Was Hayek right that the "institutions of a society had to evolve organically and could not be designed"?:
The consequences of external reform: Lessons from the French Revolution, by Daron Acemoglu, Davide Cantoni, Simon Johnson, and James A Robinson, Vox EU: Different incentives, created by variation in key institutions such as property rights and the functioning of markets, explain why some countries are much more prosperous than others. Therefore, institutions often need to be reformed to improve the economic conditions in poor countries. There is a lot of controversy, however, about how this can be done, and, in particular, whether agents external to a country can successfully impose or foster institutional reform.
“Big Bang” external reforms
Knowing the answer to this question is important for understanding whether, for example, the mass expansion of resources for the IMF announced recently by the G20 is likely to be effective. Many, like Rodrik (2007), argue that external reform has been a failure and reject reform agendas such as the “Washington consensus” as being inappropriate to the problems of countries with poor institutions. This argument is reminiscent of Hayek (1960), who claimed that the institutions of a society had to evolve organically and could not be designed. Those who advocate these views point to the relative success of gradual Chinese economic reforms as opposed to reforms in the former Soviet Union, which took place in a “Big Bang” fashion with a lot of external influence. Interestingly, the conservative English philosopher Edmund Burke seems to have been a precursor to these views. In 1790, he condemned the radicalism and the interventionist spirit of the French Revolution and argued:
“It is with infinite caution that any man should venture upon pulling down an edifice, which has answered in any tolerable degree for ages the common purposes of society, or on building it up again without having models and patterns of approved utility before his eyes.”(p.152).
In Acemoglu, Cantoni, Johnson and Robinson (2009), we argue that the impact of the French Revolution on the institutions of Europe can be seen as a “natural experiment” that sheds light on these debates. After 1792, French armies invaded and reformed the institutions of many European countries. The package of reforms the French imposed on areas they conquered included the civil code, the abolition of guilds and the remnants of feudalism, the introduction of equality before the law, and the undermining of aristocratic privilege. These reforms clearly relate to the above-mentioned debates. They were imposed “Big Bang” style from the outside. And, institutions such as the civil code were self-consciously designed and were not necessarily “appropriate” for the lands on which they were imposed. If externally-imposed and “Big Bang” reform is generally costly or if designed institutions like the civil code create major distortions, the reforms should have had negative effects on nineteenth-century Europe.
The impact of French-imposed reforms
So what were the economic consequences of these reforms? To analyse this question the first crucial observation we make is that the French conquered and reformed some parts of Europe but not others. Crucially, European polities did not choose the French institutions, but those institutions were imposed on them, first by the Revolution and then by Napoleon. Moreover, territorial expansion by French armies did not intentionally target places with a greater potential for future economic growth. Rather, the French sought to create a system of buffer states in response to the threat of Austrian or Prussian (or later British) attempts to topple the Revolutionary regime. In addition, in the early 1790s, the French sought to establish France’s “natural frontiers”. In neither case were the places which were reformed selected on the basis of economic characteristics.
These facts imply that we can separate Europe into two groups of states, those that had their institutions reformed by the French – the “treatment” area – and those that did not. We can then compare the relative economic performance of these two regions before and after the revolutionary period (1789-1815) and ask if the relative economic performance of the areas reformed by the French improves after 1815.
To undertake, this comparison we use one main outcome variable, urbanisation, which is accurately measured in this period and serves as a good proxy for income per capita (we check our findings with a less complete dataset on GDP per capita). We do this both at the level of all European states, separating them into those reformed and those not reformed, and at the level of German pre-unitary polities. Parts of Germany, primarily the west and northwest, were invaded and reformed by the French, while the south and the east were not. In addition, we collected data to directly measure the institutional reforms implemented by the French across German polities. This enables us both to verify that the French did indeed reform various aspects of institutions and to utilise a two-stage least squares strategy, with French invasion as an instrument for institutional reform.
