We are grateful for the insightful comments of Hans Eicholz. They provide us with an opportunity to clarify some misunderstanding and to further elucidate our argument.
Eicholz is dissatisfied with our framework, or at least our description of it in our opening essay. Eicholz’s first comment is that our theory is a stadial theory like that of the Scottish Enlightenment thinkers, or G.W.F. Hegel or Karl Marx. It is true that in Persecution and Toleration we aspire to write social scientific history. This means we are explicit in proposing a theoretical framework. But we don’t see our theory as stadial—at least not as strictly defined. Certainly we don’t find it useful to think in terms of rigid historical stages with their own or laws or dynamics. What is true is that, as economic historians, we are conscious of the vastly different scale of economic activity and living standards that differentiate modern societies from pre-modern societies. And we see important differences in the way past societies were ordered. In particular, we think societies that are governed by identity rules function quite differently from those where more general rules obtain.
In Persecution and Toleration we acknowledge the importance of historical contingency in shaping the paths taken by different countries. For example, not all regions of Europe, when confronted with religious heterogeneity, chose to relax the bounds of toleration. Notably, Spain expelled its Jewish population in 1492—choosing to eliminate a source of tension and maintain its relatively decentralized and low-capacity institutions. This represented what Acemoglu and Robinson term a “critical juncture” for Spain. It could have continued towards building state capacity and abandoning identity rules. This is not how history played out, however, for reasons as difficult to predict as silver coming in from the Americas, and the personality of Spain’s rulers.
Eicholz suggests that what he calls stadial theories, whether of Hegel, Friedrich List, Marx, or the early Douglass North, suffer from the same problem. But he doesn’t elaborate on what this problem is. In any case, rather than the early North, we are explicit in building on the ideas outlined in the last book North co-wrote (with Barry Weingast and John Wallis), Violence and Social Orders. But this is by-the-by. Our work is structured around a theoretical framework because the alternative to an explicit framework is an implicit theory and often an incoherent one, as Karl Popper observed.
Eicholz also finds our definition of state power problematic. The concept we rely on is that of state capacity. How does state capacity differ from simple power? The Ottoman Empire serves as an example. From Machiavelli onward, European commentators noted the absolute power of the sultan. Served by slaves, the Ottoman sultan could expropriate whomever he wished. But did the Ottoman Empire have high state capacity? While it was a powerful state at its height, by the late 17th century it had less fiscal capacity than any of its major European rivals. While the sultan could seize the property of any of his subjects, he collected far less taxation on a per capita basis than the King of France, let alone the States-General of the Dutch Republic. Furthermore, as we elucidate in the first chapter of the book, taxes collected per capita are just an imperfect, albeit useful, proxy for true state capacity. For example, in the Ottoman Empire, tax collection continued to be farmed out to private individuals well into the modern period—resulting in poor oversight of fiscal institutions as well as frequent violations of fiscal contracts by the sultan. Investment in state capacity and reliance on general rules are thus often strategic complements. Perhaps in our essay we should have been clearer (as we are in the book) that the types of modern states we envision as promoting religious freedom were constrained and limited.
Eicholz also suggests that we clarify our use of the term freedom. Here there seems to be a simple misunderstanding. We use freedom in a political sense and the sense that is widely accepted within liberal theory as freedom from restraint. Religious freedom simply requires the state not to coerce people on the basis of their religious beliefs and not to favor or penalize one religion over another. And it goes without saying that religious freedom is a continuous rather than a binary measure.
Finally, Eicholz emphasizes the role of inter-state competition. He sees polycentric competition among divided states as critical to the emergence of religious freedom. Here there is some agreement between Eicholz and ourselves. Joel Mokyr’s recent book A Culture of Growth restates the view that repression in early modern Europe was rendered ineffective because thinkers and their books could cross borders. One of us has written a paper on the beneficial consequences of political fragmentation in Europe.
Political fragmentation and Inter-state competition superficially seem like an attractive alternative explanation. A deeper look however reveals that interstate competition is not an alternative explanation to investments in state capacity; they are part of the same story.
Political fragmentation alone doesn’t get you very far. Scholars who wish to argue that Europe’s political fragmentation was crucial to its dynamism and growth have to explain why fragmentation among Indian polities after the decline of the Mughal Empire had no such effect. Not all fragmented political systems have the same properties. What distinguishes the European state system after 1500 is not simply that it was fragmented but that it was characterized by competitive investment in state capacity and state-building.
And one reason why political fragmentation prompted religious liberalism was that it was one way competitive states sought to gain an advantage over their rivals—this was why Prussia embraced Huguenot immigrants and one reason why Oliver Cromwell and Cardinal Richelieu were favorable to Jewish settlement. We don’t believe it coincidental that these were the same states making the greatest investment in state-building. Interstate competition is what prompted European states to raise larger armies, increase taxes, and run up debt. In other words, we agree with Eicholz that competition matters, but it is part of the larger story we wish to tell and not an alternative to it.
Why does this distinction matter? Well, Eicholz concludes that it was “the processes of competition that forced open the various monopolies of power”. We don’t disagree with the sentiment, and we favor both competition and breaking down monopolies. However, while the process of interstate competition and state building that occurred in early modern Europe did prevent the emergence of a single hegemonic state in the continent, it was characterized by the establishment of monopolies of violence within each European state.
 At the Battle of Lepanto (1571), the Ottoman commander Ali Pasha is said to have taken with him his entire treasure because he feared expropriation.
 In per capita terms by 1700, taxes in the Dutch Republic were 26 times higher (in silver prices) than in the Ottoman empire. Data from K. Kivanc Karaman and Sevket Pamuk, (2010) Ottoman State Finances in European Perspective, 1500–1914, The Journal of Economic History 70(3), pp 593-620.
 Eliana Balla and Noel D. Johnson, (2009) Fiscal Crisis and Institutional Change in the Ottoman Empire and France, The Journal of Economic History 69(3), pp 809-845.
 In the sense of J. Bulow, J. Geanakoplos, and P. Klemperer (1985), ‘Multimarket oligopoly: strategic substitutes and strategic complements’. Journal of Political Economy 93, pp. 488-511.
 Reviewed here by one of the authors http://www.independent.org/publications/tir/article.asp?id=1267.
 “Unified China; Divided Europe” Chiu Yu Ko, Mark Koyama, and Tuan-Hwee Sng International Economic Review, February 2018, Volume 59, Issue 1, pp 285-327.