Bayesian Investor Blog

Book review: The Institutional Revolution: Measurement and the Economic Emergence of the Modern World, by Douglas W. Allen.

What do honor duels, purchases of commissions in the army, and privately managed lighthouses have in common?

According to Allen, they were institutions which made sense in the pre-modern age, but were abandoned when improvements in measurement (of labor quality, product quality, time, location, etc) made them obsolete in the nineteenth century.

Allen presents a grand theory of how large variations in job performance, product quality, etc, before 1800-1850 created large transaction costs which caused widespread differences from modern life, and which explain a wide variety of institutions which seem strange enough to people with a presentist bias that most have dismissed many pre-modern institutions as obviously foolish.

What starts out as an inquiry into some apparently quirky and unusual practices finishes as an ambitious attempt to explain the industrial revolution as a revolution whose institutional changes were more pervasive and valuable than the technological advances which triggered them.

The book convinced me that it explains the timing of some important and often forgotten social changes. But the frequent implication that the institutions in question were the most rational way to deal with limitations of pre-industrial life seem overdone. I suspect that there was often a mixture of reasons behind those institutions that included some foolishness and some catering to special interests.

For example, his theory requires that honor duels be designed so that skill at dueling is fairly unimportant compared to random luck. He provides some evidence that people tried to introduce randomness into the dueling process, but leaves me doubting that it made skill unimportant.

The book provides a framework that might be valuable in predicting future institutional changes as technological change further reduces transaction costs, and does a valuable job of offsetting the tendencies of economists other than Coase to downplay the importance of transaction costs.

This was the first book I’ve read in several years that seems too short.