The Institutional Change Of Public Finance And Modern Economic Development

Why the Industrial Revolution took place first in England has been being a major concern of numerous scholars in the world since World War II. Not only make economists their efforts to inquiry its causes from the perspectives of technology-determinantism and institution-determinantism through the comparison between the economic histories in Europe and those in Asia, experts in other areas also contribute lots of explanations in terms of culture, religious, history, geography and social. Focusing on the analysis of the efficiency of public finance, my comparison between the institutional changes of public finance in the Britain Industrial Revolution and that in Dutch Market Revolution is ether an application and development of Neo-Institution analyzing-tool developed by North (1973) or a new try to interpret the Industrial Revolution in terms of public finance. It is concluded that the main cause of the modern economic revolution is the institutional changes of public finance and the improvement of public economic efficiency, and that the changes of public finance system is the aftermath of the accidental combination of market economy with the backward political, juridical, cultural, and financial systems in England in view of the segregation by the strait rather than the consequence of the development of European advanced cultural, political and legal systems, like most of the thinkers image. This thesis includes six parts.In the first part, I discuss the significance and the complexity of this topic I choose and the possibility of breakingthrough in my work. The relationship between the topics about the Industrial Revolution and those in development economics and economic policies in undeveloped economies is analyzed at first, follows a review of the reasons of the failures of development economics and development policies in developing economies. Basing on the conditions and research methods we can utilize in this thesis, a brief description of a path to develop my analysis, a theoretical framework and a structural system of this paper is provided in figure1 and 2.Part II is a review of literatures concerned with the Industrial Revolution, the economic development and the efficiency of public finance which is the theoretical base in my explanation. It is showed that development economics could not make a help to the success of economic development in developing economies because it overlooks the positive role of state and its governments in public economies. Similarly, ignoring the impact of institutions gives rise to the failure of the economic growth theory in interpreting why some countries succeeded in catching-up with developed economies, but others did not. After pointing out the problem of traditional economic history researches is relying upon the econometrical method of mainstream economics, my concern is focused on the Neo-Institutions Economics whose topic is the property right. While the explanation that North proposed seems to draw almost all attentions of economists, the puzzle of England left to open, especially comparing with the case of the Dutch Republic. As the theoretical base of my research, the contributions of economists in public finance is examined, this will be helpful to my concern with the efficiency of public finance in the Part IV. In Part III, I construct a model of modern economic development. By analyzing the evolving process of economic system in the development of human society, the connotation of economic development and its different embodied forms in the different historical stage are examined, the emphasis is especially put upon the revolutionary significance of public finance in terms of efficiency as the outcome of the first labor division in the history of human society, a distinction is also made between the market economy and the industrial economy both of which overthrow the culture, value and principles of economic activities keeping for a long term in the traditional subsistence economy. I examine two hypotheses of market economic activities in mainstream economics again, then by introducing the price into economic model as a endogenions variable, I integrate the role of entrepreneur and public finance into the model of economic growth in order to construct the new model of economic development, which can be used to analyze the transformation of society and the institutional changes. According to this model, a discussion about the economic activities in real economic world is conducted, the meaning of economic revolutions in terms of efficiency is uncovered, and then the role of public finance system in the economic development is emphasized firstly which lead us to discuss the efficiency and mechism of public finance in next part.Part IV is a theory of institutional change of public finance oriented to improve its efficiency which is the theoretical base of explanation of the Britain Industrial Revolution. A historic fact has been being ignored so far that the institutional change of public finance and the improvement of the efficiency of public finance play a critical role in the process of social and economic development or in the human history. Following to the path that North developed a review of the merit and defect of public finance theory, and some revisions and corrections are contributed. The institutional change of public finance can result in economic revolutions,because it can raise the efficiency of economic performance. As a major concern, the efficiency of public finance is more plentiful than that of market economy, and depends upon the different aspects of public finance system, such as the showing mechanism of preference of taxpayers on public goods, the coordination system among taxpayers, the bargaining system between the taxpayers and governments. Thanks to the contributions of sociologists and the game theory, a discussion on the conditions of institutional changes of public finance is conducted which is important to the area the industrial revolution will take place.There are some cases in Part V to confirm the model I posed in part III. The main aim of this part is to examine the role of the institutional change of public finance in modern economic development by comparing the success of the Britain Industrial Revolution with the failure of the Dutch Republic. The logic is that the institutional change of public finance gives rise to the improvement of the efficiency of public finance, which in turn gives rise to the Britain Industrial Revolution. But why did the institutional change of public finance take place in the Britain? There are five possibilities to raise the efficiency of public finance in England which did not come from its advanced in politics, legal, culture and traditions, but its backward. They include the efficiency of bargaining system from the parting of taxpayers, the efficiency of coordination from the controlling of size of bargaining group, the efficiency of enforcement from the collective sovereignty, the efficiency of the match between demand and supply of public goods from the supervising of taxpayers on the suppliers, the efficiency of scale economy. The discussion in this part gives a convincible interpretation about why the Dutch Republic did not go ahead of England in the Industrial Revolution for its lack of the institutional change of public finance; even it has achieved a commercial boom in 17th century. A conclusion also can be drew from the comparison of political system that the democracy is far from an enough condition to the economic development, the democracy itself is not the efficient system of public finance which is heavily dependent upon the structure of the group of taxpayers. Therefore the fact that the political democracy run faster than the construction of public finance system in many developing countries throw light on their failure in economic development.In the last part, I drive some enlightenment from the experience of the success of the Britain Industrial Revolution. That is, the rising and declining of civilization and the modern economic development is not just relying on the technological change, but also on the institutional change, moreover the institutional change is not just taking place in the area of market economy, but also in the area of public economy. The Britain going ahead in the institutional change of public finance is not because it's inherit of best traditions of politics and laws from the Continent of Europe, but because its system of politics and laws is backward coming from a barbarian society. The institutional change of public finance, which determined the economic revolution, is the consequence of coordination among the taxpayers at first, then the outcome of the negotiation between taxpayers and governments.