Institutionalising commitment and credit : historical tests of a microeconomic theory of innovation, governance and growth
This study investigates a factor that observation suggests is an important causal factor in economic outcomes, namely governance. Because contemporary economic theory provides little explanation of the observed link between innovation, governance and growth, a new theory of microeconomic activity is proposed; one that brings together the efficient markets hypothesis of financial economics, and the role of property rights that is central to the new institutional economics of North and Williamson. In particular, a conceptual model is set out, suggesting that the existence of governance mechanisms, which enable credible commitments to be given regarding future economic performance, is a crucial enabling factor for economic growth; because, within a market economy with imperfect information, they provide the right incentives for the cooperation necessary for socially beneficial innovation. The central body of the thesis seeks to test this model by applying it to four separate but important historical epochs, using secondary historical sources. Ancient and medieval Europe provides the first two applications. Following this, detailed consideration is given to England around the eighteenth century, and then to the United States in the late nineteenth and early twentieth centuries. The development of commitment mechanisms, first in the form of legal contracting, and then in public accounting, is described, and, when this also enables the growth of financial markets, economic growth in the form envisaged by the theory can be observed. Furthermore, the thesis argues for the scientific value of this commitment-credit theory, because of the observability, and so testability, of the concepts at its core. This suggests that, from the point of view of managers and government policymakers, this is an improvement over many other economic theories, and the neoclassical theory in particular, which builds on introspectively derived axioms, and rushes to give policy recommendations, without first testing the validity of the theory.