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Econ Gov (2009) 10:119145
DOI 10.1007/s10101-008-0054-7
ORIGINAL PAPER
The economic evolution of democracy
Christopher J. Ellis John Fender
Received: 27 February 2007 / Accepted: 30 May 2008 / Published online: 30 September 2008
Springer-Verlag 2008
Abstract Using a variant of the Ramsey growth model, we explore the relationships
between economic growth and the emergence of democracy. We argue that democracy
acts as a commitment device to economic reforms favored by an elite under the threat
of rebellion. Consistent with British economic history we model liberalizing reforms
of the labor market as the mechanism by which the elite redistribute resources to the
poor. We find that if democracy emerges it is preceded by a period of growth, however
the emergence of democracy will only encourage further growth if the redistributions
it entails do not significantly hamper capital accumulation.
Keywords Democracy Growth
JEL Classification H11 D99 O11 N10
1 Introduction
This paper investigates the links between economic growth and democracy. We model
incentives to accumulate capital in different political regimes and how this process
may lead to the emergence of political pressures that give rise to democracy. To our
knowledge this is the first paper to explore these questions in the framework of a fully
articulated standard growth model.
The links between political institutions and various measures of economic perfor-
mance have received considerable attention in the last decade. Much of the focus has
C. J. Ellis (B)
Department of Economics, University of Oregon, Eugene, OR 97403-1202, USA
e-mail: cjellis@uoregon.edu
J. Fender
Department of Economics, Birmingham University, Birmingham, UK
123
120 C. J. Ellis, J. Fender
been on whether democracy is a good institution from various economic perspec-

