Why Nations Fail

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 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 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:
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.