A Theory of Institutional Emergence

Abstract

In this dissertation, I develop a theory of institutional emergence. I use this theory to explain one of the most important events in modern economic history: the emergence of financial markets in London in the late seventeenth century, a period known as the English Financial Revolution.

I define institutions as durable roles within recurrent patterns of social relationships. An implication of this account is that an institution is a potentially unoccupied social structure: institutions have a reality independent of any one instantiation. Building on a tradition of relational social theory, I go on to argue that institutions emerge when new roles attach to novel positions within social networks. Both exogenous contextual features as well as endogenous mechanisms within existing networks can generate new patterns of relations. The key, however, is that the network reproduces itself and, consequentially, role-specific network positions endure.

Following the Glorious Revolution of 1688, England endured a once-in-a-century fiscal crisis. The state lacked the capacity to raise revenue, rampant fraud disincentivized investments, a monetary crisis severely contracted domestic economic activity, and ongoing military engagements hampered international trade. Emergent brokerage relationships in coffeehouses, however, gradually developed, and these facilitated a liquid market in public debt securities. These debt instruments laid the foundation for a radical transformation of the English state. Coffeehouse brokers were the institutional basis for what would become the financial system that funded the British Empire and England's world-historically unique economic development in the late 18th century. Using the population of transactions in Bank of England shares for roughly the first decade of its existence, and employing inferential network analysis methods, I document when specific patterns of brokerage developed, the social background of market participants, and the macroeconomic consequences of the legal regulation of brokers.

The dissertation concludes with a discussion of the explanatory usefulness of radically relational social ontologies. I explain why strategies of historical explanation that rely primarily on micro or macro variables would be unable to account for the emergence of institutions during the English Financial Revolution. One must instead begin with patterns of relationships, because novel institutions emerge from social network structures.