tives. Notably a debate has developed over whether democracy promotes economic
growth. Barro (1996) and Perotti (1996) conclude that for moderate pre-existing lev-
els of political rights an increase in democracy reduces growth. More recent studies
by Minier (1998) and Papaioannou and Siourounis (2004) find this relationship to
be positive. These mixed findings are unsurprising. The theoretical literature points
to several conflicting effects of democratization. On the negative side Persson and
Tabellini (1994) and Besley and Coate (1998) suggest that redistributive policies as-
sociated with democracy may reduce investment incentives. Further, the public choice
tradition argues that political lobbying associated with democracy imposes a dead-
weight loss on society. This is contested by Wittman (1989) who argues that political
markets are as efficient as their economic counterparts. Furthermore, several authors
point to the positive effects that democracy may have on growth. Olson (1993) argues
that it solves commitment problems, provides secure property rights, and supplies an
efficient legal system. It has also been claimed that democracies may be more open
to innovation (Acemoglu 2003), foster greater human capital accumulation (Tavares
and Wacziarg 2001), and encourage greater expenditure on education (Saint Paul and
Verdier 1993; Bourguignon and Verdier 2000).
Concurrently two other interrelated literatures have sought to ask the reverse ques-
tions of how the level of income and its growth rate effect political institutions. One
specific issue is whether income growth leads to democracy. Barro (1999) finds evi-
dence that income growth causes democracy. However this has recently been disputed
by Acemoglu et al. (2004) who argue that a third omitted variable explains this posi-
tive correlation. The question then becomes; if income growth is not the fundamental
cause, why do some economies progress from autocracy to democracy while others do
not? Acemoglu and Robinson (Acemoglu 2003; Acemoglu and Robinson 2006) argue
that democracy allows an elite to credibly commit to a desired set of economic policies.
By relinquishing political power to make economic decisions, the rich can promise
policies they otherwise would not necessarily honor. Specifically, suppose agents in
an economy are divided into rich and poor, the poor being greatly more numerous
than the rich. Initially the rich hold exclusive political power and own significantly
more capital per capita. The poor have the option of rebelling and seizing all capital
from the rich. In response to this threat of rebellion the rich redistribute income from
themselves to the poor. However, a one period redistribution may be insufficient, so
future redistributions must also be promised. However, the future is uncertain, and
the rich may not find it in their interests to fulfill their redistributive promises. They
thus require a commitment device. Democracy serves this purpose by giving political
power to the median voter who is a poor agent.
Both Lizzeri and Persico (2004) and Llavador and Oxoby (2005) offer alternative
explanations for the relationship between economic growth and democracy. Lizzeri
and Persico argue that the redistributional policies required by the Acemoglu and
Robinson story were not present for the appropriate period of British economic history.
They suggest the elite benefit from an extension of the franchise because it induces
a change in the composition of government spending. With a restricted franchise
politicians employ redistributive policies to compete for the support of swing voters
amongst the elite. But, with an extended franchise, political competition takes the
123
The economic evolution of democracy 121
form of increased public goods supply which has greater total benefits to the elite.
Llavador and Oxoby argue that competing factions within an elite co-opt supporters
from outside by extending the franchise.1
We follow an approach similar to Acemoglu et al. However, for both empirical
and theoretical reasons, we modify their analysis in a couple of important ways. The
histories of Britain, France, Germany, Sweden and Switzerland in the 19th and early
20th centuries lead us to believe that capital accumulation and labor market struc-
ture may have played significant roles in the development of democracies in these
countries. We argue that franchise extensions were at least in part due to the threat
of rebellion. However the redistributive mechanism used by the rich to buy off this
threat was a shift from local monopsonistic labor markets to a national competitive
one. The change offered workers their marginal product rather than a lower reser-
vation wage. Democracy was not required to make future redistributional promises
credible (although this would be entirely complementary) but to prevent contempora-
neous cheating on the part of individual Oligarchs on the promises to pay workers
the value of their marginal product. The problem faced by the rich was tantamount
to a cartel problem where each member would like the others to avert the threat of
rebellion while avoiding the costs themselves. We argue that even if the labor mar-
ket is formally liberalized, it must also be de facto liberalized, that is the power to
enforce, or ignore, legislation must be removed from the hands of the oligarchs, hence
Democracy is required to discipline the cartel. We model this story. Our analysis is
consistent with the empirical evidence gathered by Lizzeri and Persico (2004) and
adds to the theoretical analysis of Acemoglu and Robinson by modelling in greater
detail the economic decisions underlying capital accumulation. This gives insights
into the processes that lead to political regime change, and provides predictions on
the timing of regime changes and the relationships between these regime changes and
economic growth. Acemoglu and Robinson (2006) also consider capital accumulation
and political regime change, but are motivated by a desire to understand the underpin-
nings of the Kuznets curve. They assume there is a non-convexity in the investment
technology that implies (given appropriate parameter values) that only the rich invest.
Furthermore the per period investment by a rich agent is either 0 or a fixed propor-
tion of their pre-existing capital stock. Once the capital stock owned by the rich, and
hence the level of inequality, reaches a critical level, revolution by the poor becomes a
real threat; then the rich extend the franchise. Redistributional taxes under democracy
allow the poor to overcome the non-convexity in the investment technology and thus
invest. Inequality then declines and the model displays a Kuznets curve. We adopt
a more standard investment technology that allows the rich continuous investment
choices at each instant. The advantages are that we may then address issues of the
timing of political regime change, and also allow the impending threat of revolution
to enter into the investment decisions of the rich.
Since our primary motivation is drawn from the experience of Britain; a broad
strokes interpretive review of 19th century British economic history serves to set the
scene for our analysis. The interpretation we place on events is not broadly at variance
1 Particularly those elite factions associated with industrialization wished to enfranchise workers with
aligned interests.
123
with that given by Acemoglu and Robinson (2006) or the views of several economic
historians, including Lee (1994), Harrison (1965), and Trevelyan (1937) who have
studied this time period in depth.
1.1 19th Century British economic history: a selective review
We break our review into two periods for reasons that will shortly be apparent.
17991832 The first third of the 19th century was characterized by rapid techno-
logical growth and industrialization. This occurred against a backdrop of repressive
political and social legislation, industrial unrest, and low wages both in agriculture
and the new, growing, industrial labor force. Britain was still operating under the
Elizabethan Poor Laws 16011832, and the Act of Settlement of the Poor
16621865 which jointly created incentives that led to local monopsonistic labor
markets. The Poor Laws made individual parishes responsible for funding and dis-
tributing relief to the needy. Those without settlement in a community were dis-
qualified from relief. The Act of Settlement of the Poor allowed parishes to forcibly
relocate individuals claiming relief back to their home parishes if they did not have
settlement.2 Parishes would not accept the presence of outsiders unless their home
parishes provided them with documents guaranteeing that they would bear the costs
of their return. Home parishes were naturally unwilling to issue such guarantees. This
reduced labor mobility, as did the unwillingness of workers to stray from the social
safety net of poor relief in their home parishes.
This first period was also characterized by unrest and sporadic outbreaks of violence
such as the Luddite riots of 18111816, the Spa Fields Riots of 1816, the Derbyshire
Rising 1817, the Peterloo Massacre of 1819, and the Swing Riots of 1830. Workers
also began to form Trades Clubs, forerunners of Trades Unions, in an attempt to redress
the imbalance in the labor market and obtain higher wages. These actions were met
with considerable restrictive legislation. The 1799 and 1800 Combination Acts, the
1817 Gagging Acts, the 1819 Six Acts, and the 1825 Combination Act all sought to
prevent the political organization of labor, and to severely punish those who organized
or incited others to do so. It was under the Combination Acts that the Tolpuddle
Martyrs were convicted of organizing a union and transported in 1834. Further, the
1823 Master and Servant Act established a contractual relationship between employer
and employee that allowed employers to exact severe punitive damages against any
employee that had not completed their work.
While controversial there is a body of opinion among economic historians that real
wages trended little over the 600 years preceding the mid 19th century. Evidence is
provided in Lindert and Williamson (1983) and Allen (2001).
2 Settlement could be estabished via property qualifications, typically requiring considerable wealth, or by
an individual working 365 days in a parish. This latter qualification was typically manipulated by employers
who frequently terminated their workers after 364 days of employment.
123
18321912 Our interpretation is that there was a major sea-change around 183234.
Domestic unrest and the revolutions in France in 1830 and 1848 prompted a series of
major political and economic changes. From 1834 onward real wages and working
conditions improved, the franchise was slowly extended, and restrictions on the mobil-
ity and rights of labor were removed. The emphasis of the labor movement shifted from
being primarily concerned with wages and working conditions to also emphasizing
political rights.
Increasing pressure and threats of violence from various groups, particularly the
Chartists (especially the physical force Chartists led by Fergus OConnor), lead to
political change. Indeed it can be plausibly argued that over this period the British
Government seriously feared revolution. Evidence of this is provided by the events of
1848 when safety concerns led the government to send Queen Victoria to the Isle of
Wight, and have the Duke of Wellington defend London with thousands of soldiers
and special constables.
The ensuing changes were quite dramatic, in 1832 the Elizabethan Poor Laws
were repealed and replaced by the New Poor Law which made poor relief subject to
the workhouse test, under which relief could only be obtained by going into the
workhouse, that is accepting to live and work in a squalid and degrading environment.3
This was not a very appealing prospect and caused individuals in need to travel in search
of employment, establishing a more competitive labor market.4 Over this period the
franchise was repeatedly extended via a series of Reform Acts increasing the share of
the population eligible to vote to 7% (1832), 15% (1867), and 30% (1884). The secret
ballot was introduced in the Ballot Act of 1872. The Corrupt and Illegal Practices
Act of 1883 sought to prevent the wealthy from purchasing the votes of the less
well-off, and restricted campaign spending. In 1858 property qualifications for MPs
were scrapped, and in 1912 MPs were finally paid.
At the same time as extending political rights the British Government also made
concessions to the labor movement. In 1871 it introduced the Trade Union Act which
reversed the various Combination Acts and protected union funds from seizure. This
was followed by the 1875 Conspiracy and Protection of Property Act which made
peaceful picketing legal, and the 1906 Trades Disputes Act which removed Trades
Union liability for damage done during strikes.
Interpretation Our interpretation of the events chronicled above is that faced with
the threat of losing property rights over capital (revolution) the ruling elite sought
credible ways to placate the poor majority. Reforms that made the labor market more
competitive and raised wages served this purpose. However, guarantees were required
that the rich would neither individually or collectively retreat from these concessions.
Hence the introduction of democracy, both as an intertemporal commitment device
3 There is considerable debate amongst historians about the implementation of the New Poor Law. Some
argue that most poor relief continued to be disbursed by the old mechanisms developed under the Elizabethan
system.
4 Our interpretation here contrasts with that of Besley et al. (2004). They argue that the introduction of
the workhouse test was to provide a screening mechanism for poor relief in response to the informational
problems arising from increased labor mobility. We argue that causality runs the other way, the replacement
of the Elizabethan poor laws was a spur to labor mobility.
123
as in Acemoglu et al., and as a mechanism to prevent internal cheating within the

