitment to these rights are necessary.

The Role of the Constitution Incentive for political actors Does growth suffice as incentive? Compliance as reoccuring problem Must be self-enforcing Does reputation suffice as incentive? Credible restrictions of coercive powers needed

The Stuarts‘ Economic Problems 1600-1688 Household deficit Parliament‘s tax authority Other revenue sources: Sale of lands Impositions Forced loans Sale of monopolies Sale of peerance Purveyance Sale of hereditary titles Court of Wards Dispensations Expropriations

Institutions Allowing the Stuarts‘ Governance Royal Prerogative Star Chamber Control over the judiciary Insufficient Checks and Balances

Historical Developments 1642-1652 Civil War 1660 Restoration of the Monarch 1688 Glorious Revolution

Evolution of Institutions after 1688 Restriction of the Monarch‘s powers Parliamentary Supremacy Parliament‘s financial authority Substantial reduction of the Royal Prerogative Political Rights Checks and Balances Fiscal revolution

Control of Wealth Holders over Government No unilateral action by the Monarch Checks and Balances Self-enforcing constitution Threat of removal Sufficient tax revenue

Constraints on Parliament (Why did Parliament not assume absolute power?) Political reasons: Uncertainty and higher returns lead to less demand for control Less regulation strengthened the constitutional democracy Democracy made rent-seeking activities inefficient Institutional reasons: Veto powers Arbitrary administrative institutions abolished Coalition advocating a limited government after the Glorious Revolution Independent judiciary

Consequences of Restrictions Higher predictability of the government No incentive and political obstacles for expropriation Higher political hurdles for interest groups

Evidence: Public Capital Market Data Pre-revolutionary government loans were forced loans Post-revolutionary government loans after the fiscal revolution: Earmarked taxes pay the interest on new loans Bank of England controlled by Parliament Separate fund for earmarked tax deficiencies Milling coins instead of shaving

Evidence: Public Capital Market Data

Evidence: Public Capital Market Data

Evidence: Private Capital Market Data

Recap Constitutional commitment to private rights leads to credibility and therefore creates economic development. Capital markets responded very well to the institutions created after the Glorious Revolution in 1688.

Conclusion

Open Question “We have shown how the political institutions governing society can be considered endogenously.” No exogenous effect needed?