British economist Geoffrey M. Hodgson argues private property and individual enterprise fueled the Great Enrichment.

Stephen Davies | From the August/September 2024 issue

The Wealth of a Nation: Institutional Foundations of English Capitalism, by Geoffrey M. Hodgson, Princeton University Press, 304 pages, $39.95

A galaxy of brilliant scholars have tried to account for the economic transformation of England in the 18th and early 19th centuries—the period that began the Great Enrichment that created the modern world. What could Geoffrey M. Hodgson’s The Wealth of a Nation add to this mountain of scholarship and disputation?

Quite a lot. Building on his earlier work, especially 2015’s Conceptualising Capitalism, the British economist argues that the Great Enrichment and the associated rise of liberalism stemmed from institutional change, particularly a legal and political system that protects property and contracts and provides a secure space for individual enterprise. He combines that view (which owes much to the Nobel-winning economist Douglass North) with a redefinition of capital and capitalism, where he draws on Joseph Schumpeter, Thorstein Veblen, and other heterodox economists.

Hodgson criticizes the definition of capital used by the great majority of economists and historians, in which the word means physical goods used to produce other goods or services. He argues instead that it properly refers to the purchasing power used to acquire those goods, whether as cash or as credit. This makes finance and financial institutions central to capitalism. It also makes capitalism historically unique: a modern phenomenon that is distinct from the different sorts of markets and property relations that have existed in civilizations throughout history.

In Hodgson’s account, the critical shift stemmed from legal institutional changes (including the Financial Revolution of the 1690s) that made it possible both to access more capital and to create it essentially from nothing. One central innovation was the amendment of land title law and enforcement to enable far more mortgage finance. The main process here, which took a considerable time to take hold and is not yet fully complete, was the replacement of older feudal forms and rules of tenure by more straightforward title.

These shifts did not just make the pooling and collection of capital easier. They made it possible to effectively bring credit from the future into the present: You could secure credit against the income that would flow from future production to mobilize resources to create that production, then use the eventual income to service and liquidate the credit. Hodgson argues that growth was held back by a shortage of capital until the middle of the 19th century, when the changes were sufficiently advanced.

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This story, making finance the driver of economic modernization and making legal institutional reform the factor enabling finance, means that Hodgson has to engage with several rival accounts. One rival theory is that of Karl Marx, who saw class conflict as the driving force of historical change. Hodgson essentially accepts much of Marx’s analysis of how a capitalist society’s social relations work, but he rejects Marx’s theory of history and his account of the relation between material productive processes and social relationships.

Hodgson also rejects four other theories of the origins and nature of modern capitalism. The first, which sees technology as the autonomous source of economic growth and modernity, is represented mainly by the ideas of the Texas economist Clarence Ayres. The second is Max Weber’s thesis linking capitalism to the change in outlook and psychology brought by Protestantism. The third is Deirdre McCloskey’s argument attributing the Great Enrichment to the proliferation of liberal values and ideas, such as respect for trade and business as ways of life, welcoming innovation rather than fearing it, and simply allowing wide limits for people to do and think what they like. The fourth, associated with Joel Mokyr, combines cultural and technological explanations.

Of these rival accounts, those of McCloskey and Mokyr are closest to Hodgson’s and yet most different. Both share Hodgson’s belief in the historical uniqueness of modern capitalism (though McCloskey prefers not to call it that) and both date its emergence to the mid-17th century. But both reject his central thesis that legal institutions are the fundamental factor in this historical rupture.

The problem with Mokyr’s arguments, as Hodgson says, is that they rely on a series of seemingly fortuitous and unexplained shifts or innovations. With McCloskey, however, the debate is more of a draw, coming down to a possibly unresolvable dispute about what counts as necessary and what as sufficient. McCloskey notes that the institutions that North and others point to had been around for centuries without creating capitalism, so they could be only a necessary condition, not a sufficient one; the institutions had to be combined with a shift in outlook to launch the Great Enrichment.

Hodgson counters that these cultural changes would have had no effect without the institutions—and that the institutions that underlay the emergence of modern credit-based capitalism were themselves novel, coming about only in a specific place at a certain time. The weakness of Hodgson’s account is that it implies there is a suite of institutional rules that will drive the emergence of a modern capitalism unless there are very powerful countervailing forces. That is surely optimistic, and McCloskey’s argument that institutions require a particular cultural and ideological milieu to have economic results is well-taken.

A specific challenge is the case of Japan, which independently saw the emergence of a recognizable type of modern capitalism at the same time that England did. This is not a problem for McCloskey, because her model can be easily applied to Tokugawa Japan (with Chonindo, a form of neo-Confucianism that valorized the “way of the merchant,” playing the role played in Europe by Anglo-Dutch liberalism). It is more of a challenge for Hodgson—hence a section of the book that argues that a similar set of institutions and financial arrangements emerged under the Tokugawa. This section is suggestive, but because of its relative brevity it is not fully worked out.

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That said, this is a well-written book with a clear argument, and it adds something important to our understanding of how the first modern economy came into being. Its arguments for emphasizing the role of finance and for defining capital as money or purchasing power are very convincing. And it points the way to further questions, a research agenda that we can hope Hodgson himself will pursue while inspiring other researchers to do likewise.

They could, for example, explore finance’s role in economic modernization in more detail by examining the different forms it has taken in different countries and how this in turn generates varied forms of business organization. The way large-scale and readily accessible finance transformed business structures during the Belle Epoque of 1870 to 1914 is worthy of a large book itself. Another topic to explore is the relationship between the precise forms taken by capitalist social relations and the monetary and financial systems in place. Another would be the ways that some countries, including England, are still hampered by feudal remnants and by the continuing economic and political weight of the landed aristocracy.

Many historians might push back against Hodgson’s claim that capitalism, as he defined it, is found only in the modern world. Here we may draw on a theorist who Hodgson does not discuss, the French historian Fernand Braudel. For Braudel, capitalism was built around and defined by finance in the way Hodgson describes. But he saw it as a recurrent phenomenon, something that appeared at various points in history as an occasional outgrowth or superstructure of market relationships. This would mean that the institutions Hodgson sees as unprecedented when they emerged in early modern England were in fact only the latest instance of something that had happened several times before—for example, in Antonine Rome, Gupta India, Abbasid Iraq, and Song China.

But if this is correct, we must also conclude that those previous episodes did not sustain themselves. That in turn poses a question that Hodgson does not explore: whether capitalism as he defines it can persist indefinitely.

One possible response to that question—another part of the research agenda this book should inspire—would be to study the social and legal position of finance in different times and places. In most cultures, finance is feared and mistrusted, precisely because of its solvent effect on social, political, and economic relations. Yet it is simultaneously desired (when it exists) because of its ability to make so many projects feasible. If you are looking for theories as to why these capitalist episodes are cut short, there just might be some clues in that tension. This has obvious, and pressing, contemporary relevance.