elites cartel. This story that the evolution of democracy occurs coincidently with
structural changes in the labor market is also consistent with the findings of Rodrik
(1999), who shows that both over time within countries and across countries there is a
significant positive correlation between democracy and wages even after controlling
for labor productivity and other factors.
In the sections that follow we develop a model of the relationship between polit-
ical institutions and economic growth consistent with the events chronicled above.
In our analysis the causal relationship between economic and political change is
bidirectional, and has several elements in common with the story of Acemoglu et
al., but also has several key differences. In our analysis democracy will still play
the role of a commitment device, but the commitment is to structural reform of the
labor market. We assume an economy initially run by a small group of oligarchs who
are sufficiently well coordinated and posses sufficient economic and political power
to impose a subsistence wage on their workers. Initially the oligarchs hold all property
rights to physical capital, and the capitallabor ratio is low. Workers may seize the
capital from the oligarchs, but such a rebellion involves the destruction of a proportion
of the capital stock. Thus, at first, workers have no incentive to change the status quo.
However, over time the oligarchs invest and thus the capitallabor ratio increases. Seiz-
ing the capital, despite the associated destruction, becomes increasingly appealing to
the workers. Should capital accumulation continue to some critical level a revolution
will occur. In order to prevent this the oligarchs must choose between two options.
They may cease investing. Alternatively, they may pay the workers the value of their
marginal product, that is instigate a national competitive labor market. Should they
decide to pay marginal products they require a mechanism to prevent individual oli-
garchs from free riding and reducing wages. Legislation liberalizing the labor market
is in itself insufficient to prevent free riding if its enforcement remains in the hands
of the oligarchs.5 Thus they pass political power to the median voter by introducing
democracy. Democracy makes credible both the commitment between Oligarchs not
to cheat on their own cartel by reverting to paying subsistence wages, and over time
not to repeal or neglect the legislation that liberalized the labor market (although this
plays no essential role in our analysis). Hence, our story is consistent with the recent
empirical findings of Acemoglu et al. (2004) in that income is correlated with democ-
racy, but both are caused by the political economy of the accumulation of capital. It
also accords well with the evidence presented by Lizzeri and Persico (2004).
2 Structure of the economy
The economy is described by a variant of the Ramsey (1928) growth model. There
are two type of individuals: Workers, w, who own only their labor endowments, and
5 There has been significant debate among economic historians over the actual effects of the replacement of
the Elizabethan Poor Laws in Britain by the New Poor Law (1832). In some boroughs it appears poor relief
practices changed little, on others the going into the workhouse was required for relief. This suggests
local oligarchs did indeed have some flexibility in enforcing legislation.
123
Oligarchs, g, who hold the property rights to capital. At any time, t, there are alive
L(t) workers and M(t) < L(t) oligarchs. Both types are assumed to have identical
constant relative risk aversion utility functions of the form

t ci (t)1
V (0) =
i
U (c (t))e
i
dt = et dt i = w, g, (1)
1
t=0 t=0
where c(t) is consumption per capita, is a discount rate, and a preference parameter.
Output in this economy is generated via a fixed number, q, of constant returns to
scale production technologies that may be aggregated into the single function
Y (t) = f (K (t), L(t)) = K (t) L(t)1 , (2)
where Y (t) is aggregate output, K (t) total capital, L(t) aggregate employment, and
(0, 1) is a technology parameter.
We assume that the labor force and the number of oligarchs both grow at the same
constant exogenous rate

L(t) M(t)
= = n 0. (3)
L(t) M(t)
For algebraic convenience let L(0) = 1 and M(0) = < 1 hence L(t) = L(0)ent =
ent , M(t) = ent and M(t) = L(t).
Reexpressing the aggregate production function in per worker terms gives us
y(t) = k(t) , (4)

(t) (t)
where y(t) = YL(t) and k(t) = KL(t) .
The capital stock per worker evolves according to the standard process

