In chapter 4 A&R outline their way of explaining the difference in growth and inequality of levels of development that we observe today. We already know that institutions matter, but how do they matter. They argue that at critical junctures small differences made more inclusive institutions possible, or reinforced extractive institutions.
The key example is the bubonic plague as a critical juncture for Europe. The deaths caused by the plague created a shortage of labour that undermined the feudal order. In Western Europe peasants freed themselves from compulsory labour services, competition for labour and a more inclusive labour market emerged and consequently wage rates increased. However, Eastern Europe experienced a Second Serfdom. A&R ascribe this to little differences: “in the East the lords were a little better organised, they had slightly more rights and more consolidated land holdings. Towns were weaker and smaller, peasants less organised”. The result was a booming market economy in the West, being served by coerced labour growing food in the East.
The authors go on the argue that the changes following a critical juncture were often not based on consensus, but were the result of conflict as different groups competed for power and attempted to structure institutions in their favour. In England the Civil War and Glorious Revolution are examples. It limited the power of the monarchy and created incentives that paved the way for the industrial revolution. Pluralistic political institutions enabled the development of inclusive economic institutions.
The chapter then goes on to examine more of the little differences – what made England different from France and Spain that led to different development paths following the expansion of world trade after 1600? They call it institutional drift and the result is the so-called contingent path of history:
The outcomes of the events during critical junctures are shaped by the weight of history, as existing economic and political institutions shape the balance of power and delineate what is politically feasible.
The chapter finishes off by relating a number of other examples, explaining the lay of the land. It is thought-provoking stuff.