The Paradox of Prosperity: State, Innovation and Economic Leadership in Western Europe, 1100-1930

Abstract

In the long-standing debate on how some economies become more successful than others, the successes of liberal historical economies such as the northern Italian city-states and Britain after the Glorious Revolution have been foundational in establishing and testing theories. However, a related puzzle has long eluded social scientists. Economies like the northern Italian city-states and Britain form part of a successive chain of leading economies - i.e., the most productive, innovative and influential economies - in Western Europe. Yet the successes of such economies have always been ephemeral: After a period of dominance, leading economies inevitably become less capable of innovation and growth compared to rising competitors. This dissertation provides an answer to the puzzle. I argue that liberal institutions play paradoxical roles during a leading economy’s rise and decline. By allocating political power to a relatively wide range of societal actors and groups, liberal institutions have two, opposing effects on state-building: (1) participatory mechanisms facilitate state-building through the effective mobilization of societal resources; (2) participatory mechanisms hinder state-building by increasing the possibility of one or more of the actors and groups blocking institutional change. The relative magnitudes of these two effects change depending on the level of external threat faced by the state and its liberal institutions. Under a high level of threat, the positive effect outweighs the negative, while the negative effect begins to outweigh the positive as the threat decreases. The changing dynamics between these two effects explain why successive leading economies in Western Europe experience highly similar patterns of rise and decline. Economic leadership depends on an economy's large-scale exploitation of new economic opportunities, for which the state's provision of public goods is necessary. Hence, in any period during Western Europe’s history, the leading economy always coincides with the state with the highest capacity - not a result but a necessary enabling condition of economic leadership. Initially, as the leading economy liberalizes, a period of intensive warfare allows liberal political institutions to build up state capacity quickly and effectively. However, as the economy leverages state support to acquire regional leadership, the level of threat faced by the state and its liberal institutions decreases. Under a low level of threat, the negative effects of liberal institutions on state-building come to outweigh the positive effects, leading to stagnation in state capacity and the loss of economic leadership. This dissertation illustrates how this process takes place across historically disparate leading economies through the trajectories of three Western European historical economies: the city-states of northern Italy during the 16th and 17th centuries, the Dutch Republic during the 18th century, and Britain during the late-19th and early-20th centuries. Although I have deliberately chosen cases that are separated by centuries, I show that the same mechanisms can be observed at work in each economy. I focus most centrally on the leading economies during the period in which each is in decline respectively, and then compare each declining leader to two counterfactual cases: to its former self during the earlier period of growth, and to its most successful contemporaneous challenger. For example, I compare the 18th-century Dutch economy to the 17th-century Dutch economy and to the 18th-century British economy. The analytical leverage in these comparisons derives from the considerable similarities between the cases: incumbent leaders and successful challengers often share crucial economic, political, social and cultural characteristics. Finally, I compare the three periods during which economic leadership succession took place, and demonstrate that the same mechanisms, albeit with some variations in detail, can be observed across all three cases. Chapter 1 introduces the problem of leading economy decline and discusses why the problem poses a challenge to most existing theories of economic growth, and how a systematic examination of these cases within political economy could contribute to our understanding not only of these economies but of economic growth and political institutions in general. Chapter 2 lays out the theoretical argument: First, it constructs a systematized definition of economic leadership based on existing concepts in the literature. Then it presents a theory of economic leadership that explains the pattern of rise and decline of leading Western European economies, arguing that liberal institutions initially conducive to these economies' ascent subsequently become detrimental to their exploitation of new economic opportunities. After introducing the theory, it checks the theory's core propositions against empirical observations of historical leading economies, and discusses the theory's implications for theories of economic growth and liberal institutions more broadly. The next six chapters consist of empirical studies. Chapter 3 covers both the rise and decline of the northern Italian city-states. Using the case study of Genoa, it demonstrates that Genoese state-building was much more robust during the period in which it faced significant existential threats than in subsequent centuries, and that the lack of state support contributed to Genoa's limited participation in the Atlantic trade. Chapter 4 argues that while the Dutch cities were highly similar to their northern Italian counterparts, Spanish threat during the Eighty Years' War enabled effective state-building in the Dutch Republic, which contributed to its subsequent economic success. Chapter 5 shows that a century later, a more secure international environment led to increasing factionalism and stagnation in Dutch state-building, which prevented the Dutch economy from developing new markets and manufactures more effectively. Chapter 6 studies Britain - a counterfactual highly similar to the Dutch Republic - during the same period. Britain experienced the Financial Revolution as a result of the royalist/Jacobite threat, and thereby developed state institutions that enabled the Industrial Revolution. Chapter 7 demonstrates how, a century later, Britain's performance in the Second Industrial Revolution suffered as a result of slow state response to industrial demands for public goods provision. Chapter 8 picks up where Chapter 7 leaves off, and shows slow state response resulted from tight fiscal constraints and multiplying factionalism in British politics. The lack of threats during Pax Britannica contributed to both. Finally, Chapter 9 discusses the main takeaways from these sets of comparisons, as well as the theory's generalizability to cases beyond historical leading economies.