k(t) = i(t) ( + n)k(t), (5)
where i(t) is investment per worker and is the capital stock depreciation rate.
As is standard the time paths of utility and output in this economy depend crucially
on the evolution of the capital-labor ratio, k(t), which in turn depends on the incentives
that underlie the investment decisions i(t). These incentives depend on the political
regime obtaining. We define these next.
3 Politics
3.1 Political regimes
There are three types of political regime, defined by both who is enfranchised, and
who holds property rights over capital.
123
1. Oligarchy
We envisage Oligarchy as the initial state of the economy. Property rights over capital
are held by the oligarchs, who are the only group enfranchised. The oligarchs hold
de jure political power through the right to vote, and exercise local de facto political
power by fulfilling the role of agents of the state. Workers earn a subsistence wage, w
,
which is also the value of home production and consistent with labor markets being
local monopsonies.6
2. Democracy
Here property rights over capital remain in the hands of the oligarchs, but workers are
paid their marginal product and the franchise has been extended to include all workers
and oligarchs. This is a modern democratic market economy with the apparatus of
democratic governance and competitive labor markets.7
3. Socialism
The oligarchs are no longer present in the economy, property rights over capital are
held by workers all of whom are enfranchised.
3.2 Political Change
The economy starts in the non-democratic state of Oligarchy. Workers are paid a
subsistence wage. They have no incentive to rebel and seize the property rights to
capital as the destruction associated with a revolution actually leaves them worse off
than before (a proportion of the capital stock is assumed destroyed). However, over
time, as the per worker capital stock grows,so too does the potential post revolution
capital stock and the incentive to rebel. Should the per capita capital stock reach a
critical level, k , a revolution will occur. Oligarchs, aware of the impending revolution,
can respond in one of two ways. They can reduce investment per worker to avoid the
conditions that trigger a revolution, or, they can raise workers wages. However, should
the oligarchs choose to raise wages they then face a collective action problem. Each
oligarch would like the others to pay higher wages to prevent a revolution, while
themselves continuing to compensate their workers at the subsistence level. To solve
their collective action problem the oligarchs liberalize the labor market and extend the
franchise to the workers. This acts as a commitment device, enhanced labor mobility
makes it necessary for each oligarch to pay the market wage, the extended franchise
makes it impossible for the oligarchs to undo these reforms. Notice that this sequence
is consistent with the evidence presented by Rodrik (1999) that the introduction of
democratic reforms precede increases in wages.
6 We assume workers are homogeneous and fully employed at a common subsistence wage. Were workers
heterogeneous in terms of their subsistence wages several possibilities emerge; first if subsistence wages are
observable (perhaps due to family size) then oligarchs might either practice perfect wage discrimination,
or pay the highest reservation wage if this were equal to or less than the marginal product of labor at full
employment.
7 It might seem that after realizing democracy the poor median voter could then engage in further redistribu-
tion in their own favor. This is entirely possible, however rational redistributions would be non-distortionary
and would impact neither the steady state nor transition paths of our model. It follows that the qualitative
conclusions of our analysis would remain.
123
4 The political-economy equilibrium
4.1 Oligarchy
We begin with the choice problem of an individual oligarch. Each takes the time
path of the aggregate capital stock as given, but recognizes that at some time in the
future the aggregate will hit the critical level k and precipitate a regime change.
For the interval [0, T ] the oligarch is under no immediate threat of rebellion, pays
the reservation wage w , and makes capital investment decisions that maximize their
own utility stream. After T the threat of rebellion necessitates a change in oligarch
behavior. For our current purposes it is sufficient to note that the oligarchs subsequent
payoffs are determined by the capital stock accumulated to time T and captured by
the function V g (k(T )), which will be made precise subsequently.8 Each oligarch thus
maximizes
T g
co (t)1
Max V (0) =
g
et dt + V g (k(T ))eT
1
t=0

s.t. k o (t) = ko (t) co (t) ( + n)ko (t) w
g

k0 (0) = 1 (6)
g
Note that co (t) is consumption per oligarch, while ko (t) is capital per worker. Here
the Hamiltonian is
g 1
co (t)
et + (t) ko (t) co (t) ( + n)ko (t) w
g g
H (co , ko , t, ) = .
1
(7)
Giving the necessary conditions

1
H g
co = g et (t) = 0, (8)
co (t)

Hko = (t) ko (t)1 ( + n) = (t). (9)
The dynamic system arising from solving this optimization problem involves the Euler
equation together with the equation of motion for the capital stock
co (t)
g
g
co (t) = ko (t)1 ( + n + ) (10)

k o (t) = ko (t) co (t) ( + n)ko (t) w
g
(11)
and the transversality condition
8 V g (k(T )) is then a scrap value function as discussed in many dynamic optimization texts.
123

V g (k(T )) T 1 1
e = (T ) = g eT (12)
k co (T )
Expressions (10) and (11) represent a standard Ramsey growth model with a saddle
path stable equilibrium, expression (12) is a terminal surface the specific nature of
which depends on the regime change precipitated when the critical aggregate capital
stock is reached. Note that the terminal surface is determined by the aggregate capital
stock, the dynamics of which are taken as given by each oligarch in making their
individual investment decisions. Each oligarch is fully forward looking, but correctly
regard the critical capital stock, k , and timing of any future regime change T (k ) as
independent of their own decisions.
Given the non-linearity of the differential equations (9) and (10) we work with
a first-order approximation
to the dynamic system
around the saddle path stable
1 1
g
equilibrium co = 1 1 ( + n) 1 w and k o = 1 where ++n .
The approximate equation of the saddle path is then given by

2 g
ko (t) k o +

co (t) cog .
(13)
g
co 2
+ 2 4 ( 1) k o
along which the capital stock dynamics are

k o (t) = zko (t) zk o (14)

g
co 2
+ 2 4 (1)k o
with z = 2
< 0, this differential equation has the
solution

ko (t) = ko (0)e zt + k o 1 e zt . (15)
As oligarchs are identical, and possess a constant returns to scale production tech-
nology, then (15) also describes the (approximate) dynamics of the aggregate capital
stock. It follows that if we can define k the critical capital stock we can deduce T
from (15).
4.2 Incipient rebellion and the critical capital stock
Workers rebel whenever it is their interests to do so. A rebellion will destroy ko (t)
of the pre-existing capital. Thereafter all property rights to capital will be held by the
workers who make all subsequent investment decisions. As the workers investment
decisions are efficient they cannot do worse than the investment decisions made by
the oligarchs, but will reallocate to themselves the resources previously received by
123
the oligarchs. As soon as the post-revolution capital stock (1 ) ko (t) supports pay-
ment of the subsistence wage, workers prefer to rebel and make all future investment
decisions themselves. It follows then that a revolution will arise if and when
= [(1 ) ko (t)] ( + n) (1 ) ko (t).

w (16)
We know from (15) that ko (t) is monotonically increasing in t, and that the steady
1
state value of the capital stock is given by k o = 1 hence a revolutionary threat
will emerge provided
1
(1 ) 1 ( + n) (1 ) 1 .
w (17)
That is if a wage in excess of the subsistence wage can be supported by a feasible

capital stock. This is tantamount to stating that the terminal surface (12) intersects the
saddle path at a capital stock below the steady state level. If we define k = ko (t) as the
= [(1 ) ko (t)] ( + n) (1 ) ko (t)
smallest strictly positive real solution to w
then from (15) the timing of the revolutionary threat is given by

