A fiscal state with its Royal Navy:institutions and the industrial revolution.

'Good' institutions have become a core ingredient of most modern day explanations of economic growth and development. The recently published WIDER book on Institutional Change and Economic Development (see the previous Angle article by Ha-Joon Chang) emphasizes that what is appropriate as an institutional framework for development in one context, might not be appropriate in another. This implies that there might be important historical specificity in the relationship between institutions and development. In this article I illustrate this link between institutions, history and development, by describing the institutional context which led during the eighteenth century to the First Industrial Revolution, arguably one of the most significant events in the economic history of the modern world. Why, and how, did the Industrial Revolution happen to take place in the United Kingdom (UK) when it did?

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In this article I argue that to some significant degree an Industrial Revolution emerged in the UK as the outcome of aggressive and successful mercantilism. In the beginning was a fiscal state with its Royal Navy.

The Formation of a Fiscal State

Not long after the First Hundred Years War (1337-1453) when England's feudal armies had ignominiously retreated from centuries of dynastic and imperialistic warfare on the mainland, the island's kings, aristocrats and merchants began to conceive of naval power as the first line of defence against external threats to the security of their realm and as the force required to back conquest and commerce with continents other than mainland Europe. For several reasons that conception took nearly two centuries (1453-1649) to mature, one of the most important being that the aristocracies and the propertied elites assembled in the Houses of Lords and Commons successfully resisted all attempts by the Crown to deepen and widen its fiscal base in order to fund the resources required to establish armies and navies of sufficient scale, scope and technological capability to defend the realm, maintain internal order and protect private investment in commerce and colonization overseas.

Eventually nearly two centuries of fiscal stasis, economically malign, disputes over religion and persistent acrimony over the crown's rights to taxation, culminated in an 'interregnum' of highly destructive civil war, republican rule, and the restoration of monarchy and aristocracy. As well as truly massive destruction of life and capital, this famous interregnum witnessed: the most serious threats to hierarchy and property rights in English history; the appreciation by wealthy elites of the advantages attending the establishment of a standing fleet of warships under control of the Crown as well as the externalities generated by a Royal Navy for the maintenance of that other and equally significant public good--internal order.

Following on from a series of republican and royalist experiments with the political principles, methods of assessment and collection of taxes, a 'reconstructed' fiscal base came into place under the restored Stuart monarchy. Constitutionally that base rested, first and foremost, upon the reaffirmation by the Crown of the long-established tradition (challenged under provocation by Charles I) that English monarchs could not levy taxes without formal consent from Parliament. Thereafter, Parliament never presumed to control royal expenditures and hardly ever withheld consent for supply; particularly in wartime.

The Royal Navy

It is upon the Navy under the Providence of God that the safety honour and welfare of this realm do chiefly attend

Preamble to articles for the First Anglo-Dutch War, 1652-54

The maritime strategy pursued for the defence of Britain was taken forward during the Commonwealth to mature into a well-funded and binding commitment by the state to a standing navy of the size and technical capability required to preclude invasions of the Isles from offshore. That commitment which continued to our own era of airpower made sense to an isolated Republic threatened with Royalist inspired privateering on its trade, with invasions supported by outraged kings from the mainland, but in possession of funds (realized from the sale of the expropriated wealth of the monarch and his treasonable supporters) to invest heavily in the construction of warships.

Persistently high levels of public expenditure on the Royal Navy probably exceeded allocations for gross domestic capital formation between 1760 and 1810 and in times of war amounted to around half of the value of Britain's exports, plus re-exports. This commitment provided the kingdom with Europe's (the world's) largest fleet of battleships, cruisers and frigates, manned by a largely coerced workforce of able seamen, managed by well motivated officers.

The relatively low costs, and in outcome, highly successful and economically significant offshore strategy for defence allowed the British state to spend more upon armed forces and to allocate greater proportions of its already elastic fiscal and financial resources not only to complementary mercantilist and imperial missions pursued at sea, but to sustain surprisingly high levels of military expenditure. Throughout the period 1688-1815, the military share of expenditures on armed forces by the European state most committed to naval defence and aggression amounted to a modal 60 per cent.

Prospects for trade across a 'less than united' Kingdom came, from time to time, under serious threat from within the potentially seditious provinces of Scotland and Ireland; particularly the latter where a colonized Catholic population resented 'English' property rights and the metropole's discriminatory regulation of local commerce and industry. With external security taken as given, stability, good order, respect for an established inegalitarian system of property rights and the maintenance of hierarchy over their potentially unruly employees became a key political-cum-economic interest for landowners, merchants, farmers, industrialists and other businessmen of Hanoverian Britain.

On the whole, their 'monarchical and aristocratic' state met concerns for the protection of property, for the maintenance of authority over workforces and when necessary redefined their legal rights by promulgating statutes for the realm which superseded custom and common laws that could be interpreted as providing protection for the welfare of the majority of the nation's workforce without assets, status and power.

Conclusions: The Security, Stability, and Growth of the Realm

Somehow through eleven wars the Royal Navy retained command of the Channel and the North Sea. Throughout the period which witnessed Britain's combined geopolitical and economic rise, the Navy's guard over Western and Eastern approaches to the Isles, blockades of enemy naval bases, the interdiction of their supplies of strategic raw materials and weapons and occasional pre-emptive strikes effectively prevented a rival fleet from clearing a viable sea route for the landing of armies on the kingdom's shores.

In wartime the proportions of the British workforce (particularly skilled artisans) drafted into the army (the country's secondary line of defence) remained low. Troops (and embodied militias) required for defence and service overseas could, moreover, be recruited overwhelmingly from among the unskilled potentially unemployed fringes (often Celtic and Colonial) of an expanding imperial workforce or, when necessary, hired as mercenary soldiers from labour abundant societies on the mainland. Furthermore, and while the Navy operated as the realm's main relatively cheap but highly effective first line of defence, the state funded and maintained a royal army which (together with local militias) remained on call and active for the preservation of the internal order necessary for investment and economic growth.

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Patrick Karl O'Brien, former Director of the Institute of Historical Research at the University of London and past president of the British Economic History Society, is now a Centennial Professor of Economic History at the London School of Economics where he acts as Convenor of the Global Economic History Network (GEHN).

This article is based on WIDER Research Paper (2006/75) 'The Formation of a Mercanilist State and the Economic Growth of the United Kingdom 1453-1815' that was prepared within the WIDER project on 'Institutions for Economic Development: Theory, History, and Contemporary Experiences', directed by Ha-Joon Chang.