Counterpoint to Ogilvie and Carus - Netherlands

Parliament of Romania

Ogilvie and Carus offer the Netherlands as another example for where parliamentary institutions "failed to create the institutional basis for sustained economic growth." The statement is puzzling because, by the authors own account, "For the first century of its existence, the Dutch Republic was the miracle economy of early modern Europe, with high agricultural productivity, innovative industries at the forefront of technology, highly competitive global merchants, sophisticated financial markets, high living-standards, and rapid economic growth." The case for failure seems even harder to make in light of Maddison's account of the Dutch economy:  "From 1400 to 1700, Dutch per capita income growth was the fastest in Europe, and from 1600 to the 1820s its level was the highest. Before 1600 this performance was due to seizure of opportunities for trade in Northern Europe, and success in transforming agriculture by hydraulic engineering. Thereafter prosperity was augmented by its role in world trade."

Ogilvie and Carus' argument is that after 1670 the Netherlands did not experience as much growth as it had during the previous centuries, something that Maddison also reports. But to propose that the mere fact that an economy has failed to maintain a "miraculous" rate of growth, even as it is the richest economy in the world in per capita terms, seems too high a requirement. Moreover, I can find some pretty authoritative sources, including authors cited by Ogilvie and Carus themselves, arguing that not only the Netherlands was not a stagnant economy, but that it was the very first modern economy. De Vries offers reasonable explanations for a relative decline, reasons which do not depend on the failure of Dutch institutions: wars with Britain (with around five times as many people and eight times as much territory) and France (with around 11 times as many people and 15 times as much territory), combined with mercantilist restrictions by partners, represented a significant disruption of Dutch trade patterns.

Also, the Solow growth model predicts that economies will have different "steady states" - upper bounds on their per capita GDP - given a level of productivity. If the Netherlands had found some productivity-enhancing practices, it is expected that the return to these practices would decrease over time. Also, if other countries happened to adopt some of these practices by the Netherlands, then we should expect that they grow faster (since they are coming from a lower GDP per capita level) than the Netherlands. 

It is interesting to note that despite the decline after 1670, the Netherlands were still able to invade Britain, install a Dutch prince as the king, and restore parliamentary prerogatives in London, in an event which came to be known as the Glorious Revolution.  We would expect that Britain would exploit many of the high productivity practices that the Netherlands had an advantage, and they did just that - to a large extent with Dutch capital, which saw better rates in Britain than in the more mature Netherlands. 

To see how the Netherlands governance did not fail, it is worth paying attention to other aspects other than income per capita. One remarkable fact is that the Netherlands never defaulted on their debt during this period, despite deeply relying on debt financing (its first default in centuries would come after the Napoleonic annexation). Human capital increased substantially, as happened with urbanization and monetization. From Wikipedia, we see that the Dutch Republic was responsible for some key developments which would help turn it into the first modern economy:   the world's first publicly listed company ;  the world's first official stock exchange ;  the first historical model of the central bank ; the first investment funds. 

Ogilvie and Carus talk about "institutional putrefaction" after 1670. De Vries offers a very different perspective: "The Republic was a well-ordered government long capable of protecting the security of its citizens, nurturing the economic interests of its merchants and fishermen, establishing vigorous institutions to advance its colonial ambitions, and maintaining domestic tranquility" and "expressions of dissatisfaction with the Republic's institutions are barely detectable in the seventeenth century." The decline is explained in modern terms; it is indeed called a modern decline. The fall in birth rates is due to urbanization, not food shortage (much like is happening in the entire world right now). The fiscal problems are not due to plutocrats, but to the lack of current tools for financing debt.  

I can see how one may dispute that the Dutch can really be considered "the first modern economy" without industrialization. It may well be the case that industrialization is essential for the characterization. That is not the point of this post, however. My point here is much more modest: it is to argue that the Dutch economy, a candidate for being the first country to ever have escaped the Malthusian trap, cannot possibly be considered an example of failed governance in the 18th century. On the contrary, the remarkable success of this supposed failure of parliamentarism should increase our confidence in the hypothesis.