1 k k 1 k k
T (k ) = ln
o o
= ln > 0. (18)
z k(0) k o z 1 ko

Notice that Tk(k ) = 1z 1
> 0; if the critical capital stock is larger then all
k k o
else equal the incipient revolution takes place at a later date. Further, the more rapid is
the speed of convergence, the absolutely greater is z, then the sooner the revolutionary
threat will materialize.
Revolution and the subsequent socialist regime constitutes an off-equilibrium threat.
In determining what to do about this threat the oligarchs need to know the value to
workers of the consumption time path under socialism. In the appendix we demon-
strate that the time path of per worker consumption under a socialist regime can be
approximately expressed as

crw (t) = w
eat + cw
S 1e
at
, (19)
2c(1) 2
where a = < 0, allowing the discounted present value of
cw
+ 2 4 r [(1) 2 ]
the workers utility stream under socialism to be written
at
e + cw
w S 1e
at 1
et dt. (20)
1
t=0
It follows that any response of the oligarchs to the threat of revolution must either
prevent the capital stock achieving k , or must offer the workers a stream of utility the
present discounted value of which is no less than (20). We take up this question next.
123
4.3 Democracy or stagnation
Faced with an incipient revolution, that is once the aggregate capital stock reaches
k , the oligarchs cannot continue along the same capital accumulation path as before;
with workers being paid only their reservation wage. Either net investment must
cease, making it undesirable for workers to seize the capital stock, or, if the capi-
tal stock continues to grow, workers must receive more than their reservation wage.
In Acemoglu and Robinson (2006) the poor receive redistributive transfers from the
rich via the tax system. However, evidence presented by Lizzeri and Persico (2004)
indicates that in the British case there were no increases in redistributive transfers
over the time period of franchise extension. Here, following the prompts of British
economic history, we posit a redistributional mechanism that involves labor market
reform.9 Specifically, workers are paid their marginal products rather than reservation
wages. Given that after a revolution workers own all capital and subsequently invest
efficiently it is perhaps not immediately clear why the receipt of a market wage will
serve to prevent a rebellion. However, recall that a rebellion involves the destruction
of capital, and the post revolution capital stock is just sufficient to fund the reservation
wage. Under reasonable parameter values, particularly if is sufficiently large, then
workers are better off in the short term accepting the value of their marginal product
rather than taking over the economy.10 Obviously one key question remains. Why is
it also necessary for the Oligarchs to both enact redistributive policies and introduce
democracy? Here we again differ slightly from Acemoglu and Robinson. They argue
that the destruction associated with a rebellion is an exogenous random variable, so
the threat of rebellion may be credible today, because destruction will be slight, but
the threat of revolution may evaporate in the future if destruction is greater. Hence
promises of future redistributive policies on the part of the rich will not be credible;
when the threat of revolution disappears they will renege on them. The rich must
relinquishing de jure political power to the poor, instigate democracy, to make redis-
tributional promises credible. We take a slightly different tack. The Oligarchs may
be thought of as a cartel, each member of which enjoys de facto political power within
their own domain. Each wishes to avert a rebellion, but at minimum cost to themselves.
With the additional innocent assumption that the critical mass of workers needed to
instigate a revolution exceeds the labor force associated with a particular oligarch we
find that they face the standard cartel problem, each wishes the others to pay marginal
products while they pay only reservation wages. By relinquishing de jure political
9 Lizzeri and Persico (2004) argue that franchise extension may occur without any external threat to the
elite. They suggest that only the swing voters amongst the elite benefit from redisrtibutive politics. Hence
by extending the franchise the elite give the politicians better incentive to choose policies with more diffuse
benefits, that is supply public goods. The elite as a whole gain from this. This story is probably quite
complementary with the analysis we present.
10 It is relatively straightforward to show that the workers steady state consumption is greater under
a socialist regime rather than one where they receive the value of their marginal product. However, it
is also the case that if a rebellion leads to moderate levels of capital stock destruction, then workers
initial consumption levels will be higher in the democratic regime, hence the up-front gains can cause the
discounter present values of democracy to be the greater for the workers.
123
power to the workers via the extension of the franchise the oligarchs cartel solves
their internal discipline problem.
To analyze the oligarchs choice between democracy or stagnation we must first
solve for their optimal consumption and utility paths in each of the two possible
regimes.
4.3.1 Democracy
After extending the franchise the oligarchs pay a wage equal to the marginal product of
labor. We think of them now as the owners of modern price taking firms who maximize
utility given by,
g

cd (t)1 ))
Max V (D) =
g
e(tT (k dt
1
t=T (k )

s.t. k d (t) = kd (t) cd (t) wd (t) ( + n) kd (t)
g
kd (T (k )) = k . (21)
From the Hamiltonian (see the appendix) the dynamic behavior of the economy now
follows from the Euler equation

cd (t)
g
g
cd (t) = kd (t)1 ( + + n) , (22)

the equation of motion for the capital stock (5), and the labor market equilibrium
condition
wd (t) = (1 ) kd (t) . (23)
Following the same procedures as before gives

the1 saddle path stable steady state
1
values k d = 1 , and cd = 1 +n
g
1 around which we linearize to
obtain an approximation to the saddle path
g
1 cd 2
2 k d ( + n) + 2 4 ( 1) k d
+ kd (t) k d .
g g
cd (t) cd
2
(24)
From the linearized versions of (22) (see Appendix) and (24) we may write the
dynamics of consumption alone as
g g g
cd (t) bcd (t) bcd (25)
123

g 2
2cd (1)k d
with b =
g
< 0.
1 cd 2
2 k d (+n)+ 2 4 (1)k d
The solution to which is
))

cd (t) = cd (T (k ))eb(tT (k + cd 1 eb(tT (k ))
g g g
(26)
Hence the value of consumption to the oligarchs in the period after extension of the
franchise is given by
1

cd (T (k ))eb(tT (k )) + cd 1 eb(tT (k ))
g g
g
Vd (k(T )) =
1
t=T (k )
))
e(tT (k dt. (27)
Now we have to be careful about the value of c g (T (k )) since it must be the case that
consumption, and not capital, jumps when the system switches from the pre to post
franchise extension growth path, this requires

