The Wealth of Nations: The Institutional Foundations of British Capitalism, by Jeffrey M. Hodgson, Princeton University Press, 304 pages, $39.95
Many distinguished scholars have attempted to explain the economic transformation of Britain in the 18th and early 19th centuries—the period that ushered in the era of “great affluence” that created the modern world. What can Geoffrey M. Hodgson do? a country’s wealth What to add to this mountain of scholarship and debate?
Quite a lot. Building on his earlier works, especially those from 2015 conceptualization of capitalismThe British economist argued that the rise of great affluence and its associated liberalism stemmed from institutional changes, particularly legal and political institutions that protected property and contracts and provided a safe space for individual enterprise. He combines this view (which owes much to Nobel laureate Douglas North) with the capital and capitalismwho drew on the ideas of Joseph Schumpeter, Thorstein Veblen, and other unorthodox economists.
Hodgson criticized the definition capital Used by the vast majority of economists and historians, the term refers to physical goods used in the production of other goods or services. Instead, he argued that it correctly refers to the purchasing power, whether cash or credit, used to purchase those goods. This makes finance and financial institutions central to capitalism. It also makes capitalism historically unique: a modern phenomenon distinct from the different types of market and property relations that have existed in civilizations throughout history.
According to Hodgson, the key shift resulted from changes in legal institutions (including the financial revolution of the 1690s) that made it possible to acquire more capital and create capital from scratch. A core innovation was the revision and enforcement of land title laws to enable greater access to mortgage finance. The main process here, replacing the old feudal forms and rules of tenure with more direct titles, took quite some time to develop and is not yet fully completed.
These shifts not only make it easier to pool and raise capital. They make it possible to effectively bring future credit into the present: you can take credit based on the revenue generated by future production, mobilize resources to create that production, and then use the resulting revenue to service and liquidate the credit. Hodgson argued that economic growth was hampered by capital shortages until the mid-19th century, when change was well advanced.
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The story made finance a driver of economic modernization and legal system reform a factor in its development, which meant Hodgson had to deal with several rivals. A competing theory is that of Karl Marx, who saw class conflict as the driving force of historical change. Hodgson essentially accepted much of Marx’s analysis of how social relations work in capitalist society, but he rejected Marx’s theory of history and his explanation of the relationship between material production processes and social relations.
Hodgson also rejected four other theories about the origins and nature of modern capitalism. The first view sees technology as an autonomous source of economic growth and modernization, mainly represented by the ideas of Texas economist Clarence Ayers. The second was Max Weber’s thesis, which linked capitalism to the changes in perspective and psychology brought about by Protestantism. The third is Deirdre McCloskey’s argument, which attributes great affluence to the proliferation of liberal values and ideas, such as respecting trade and commerce as a way of life, welcoming innovation rather than fearing it, and Simply allow people broad restrictions on what they like to do and think. The fourth, related to Joel Mokyr, combines cultural and technical explanations.
Of these rival accounts, McCloskey and Mokyr’s account is closest to Hodgson’s, yet most different. Both men shared Hodgson’s belief in the historical uniqueness of modern capitalism (although McCloskey was reluctant to call it that), and both traced its emergence to the mid-seventeenth century. But both refused to accept his central thesis that the legal system was the fundamental factor in this historical rupture.
As Hodgson notes, the problem with Mokyr’s arguments is that they rely on a series of seemingly accidental and unexplained transformations or innovations. For McCloskey, however, the argument is more compelling and boils down to a potentially irresolvable debate about what is necessary and what is sufficient. McCloskey points out that the institutions identified by North and others have existed for centuries but did not create capitalism, so they may be a necessary condition rather than a sufficient one; these institutions must be combined with a change in ideas, Only then can we start great prosperity.
Hodgson counters that without these institutions, these cultural changes would have had no impact—and that the institutions that underpinned the emergence of modern credit capitalism were themselves novel, emerging only in a particular place at a particular time. The weakness of Hodgson’s argument is that it implies that there is a set of institutional rules that will drive the emergence of modern capitalism unless there are very powerful countervailing forces. This is certainly optimistic, and McCloskey’s argument that institutions require specific cultural and ideological contexts to produce economic outcomes is easily accepted.
A specific challenge is the example of Japan, which saw the emergence of a recognizable type of modern capitalism at the same time and independently as Britain. This was not a problem for McCloskey, as her model could easily be applied to Tokugawa Japan (with Chonindo, a form of Neo-Confucianism that valued the “merchant’s way”, playing the role that Anglo-Dutch liberalism played in Europe role). This was more of a challenge for Hodgson, so part of the book argues that a similar set of institutional and financial arrangements emerged during the Tokugawa shogunate. This section is instructive but not fully resolved due to its relative brevity.
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That said, this is a well-written, clearly argued book that provides something important for our understanding of how the first modern economies came to be. Its emphasis on the role of finance and its argument for defining capital as money or purchasing power are very convincing. It points the way to further questions, and we can hope that Hodgson himself will pursue this research agenda while inspiring other researchers to do the same.
For example, they could explore the role of finance in economic modernization in more detail by examining the different forms that finance takes in different countries and how finance in turn generates different forms of business organization. The massive and accessible finance that transformed business structures during the Belle Époque period from 1870 to 1914 deserves a large book in itself. Another topic to be explored is the relationship between the precise forms that capitalist social relations take and the prevailing monetary and financial system. Another problem is that some countries, including Britain, are still hampered by the continued economic and political influence of feudal remnants and the landed aristocracy.
Many historians would probably dispute Hodgson’s assertion that capitalism as he defined it exists only in the modern world. Here we can look to a theorist that Hodgson does not discuss, the French historian Fernand Braudel. For Braudel, capitalism, as Hodgson describes it, is built and defined around finance. But he believes that this is a recurring phenomenon, appearing at different stages in history as an accidental product or superstructure of market relations. This means that what Hodgson considers to be an unprecedented institution in early modern Britain was in fact just the latest instance of something that had happened many times before – for example, in Antonine Rome, Gupta India, Abbasid Iraq and Song Dynasty China.
But if this is correct, we must also conclude that the previous events did not persist. This in turn raises a question that Hodgson does not explore: whether capitalism as he defines it can continue indefinitely.
One possible answer to this question—another part of the research agenda that this book should inspire—is to examine the social and legal status of finance in different times and places. In most cultures, finance is feared and mistrusted precisely because of its solvency role in social, political, and economic relationships. However, it was also what people expected (when it existed) because it made so many projects feasible. If you’re looking for a theory as to why these capitalist events were cut short, there may be some clues to be found in this tension. This has obvious and urgent contemporary relevance.
