The Institutional Revolution: Measurement and the Economic Emergence of the Modern World by Douglas W. Allen (review)

The argument of this ambitious, well-written, engaging, closely reasoned, and seductive book is that the Industrial Revolution in Britain was accompanied and deepened by an Institutional Revolution, which laid the groundwork for a modern and professional public service bureaucracy. Douglas Allen’s focus is on explaining why many of the public services of the period circa 1500–1800 were privately organized using institutions that we now consider as inefficient and even odd, such as government by patronage run by a landed aristocracy, dueling, venal state offices, purchased army commissions, a largely privately funded judicial and police system, roads and lighthouses, and tax farming. Rather than judging these institutions to be inefficient, he explains that all of them can be seen as having economic logic within the technological constraints of society at the time by using an institutional economic methodology.

The purpose of the book “is to collect and analyze many of the strange and odd institutions of the pre-modern world” (p. 7), the substance of which Allen published previously in economics journals. Allen has a wonderful way of using well-chosen anecdotes and tells good stories. Almost all of his historical data, except for his astute quotations from Samuel Pepys’s diary, is taken from secondary works on British history. He is careful to say at the outset that he is not a professional historian, or even an economic historian. His field is the economics of organizations, and the book is a contribution to what economists call the New Institutionalism. He begins with the assumption that the purpose of a social institution—a set of economic rights and rules—is to maximize wealth. This is done by measuring the transaction cost of establishing and maintaining an institution. These costs depend on the variability of nature. During the early modern period it was very hard to measure what part of the productivity of goods and services were due to chance, and what part to the efforts of producers because it was difficult to control sources of energy, measure time and distance, and observe directly those who worked for you. Thus society developed the “odd” institutions of the period in an effort to lower transaction costs as much possible. Allen’s second chapter is a useful summary of how the Industrial Revolution lowered the transaction cost of producing goods and services through dramatic improvements in measuring time, distance weights, communication, and the direct observance of workers and officials. This, he argues, led to the creation of free labor and a professional government bureaucracy. Thus, as his subtitle explains, it was the improvement in measurement made possible by the Industrial Revolution that created the institutions of the modern world.

Allen’s method is to begin each discussion of one of his “odd” institutions by citing historians and economists who found the institution inefficient, corrupt, or plain stupid before he explains its economic logic. His method makes for good reading but unfortunately it is not hard to find other historians, and also economic historians, who understood the logic of institutions, such as dueling or the venality of offices, in the context of the period. As the English historical economists already argued during the late nineteenth century, economic institutions and public economic policy must be relative to a particular time and place. The book offers an interesting method for explaining why these “odd” institutions of the past had an economic logic.

In an interesting chapter on the aristocracy, which is the foundation for all the other chapters on particular institutions, he develops what he calls a theory of aristocracy. He begins by making the dubious assertion that most historians and economists have seen the aristocracy as “old corruption” and claims that few have recognized that they served a very useful purpose in early modern England. He points out that the major source of wealth for the...