+n 1
cd (T (k )) 1 1

g
1 c 2
2 k d ( + n) + 2 4 d ( 1) k d
+ k k .
2
(28)
4.3.2 Stagnation
As an alternative to extending the franchise oligarchs could invest just enough such
that the per worker capital stock remains at k(t) = k . This begs the question of
how the oligarchs manage to coordinate on just maintaining the current aggregate
capital stock, when in the preceding interval they had each made their investment
decisions in a non-cooperative fashion. We argue (but do not explicitly model) that
any small cost to coordination during the interval [0, T ] will be sufficient to prevent
individual oligarchs deviating from Nash behavior. The differential damage done
by a small deviation of k(t) by one oligarch from the cooperatively optimal choice
will be less than the cost of coordination, whereas at k a small deviation by one
oligarch producesa discontinuous fall in all oligarchs payoffs giving each an incentive
123
to overcome the costs of coordination. Maintaining this as an assumption it then

follows that the oligarchs enjoy the constant consumption stream11
g (k ) w
( + n) k
cs (t) = (29)

the value of the utility integral derived from which is

1
(k )
w (+n)k
g (tT (k ))
Vs (k(T )) = e dt
1
t=T (k )
1
(k )
w (+n)k

= . (30)
(1 )
4.4 The oligarchs key choice: democracy or stagnation
Whether the oligarch chooses stagnation or democracy depends crucially on

1

cd (T (k ))eb(tT (k )) + cd 1 eb(tT (k ))
g
g
Vd (k(T ) =
1
t=T (k )

e(tT (k )) dt

g 1 ( + n) k 1
(k ) w
Vs (k(T ) = (31)
(1 )
We may make a couple of immediate observations. Notice that b is the speed of

adjustment of oligarchs consumption along the saddle path. For the limiting cases
b 0 and b it is easy to show that V g (E) > V g (R) and V g (E) <
V g (R), respectively. If convergence to the oligarchs steady state consumption level
is sufficiently rapid then democracy will ensue, otherwise the economy will stagnate
in a repressive political regime. We also observe that the subsistence wage w appears
only on the right hand side of (31), hence the greater is the subsistence wage the more
likely are the oligarchs to choose democracy over stagnation. It is, after all, less of a
concession in these circumstances.
The effects on the oligarchs political regime choice of changes in the other key
parameters of the model are quite complicated. The general nature of the oligarchs key
choice is illustrated in the following diagrams. In Fig. 1 we represent the initial state of
the economy by the capital stock k(0) at point A on the saddle path associated with an
Oligarchy. Over time the economy moves along the saddle path until it reaches point
11 In the deterministic model we present this is all that is required. Were we to allow for some source
of stochasticness, then the Oligarchs would trade off the probability of triggering a revolution against the
potential gains from more capital.
123
Fig. 1 Phase diagram
B where the capital stock hits the critical level k . At this point there is an incipient
threat of rebellion. The oligarchs can either choose to restrict capital accumulation
and remain at point B forever, or they can extend the franchise to the workers and
jump the economy to point C on the Democracy saddle path. The oligarchs suffer an
initial fall in consumption, but then enjoy the consumption stream engendered by the
movement from C to D along the Democracy saddle path.
The circumstances under which the oligarchs choose democracy or repression
becomes apparent from Fig. 2.
Fig. 2 Oligarchs utility paths
123
Clearly whether Democracy or repression is chosen depends on the discounted

utility generated by the integral of the consumption time paths. In Fig. 2 we see
this reduces to whether on the interval [T (k ), ) the integral under the Democracy

w (+n)k 1
utility curve exceeds the value under the horizontal line at ( )
k
(1)
g 1
cp
1 .
4.5 Growth and democracy
Our analysis indicates that growth may promote democracy. Specifically when the
per capita capital stock reaches the critical level, k , then the oligarchs must choose
between democracy and continued growth or stagnation. Should democracy be the
oligarchs option of choice then the sooner k is achieved the sooner we expect to
observe a transition to democracy. In this sense growth promotes democracy. A second
question involves whether we should anticipate an increase in growth following the
transition from oligarchy to democracy. This is a little more complex and requires that
we evaluate the growth rates of capital under the Oligarchy and Democracy regimes
immediately before and after the transition between the two. From (13) and (24)
together with the linearized dynamic systems for the oligarchic and democratic regimes
(see Appendix) we can write these as

g
+ 2 4 co ( 1) k 2
o
k o (t) =

ko (t) k o
(32)
2
and
g
cd 2

4 ( 1) k e
2

k d (t) =
1 [ + ( 1)(n + )]

2 2

kd (t) k d . (33)
By definition of the timing of the incipient revolution it follows that ko (T ) = k =

kd (T ) and we have already demonstrated that k o = k d . It follows that whether

k o (t) k o (t), that is whether democracy increases or decreases the capital stock
growth rate, depends crucially on the relative magnitudes of + ( 1)(n + ) and
g g
, and on the relative magnitudes of co and cd . Note immediately that
+ ( 1)(n + ) (34)
123
and using (23) allows us to write

