Chapter 7

Why Did Northwestern Europe Become Rich First?

In 1700, no economy in the world showed signs that it was capable of sustained economic growth. Such growth typically involved structural change in the economy: a movement away from agriculture and towards industry and services. It came with much greater levels of urbanization. In the long run, it was aided by a demographic shift to lower birth and death rates. Most of all, it required a massive increase in the rate of innovation. These factors coalesced in northwestern Europe in the 18th and 19th centuries and ultimately led in the mid-19th century to modern, sustained economic growth. Why did this happen when and where it did?

While industrialization was an important factor in the rise of the modern economy, it is just a proximate cause. Why did industrialization and sustained innovation – and the modern economy that followed in their wake – first take place in northwestern Europe? Why not Southern Europe (which dominated Europe’s economy in the medieval period)? Why not the Middle East (which was ahead of Europe for centuries following the spread of Islam)? Why not China (which was technologically dominant until around 1500)? Why didn’t the pace of innovation slow down, as occurred in prior growth spurts around the world?

A good answer to these questions needs to address at least three questions. First, why was Europe behind most of the rest of Eurasia for centuries following the fall of the Western Roman Empire? Second, what happened in Europe in the two to three centuries prior to the 19th century that set the stage for modern economic growth? By the 18th century, Britain was clearly in a comparatively favorable position to achieve sustained economic growth. Why? Third, why did modern economic growth first happen in northwestern Europe? Modern economic growth was not a pan-European phenomenon. Simple comparisons of "Europe vs. elsewhere" are misleading. In the 19th century, Southern and Eastern Europe were closer to the Middle East or East Asia on most economic dimensions than they were to northwestern Europe. By 1700, the center of Europe’s economic geography had moved northwards away from Italy and the Mediterranean and towards economies that faced the Atlantic – especially to the Dutch Republic and the British Isles (see the figure at the top of the page). A convincing explanation must account for this.

In this chapter, we take insights from the first half of the book to provide answers to these questions. We argue that all of the features studied in the book thus far – geography, institutions, culture, demography, and colonization – played some role in the emergence of the modern economy.

But some causes are more central than others. First, we view institutions as being of central importance. But institutional developments did not occur in a vacuum. For example, the possibilities for both economic growth and institutional change were constrained by geography. Another key interaction was between institutional development and culture. Culture should not be seen as isolated from institutional, political, and economic factors.

We start by surveying some of the ways that geography shaped key institutional developments. For instance, natural resources can be a blessing, but they can also be a curse. Where political institutions are extractive, natural resources strengthen the ruling elites’ grip on power. They can use those resources to pay off friends and enrich themselves. This can lead to even more extractive institutions down the road.

Another example is the "fractured land hypothesis," which claims that Europe's unique geography led to political fragmentation. The opposite was true in China. European fragmentation had positive and unforeseeable economic consequences. The polities that succeeded the Roman Empire in Western Europe were weak. They lacked the ability to tax their populations or provide basic goods. As a consequence, political power became unbundled from economic and military power. Ideological power became the near-monopoly of the Catholic Church. The separation of sovereignty between rulers, the Church, and the nobility was an important precondition for the emergence of parliaments, independent cities, and other representative institutions that we discussed in Chapter 3.

We argue that many of the preconditions for sustained economic growth emerged in the medieval period. But why didn’t Europe take off then? Medieval Europe did experience several centuries of growth during the Commercial Revolution. Could these developments have led to sustained economic growth in the Middle Ages? What was holding the medieval European economy back?

Medieval economic growth was not sustained, and it was prone to reversals. However, the multiple centers of power that characterized medieval European life set the stage for the continent’s eventual economic rise. This rise was by no means pre-ordained, and it took centuries to come to fruition. Nor was it certain by the end of the medieval period that Europe would eventually take this path. History is not deterministic. Had a few things gone differently, modern economic growth might not have begun in Europe. Indeed, many of the wealthiest parts of Europe at the end of the medieval period, such as northern Italy and Spain, did not experience modern economic growth until the 20th century.

We proceed to discuss divergence within Europe just before the take-off. It was by no means pre-ordained that it would be northwestern Europe where the takeoff would occur. Why not northern Italy or Spain? There are many reasons why this was the case, and the literature overviewed in the first six chapters gives some indication as to what they are. Geography played a role – the opening of the Atlantic was key, although political institutions played a role in shaping how Atlantic trade proceeded. Demography was also important – the European Marriage Pattern was mainly confined to northern Europe. Political institutions played a crucial role. The late medieval period was when parliaments first emerged. Parliaments would ultimately differ in strength in different European states. This was important because parliaments placed key checks on central power. Where parliaments were strong – as they ended up being in the Dutch Republic and England – the voices of land- and wealth-holders were heard. We lay out in this chapter how the Dutch and English parliaments became strong in the early modern period, and what this meant for economic growth.

In sketching the "preconditions" for the onset of sustained economic growth, we mean those that ultimately played an important role in the structural shifts characteristic of Britain’s economy in the 18th and 19th centuries. None of the preconditions were enough by themselves. And some of these preconditions were unnecessary elsewhere, as we will discuss in later chapters. In fact, the Dutch Republic shared many of these preconditions with Britain. But it did not achieve sustained economic growth until much later.

Britain experienced a unique combination of economic, institutional, geographic, and cultural conditions in the 18th and 19th centuries. The result was the first modern economy – one in which economic growth was sustained without reversal. Why did this happen first in Britain? We began an explanation in this chapter.