What Causes Capitalism?
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 Hodgso
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