g g
w
(1 )k o = (1 )y o cd co . (35)
Applying (34) and (35) to (32) and (33) we see that all else equal the capital stock
growth rate is no lower in a democratic than in an Oligarchic regime. However,
(35) adds a complication; it may be interpreted as saying that if the workers wages
in Oligarchy are less than labors incipient share of per capita output in the Oligarchy
steady state, then this will tend to cause the per capita capital stock to grow faster under
a regime of Oligarchy. Combing these statements leads to an interesting conclusion.
The lower is the workers wage, w , relative to the wage that they ought to receive
in the log run steady state, (1 )y o , alternatively the greater is inequality relative
to the level that would be generate by the market in the long run, the greater is the
tendency for the introduction of democracy to slow capital accumulation. However, as
the workers wage approaches the long run market share of labor in per capita output,
then the introduction of democracy will accelerate capital accumulation. This may be
understood in terms of the resources available for capital accumulation. If workers
receive very little of societys resources via the subsistence wage, w , the two effects
are present: prior to democratization there are ample resources available for capital
accumulation, after democratization the large jump in societies resources devoted to
worker compensation implies the rate of capital accumulation must slow.
4.6 Conclusions and potential extensions
We have explored the relationships between democracy and growth. Inspired primar-
ily be British economic history, we have modelled the process by which oligarchs
respond to a revolutionary threat induced by growth in the per capita capital stock.
Our working hypothesis is that they cope with this threat by transferring resources
to workers via reform of the labor market. To ensure that individual oligarchs do not
cheat on their cartel, and to ensure that reforms are not undone in the future, oligarchs
introduce democracy. With this device we are able to investigate questions both of
the likelihood that democracy will be achieved and the timing of its inception. Fur-
ther, we are able to tackle some questions about the effects of democracy on growth,
and find that the difference between labors subsistence wage and steady state market
share of output, which may be interpreted as a measure of inequality, plays a crucial
role.
The structure developed in the preceding sections seems to have the possibility of
being extended in several dimensions. One possibility is the introduction of unantic-
ipated shocks to the capitallabor ratio, which could have significant implications for
the political regime and the economies growth path. Events such as the Irish potato
famine which reduced the Irish population from 8.2 million in 1841 to 6.5 million in
1851, and Swedish emigration to the USA, which saw 25% of the population leave
from 1850 to 1900, clearly impacted capital labor ratios and could be considered to
have impacted those countries paths to democracy. Indeed some have attributed the
Peasants Revolt in England in 1381, and similar revolts in Italy, France and Belgium
123
to the effects of the ravages of the Black Death, which at its peak, between 1347 and
1352, reduced Europes population by 25 million, or approximately one third.
A second line of extensions might involve the introduction of technological progress
into the analysis. If, as is commonly believed to be empirically true, technical progress
is purely labor-augmenting (Harrod-neutral), then it is well known that in the steady
state the capital labor ratio grows at the rate of technical progress. While we do not
provide a formal analysis of the implications of labor-augmenting technical progress
here, it seems quite probable that this would produce some interesting results. We
conjecture that a formal analysis would reveal labor-augmenting technical progress
hastens the time at which the oligarchs would have to choose between stagnation
or democracy. However, the potential implication of technical progress for the oli-
garchs choices are not necessarily as encouraging. One possibility is that democracy is
inevitable, but another is that stagnation will still be chosen and require the destruction
of physical capital to offset the effects of technological progress.
A final possibility that may be worth consideration is to allow oligarchs to engage
in defensive investments. Ironically these would involve raising , the destruction
associated with rebellion.
5 Appendix
5.1 Workers utility maximization under socialism

w csw (t)1
Max V (0) = et dt
1
t=0

s.t. ks (t) = ks (t) csw (t) ( + n)ks (t)
ks (0) = (1 ) k . (36)
The Hamiltonian to which is

csw (t)1
H (csw , ks , t, ) = et + (t) ks (t) csw (t) ( + n)ks (t) .
1
(37)
Giving the first order conditions

1
Hc = w
et (t) = 0, (38)
cs (t)
and

Hk = (t) ks (t)1 ( + n) = (t), (39)
123
and the transversality condition is given by
lim [(t)ks (t)] = 0. (40)

t
Taking the time derivative of (38) and using the resultant equation together with
(38) in (39) allows the dynamic system to be rewritten as the Euler equation and the
capital stock dynamic,

w csw (t)
cs (t) = ks (t)1 ( + n) , (41)

ks (t) = ks (t) csw (t) ( + n)ks (t). (42)
This is a standard Ramsey type system, with saddle path stable equilibrium
1 1
cw
s =
1 ( + n) 1 , k = 1
s (43)

where = ++n
Linearizing this system around the saddle path stable equilibrium and gathering
terms gives
w
c (t) cw 2
csw (t) cw
s = 0
s
( 1) k s s
. (44)
k s (t) 1 ks (t) k s
From this we derive the characteristic equation
cw
s 2
2 + ( 1) k s = 0.

The characteristic roots of this system are

cw
2 4 (
s
1) 2
= . (45)
2
The slope of the stable branch at the saddle path stable equilibrium is

! cw
dcs (ks (t)) !! + 2 4 (
s
1) 2
! = = . (46)
dks (t) ks (t)=k 2
123
Hence an approximation to the saddle path may be written
!
dcs (ks (t)) !!
csw (t) cw
s + ! ks (t) k s
dks (t) ks (t)=k

cw
1 + 2 4 s ( 1) 2
= 1 ( + n) 1 + ks (t) k s .
2
(47)
Now
w cw
cs (t) = s
( 1) 2 ks (t) k s

2c ( 1) 2 w
=

cs (t) cw (48)
c
w s
+ 2 4 s ( 1) 2
or

cw
+ 2 4 s ( 1) 2
k s (t) = ks (t) k s
2
which is of the form
w
cs (t) = acsw (t) acw
s (49)
with a < 0.
The solution is
t

csw (t) = cs (0)e
at
acw
s e
a(ts)
ds = cs (0)eat + cw
s 1e
at
,
s=0
as reported in the text.
123
5.2 The Oligarchs maximization problem
The Oligarchs maximize
T g
co (t)1
Max V (0) =
g
et dt + V g (T )eT
1
t=0

s.t. k o (t) = ko (t) co (t) ( + n)ko (t) w
g

ko (0) = 1 (50)
g
Note that co (t) is consumption per oligarch, while ko (t) is capital per worker.
Here the Hamiltonian is
g 1
co (t)
et + (t) ko (t) co (t) ( + n)ko (t) w
g g
H (co , ko , t, ) = .
1
(51)
Giving the necessary conditions

1
Hcog = g et (t) = 0, (52)
co (t)

Hko = (t) ko (t)1 ( + n) = (t), (53)
and the transversality condition

V g (k(T )) T 1 1
e = (T ) = g eT (54)
k co (T )
We are now interested in characterizing the time path of the solution and obtaining a
closed form solution for T , the date of political regime change. From (52) and taking
the time derivative of (52) gives
g
c (t) et
(t) = o , (55)

and
g
co (t)(+1) co (t)et + co (t) et
g g

(t) = . (56)

Substituting (55) and (56) into (53) and rearranging gives the Euler equation
co (t)
g
g
co (t) = ko (t)1 ( + n + ) . (57)

123
This is a standard Ramsey type system, with saddle path stable equilibrium
g 1 1
1
co = 1 ( + n) 1 w
, k o = 1 . (58)

Linearizing this system around the saddle path stable equilibrium and writing in matrix
form gives
g
g 2 g g
co (t) 0 co
( 1) k o co (t) co
= . (59)
k o (t) ko (t) k o
From this we may derive the characteristic equation
g
co 2
+
2
( 1) k o = 0.


g
2 4 c o ( 1) 2
= . (60)
2

! g
dc(ko (t)) !! + 2 4 c o ( 1) 2
= = . (61)
dk (t) !
o ko (t)=k o 2
hence an approximation to the saddle path may be written