The main finding from our reduced-form approach is that, both across countries and within Germany, urbanisation rates increased significantly faster in treated areas during the second half of the nineteenth century. Using just German data, we further show a strong association between our measures of institutional reforms and French invasion or control. Formerly French-controlled Rhineland and Westphalia were decades ahead in the implementation of reforms relative to other parts of Germany, even when compared to modernising Prussia. This confirms the observation made by Friedrich Engels in the 1850s, when he wrote that:
“…Rhenish Prussia shares the advantage of having participated in the French Revolution and in the social, administrative, and legislative consolidation of its results under Napoleon. Ten years earlier than elsewhere in Germany, corporations and patriarchal dominance by the patricians disappeared from the cities, having to face free competition.” (cited in Bergeron 1973, p. 537)
Using this association as a first stage, we also estimate instrumental-variables models, which indicate large effects of institutional reforms on subsequent growth. Overall, our results show no evidence that the reforms imposed by the French had negative economic consequences. On the contrary, there is fairly consistent evidence from a variety of different empirical strategies that they had positive effects. In particular, our results are strongest for the later part of the nineteenth century, which we see as evidence for the fact that French-induced reforms created an environment favourable to the Industrial Revolution, which reached Continental Europe precisely in those decades. French reforms involve no effort to be “appropriate” to local conditions and were imposed from the outside “Big Bang” style. Nevertheless, they appear to have spurred significantly faster economic growth in the second half of the nineteenth century, once the process of industrialisation throughout Europe was underway.
Why did these reforms work when other externally-imposed reforms often fail? One possibility, which sharply contrasts with Burke’s initial negative assessment of the Revolution’s radicalism, is that its success may have been due to the fact that the reforms it imposed were much more radical than is typically the case. Many reforms fail because they are de facto reversed shortly after the implementation (e.g., Acemoglu and Robinson, 2008). The French, instead, reformed simultaneously several aspects of economic, social and political institutions of the “ancient regime” of Europe, thereby significantly weakening the powers of local elites and making a return to the status quo ante largely impossible. Even when some pre-revolution elites returned to power after 1815, there was a permanent change in the political equilibrium. This scope and radicalism of the French reforms are common with the post-war reform experiences in Germany and Japan and stand in contrast with many other reform experiences.
Our results also shed new light on other important debates, perhaps the most interesting being that about the relative efficiency of British versus French institutions.
Napoleon himself saw the civil code as the most significant of the institutional reforms he imposed on Europe, and our results are consistent with positive economic effects from this imposition. This is quite different from the consensus amongst economists that French institutions, particularly the civil code had adverse effects on many dimensions of institutions (e.g., La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1998). Of course the fact that French reforms typically came as a bundle does not allow us to assess the precise importance of, for example, the abolition of guilds compared to the imposition of the civil code. Nevertheless, if the civil code and other aspects of French institutions were highly damaging to growth we would expect to find significant negative effects in treated areas. In addition, except for parts of the world that voluntarily adopted the civil code, such as Latin America, existing evidence on the consequences of the civil code comes from former French colonies which, like the Europe we study, had the civil code imposed simultaneously with other French reforms. In consequence, we believe that the evidence from the French revolutionary era should lead to some scepticism of the now conventional wisdom about French institutional legacies.
Acemoglu, Daron, Davide Cantoni, Simon Johnson and
James A. Robinson (2009), “The
Consequences of Radical Reform: The French Revolution,” NBER Working paper
Acemoglu, Daron and James A. Robinson (2008), “Persistence of Elites, Power and Institutions, American Economic Review, March 2008, volume 98, pp. 267-293.
Louis Bergeron (1973), “Remarques sur les conditions du développement industriel en Europe Occidentale à l’époque napoléonienne,” Francia, 1, 537-556.
Burke, Edmund (1790/1969) Reflections on the Revolution in France, Baltimore; Penguin Books.
Hayek, Friedrich (1960) The Constitution of Liberty, Chicago; University Of Chicago Press.
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny (1998) “Law and Finance,” Journal of Political Economy, 106, 1113-1155.
Rodrik, Dani (2007) One Economics, Many Recipes: Globalisation, Institutions, and Economic Growth, Princeton; Princeton University Press.