Story of growth - ideas and institutions?

Andrew Haldane has a nice speech where he draws attention to the work of economic historians Steve Broadberry and John Wallis, who offer an alternative explanation for long-term economic growth. 

The conventional wisdom is that since per capita incomes were largely stagnant till it started rising from the middle of 18th century, historically the "global economy stood still in growth terms" and that industrial revolution (and associated "ideas") was the game changer for economic growth. By this argument, the subsequent versions of general purpose technologies led industrial revolution - electricity, IC engines, and sanitation (late 19th century); digitisation, computers, and internet (later part of 20th century); and AI, Big Data, automation, robotics, nano-technologies (ongoing) - have been the growth drivers. In other words, "ideas" were the drivers of growth.

But closer scrutiny questions this line of reasoning. Broadberry and Wallis use moving ten year average annual GDP per capita growth data to show that there were as many, or more and higher, growth spurts in the 1300-1750 period as in the subsequent period. But, unlike during that period, there were as many similar contractionary episodes. As Haldane writes,

Between 1300 and 1700, GDP expanded slightly more than half the time. Over these expanding periods, growth averaged 5.3% per year. The reason average growth was far-lower over this earlier period – indeed, little more than zero – was because expanding periods were almost exactly offset by contracting periods. They accounted for slightly less than half the period, during which growth averaged minus 5.4% per year.

So what has changed in the period since the Industrial Revolution? Growth during expansion periods is relatively little changed. Since 1750, it has averaged 3.2% per year. That is in fact a bit less than growth during expansion periods prior to the Industrial Revolution. This strongly implies it is not the greater incidence of ideas-fuelled booms after 1750 that accounts for the growth inflexion. The explanation lies instead in the dramatic fall in both the probability and cost of GDP contractions. Recessions have occurred only 30% of the time since 1700 and only 17% of the time since 1900. During these periods, growth has averaged minus 2.2% per year since 1700 and minus 3.4% per year since 1900. Since 1750, recessions have become far less frequent and less painful. It is the avoidance of deep recessions that differentiates the Golden Era from its Malthusian predecessor. 

And the explanation, "institutions". So "ideas" and "institutions" were responsible for the remarkable growth since industrial revolution. Haldane writes,

I will argue that it was the emergence of institutions that explains the rise in the other capitals that were essential pre-conditions for growth (human, social, infrastructural, intellectual etc.) It was the emergence of these same institutions which also cushioned the damaging effects of recessions... a rather broader set of “capitals” – not just physical capital (plant and machines) but human (skills and expertise), intellectual (ideas and technologies), infrastructural (transport and legal systems), social (co-operation and trust) and institutional (national and civic, private and public) capital.

Political upheavals and technological disruptions are the common triggers for emergence and evolution of institutions. They trigger the formation of social infrastructure or "enabling" and "insuring" institutions. As to the latter, relevant today for developing countries, there was a wide-ranging shift in the role of State in society from 17th century,

State spending as a proportion of national income rose from around 1% in the 16th century to around 12% in the 18th, 14% in the 19th and 33% in the 20th.39 It financed social infrastructure of various kinds supporting those facing greatest hardship. This ranged from social housing to healthcare to income support. Its effect was to cap the downside, recessionary risk to individuals, economies and societies.

So the takeaway,

Well, the story that better fits the facts appears to be one in which the conveyor belt of ideas and innovation has been continuous over the centuries, causing lengthy if lumpy ideas-fuelled expansions. But whereas prior to the Industrial Revolution this conveyor belt was regularly halted by recessions, more recently these interruptions have been far fewer and less costly. Put differently, the real revolution in living standards after 1750 came about not exclusively, or perhaps even mainly, from the surge in ideas and technologies. Rather, it resulted from societies having found some means of avoiding the subsequent recessionary bullets. Prior to the Industrial Revolution, these killed expansions dead. After it, societies appear to have found some effective means of dodging them... 

Joseph Schumpeter spoke powerfully about the forces of “creative destruction”. The lesson of history seems to be that we need both to “cultivate the creative” and to “disarm the destructive” if innovation is to translate into rising levels of social, human and infrastructural capital and, then, higher living standards. It is only by establishing strong institutional roots that technological fruit can subsequently be harvested... But if history is any guide, the story of growth will hinge on the interplay between the two “i”s – the disruptive forces of innovation on the one hand, the stabilising role of institutions on the other.