!
g g dc(ko (t)) !!
co (t) co + ! ko (t) k o
dko (t) ko (t)=k o
1 1

= 1 ( + n) 1 w

g
+ 2 4 c o ( 1) 2
+ ko (t) k o (62)
2
or

2
ko (t) k o + g
cog (t) cog .
co
+ 2 4 ( 1) 2
123
Now
g g
k o (t) = ko (t) k o co (t) co
g
+ 2 4 c o ( 1) 2
= ko (t) k o , (63)
2
which is of the form

k o (t) = zko (t) zk o
with z < 0.
The solution is
t

ko (t) = ko (0)e + zt
k o e z(ts) ds = ko (0)e zt + k o 1 e zt .
s=0
So setting ko (t) = k we may solve for T to give

1 k k 1 k k
T (k ) = ln
o o
= ln > 0,
z ko (0) k o z 1 ko
5.3 The Oligarchs optimization problem under democracy
g

cd (t)1
Max V (0) =g
et dt
1
t=0

s.t. k d (t) = kd (t) cd (t) w(t) ( + n) kd (t)
g
kd (0) = k . (64)
The Hamiltonian is
g

cd (t)1
et
g
H (cd , kd , t, ) =
1
+ (t)[kd (t) cd (t) w(t) ( + n) kd (t)].
g
(65)
123
The first order conditions are

1
Hcg = g et (t) = 0, (66)
d cd (t)

Hkd = (t) kd (t)1 ( + n) = (t). (67)
Labor market equilibrium is given by
w(t) = (1 ) kd (t) . (68)
So the dynamic system becomes

k d (t) = kd (t) cd (t) ( + n) kd (t),
g
(69)

(t) kd (t)1 ( + n) = (t). (70)
Using (66) and its time derivative allows the dynamic system may be rewritten as

k d (t) = kd (t) cd (t) ( + n) kd (t),
g
(71)
g
g cd (t)
cd (t) = kd (t)1 ( + + n) . (72)

The steady state solutions are given by

1 g +n 1
k d = 1 , cd = 1 1 , (73)

Linearizing the system, simplifying and rewriting in matrix form gives us
g
g
g
cd 2 g
c (t) 0 ( 1) k d cd (t) cd
d = . (74)

k d (t) 2 k
1
( + n) kd (t) k d
d
From which we may derive the characteristic equation
1
c
g
2
2 2 k d ( + n) + d ( 1) k d = 0. (75)

123

1
1
2 g
2
cd
2 k d ( + n) 2 k d ( + n) 4 ( 1) k d
= .
2
(76)
!
dcd (kd (t)) !!
g
1
! = 2 k d ( + n)
dkd (t) !
kd (t)=k d
g
1 c 2
k d ( + n) + 2 4 d ( 1) k d
2
= ,
2
(77)
hence an approximation to the saddle path may be written

!
dcd (kd (t)) !!
g
g g
cd (t) cd + ! kd (t) k d
dkd (t) !
kd (t)=k d

+n 1
= 1 1

g
1 c 2
k d ( + n) + 2 4 d ( 1) k d
2
+ kd (t) k d .
2
(78)
Now from (74) and (78) we may write the dynamics of consumption alone as
2

g
g 2c d ( 1) k d
cd (t) g
cdg (t) cdg ,
1 c 2
2 k d ( + n) + 2 4 d ( 1) k d
which is a differential equation of the form

g g g
cd (t) bcd (t) bcd (79)
with b < 0.
The solution is
t
g g g g g
cd (t) = cd (0)ebt bcd eb(ts) ds = cd (0)ebt + cd 1 ebt ,
s=0
123
Acknowledgments We wish to thank Nicolas Magud and George Evans for several useful comments.
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Econ Gov (2009) 10:119145

The economic evolution of democracy

Christopher J. Ellis John Fender

Keywords Democracy Growth

JEL Classification H11 D99 O11 N10

been on whether democracy is a good institution from various economic perspec-

1.1 19th Century British economic history: a selective review

as in Acemoglu et al., and as a mechanism to prevent internal cheating within the

2 Structure of the economy

Y (t) = f (K (t), L(t)) = K (t) L(t)1 , (2)

y(t) = k(t) , (4)

3.1 Political regimes

3.2 Political Change

4 The political-economy equilibrium

Giving the necessary conditions

and the transversality condition

along which the capital stock dynamics are

4.2 Incipient rebellion and the critical capital stock

= [(1 ) ko (t)] ( + n) (1 ) ko (t).

That is if a wage in excess of the subsistence wage can be supported by a feasible

4.3 Democracy or stagnation

wd (t) = (1 ) kd (t) . (23)

Following the same procedures as before gives

The solution to which is

to overcome the costs of coordination. Maintaining this as an assumption it then

the value of the utility integral derived from which is

4.4 The oligarchs key choice: democracy or stagnation

Whether the oligarch chooses stagnation or democracy depends crucially on

We may make a couple of immediate observations. Notice that b is the speed of

Fig. 1 Phase diagram

Fig. 2 Oligarchs utility paths

Clearly whether Democracy or repression is chosen depends on the discounted

4.5 Growth and democracy

By definition of the timing of the incipient revolution it follows that ko (T ) = k =

and using (23) allows us to write

4.6 Conclusions and potential extensions

5.1 Workers utility maximization under socialism

The Hamiltonian to which is

Giving the first order conditions

and the transversality condition is given by

lim [(t)ks (t)] = 0. (40)

From this we derive the characteristic equation

The characteristic roots of this system are

Hence an approximation to the saddle path may be written

which is of the form

as reported in the text.

5.2 The Oligarchs maximization problem

The Oligarchs maximize

Giving the necessary conditions

and the transversality condition

From this we may derive the characteristic equation

The characteristic roots of this system are

hence an approximation to the saddle path may be written

which is of the form

So setting ko (t) = k we may solve for T to give

as reported in the text.

5.3 The Oligarchs optimization problem under democracy

The first order conditions are

Labor market equilibrium is given by

w(t) = (1 ) kd (t) . (68)

So the dynamic system becomes

The steady state solutions are given by

Linearizing the system, simplifying and rewriting in matrix form gives us

Following the same procedures as before gives