Why Nations Fail: The Origins of Power, Prosperity, and Poverty

T
HE
 M
AKING OF
 I
NCLUSIVE
 I
NSTITUTIONS
England was unique among nations when it made the breakthrough
to sustained economic growth in the seventeenth century. Major
economic changes were preceded by a political revolution that
brought a distinct set of economic and political institutions, much

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more inclusive than those of any previous society. These institutions
would have profound implications not only for economic incentives
and prosperity, but also for who would reap the benefits of
prosperity. They were based not on consensus but, rather, were the
result of intense conflict as different groups competed for power,
contesting the authority of others and attempting to structure
institutions in their own favor. The culmination of the institutional
struggles of the sixteenth and seventeenth centuries were two
landmark events: the English Civil War between 1642 and 1651, and
particularly the Glorious Revolution of 1688.
The Glorious Revolution limited the power of the king and the
executive, and relocated to Parliament the power to determine
economic institutions. At the same time, it opened up the political
system to a broad cross section of society, who were able to exert
considerable influence over the way the state functioned. The
Glorious Revolution was the foundation for creating a pluralistic
society, and it built on and accelerated a process of political
centralization. It created the world’s first set of inclusive political
institutions.
As a consequence, economic institutions also started becoming
more inclusive. Neither slavery nor the severe economic restrictions
of the feudal medieval period, such as serfdom, existed in England at
the beginning of the seventeenth century. Nevertheless, there were
many restrictions on economic activities people could engage in. Both
the domestic and international economy were choked by monopolies.
The state engaged in arbitrary taxation and manipulated the legal
system. Most land was caught in archaic forms of property rights that
made it impossible to sell and risky to invest in.
This changed after the Glorious Revolution. The government
adopted a set of economic institutions that provided incentives for
investment, trade, and innovation. It steadfastly enforced property
rights, including patents granting property rights for ideas, thereby
providing a major stimulus to innovation. It protected law and order.
Historically unprecedented was the application of English law to all
citizens. Arbitrary taxation ceased, and monopolies were abolished

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almost completely. The English state aggressively promoted
mercantile activities and worked to promote domestic industry, not
only by removing barriers to the expansion of industrial activity but
also by lending the full power of the English navy to defend
mercantile interests. By rationalizing property rights, it facilitated the
construction of infrastructure, particularly roads, canals, and later
railways, that would prove to be crucial for industrial growth.
These foundations decisively changed incentives for people and
impelled the engines of prosperity, paving the way for the Industrial
Revolution. First and foremost, the Industrial Revolution depended on
major technological advances exploiting the knowledge base that had
accumulated in Europe during the past centuries. It was a radical
break from the past, made possible by scientific inquiry and the
talents of a number of unique individuals. The full force of this
revolution came from the market that created profitable opportunities
for technologies to be developed and applied. It was the inclusive
nature of markets that allowed people to allocate their talents to the
right lines of business. It also relied on education and skills, for it was
the relatively high levels of education, at least by the standards of the
time, that enabled the emergence of entrepreneurs with the vision to
employ new technologies for their businesses and to find workers
with the skills to use them.
It is not a coincidence that the Industrial Revolution started in
England a few decades following the Glorious Revolution. The great
inventors such as James Watt (perfecter of the steam engine), Richard
Trevithick (the builder of the first steam locomotive), Richard
Arkwright (the inventor of the spinning frame), and Isambard
Kingdom Brunel (the creator of several revolutionary steamships)
were able to take up the economic opportunities generated by their
ideas, were confident that their property rights would be respected,
and had access to markets where their innovations could be profitably
sold and used. In 1775, just after he had the patent renewed on his
steam engine, which he called his “Fire engine,” James Watt wrote to
his father:

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Dear Father,
After a series of various and violent Oppositions I have at
last got an Act of Parliament vesting the property of my
new Fire engines in me and my Assigns, throughout Great
Britain & the plantations for twenty five years to come,
which I hope will be very beneficial to me, as there is
already considerable demand for them.
This letter reveals two things. First, Watt was motivated by the
market opportunities he anticipated, by the “considerable demand” in
Great Britain and its plantations, the English overseas colonies.
Second, it shows how he was able to influence Parliament to get what
he wanted since it was responsive to the appeals of individuals and
innovators.
The technological advances, the drive of businesses to expand and
invest, and the efficient use of skills and talent were all made possible
by the inclusive economic institutions that England developed. These
in turn were founded on her inclusive political institutions.
England developed these inclusive political institutions because of
two factors. First were political institutions, including a centralized
state, that enabled her to take the next radical—in fact,
unprecedented—step toward inclusive institutions with the onset of
the Glorious Revolution. While this factor distinguished England from
much of the world, it did not significantly differentiate it from
Western European countries such as France and Spain. More
important was the second factor. The events leading up to the
Glorious Revolution forged a broad and powerful coalition able to
place durable constraints on the power of the monarchy and the
executive, which were forced to be open to the demands of this
coalition. This laid the foundations for pluralistic political
institutions, which then enabled the development of economic
institutions that would underpin the first Industrial Revolution.