After decades in the shadows, capitalism is now a prominent term in academia. This scholarly two-volume collection of essays addresses the emergence of capitalist institutions and the consolidation and spread of capitalism after the middle of the nineteenth century. It is a major contribution to our understanding of capitalism’s history, by leading scholars in this area.
Together, the two volumes contain 34 essays, authored by a number of highly distinguished scholars. The two volumes have a coherent structure, and the essays fit together with a degree of cross-referencing that indicates a well-managed team effort. I strongly recommend this book for its breadth and depth of historical research.
The first volume is edited by Larry Neal. It is subtitled “The Rise of Capitalism: From Ancient Origins to 1848.” Each chapter in this volume undertakes a geographically and historically bounded analysis. The essays extend back in history to Michael Bursa’s chapter on “Babylonia in the First Millennium BCE,” in which he shows how investment in irrigation and state administration boosted productivity, the population, and trade specialisms. There is a chapter by Etienne de la Vassiere on the Silk Road, and another by Ann Carlos and Frank Lewis on Native Americans before 1800. The geographical range is widened by chapters on China by R. B. Wong, on India by Tirthankar Roy, on the Middle East by Sevkut Pamuk, on Latin America by Richard Salvucci, and on Africa by Morten Jerven.
All these excursions are of great interest, but some readers may wonder how relevant some of them are for the understanding of modern capitalism. (I raise this point later.) In other cases, however, important and relatively unknown connections are established. For example, Sevket Pamuk argues that some of the earliest capitalist institutional innovations in Italy—such as rules governing the issue of credit—were imported from the Abbasid caliphate, which ruled much of the Middle East from the eighth century to the tenth. More expectedly, there is a chapter on the Italian city states by Luciano Pezzolo and one on the Low Countries by Oscar Gelderblom and Joost Jonker. In the two penultimate chapters in this volume, Knick Harley focuses on “British and European Industrialization” and Jeremy Atack on “America: Capitalism’s Promised Land.”
The second volume is more thematic, and its topics are quite diverse. From a global perspective, it looks at the spread of manufacturing, the development of agriculture, technological change, firms, finance, war, labor movements, the welfare state, and other issues. Edited by Jeffrey Williamson, it is subtitled “The Spread of Capitalism: From 1848 to the Present.” Two chapters have a sectoral focus—namely, that by Robert Allen on manufacturing and that by Giovani Frederico on agriculture. The examination of industry and manufacturing is divided among several chapters. Some chapters address the organization of capitalist firms, including Geoffrey Jones on multinational corporations and Randall Morck and Bernard Yeung on “freestanding firms versus family pyramids.” Another important chapter, by Gareth Austin, is on “Capitalism and the Colonies.” In their richly detailed chapter, Kristine Bruland and David Mowery tackle the vital topic of “Technology and the Spread of Capitalism.” No less impressive is Mark Harrison’s chapter on “Capitalism at War.” In his essay, Harold James examines the forces at work behind the historical evolution of the international monetary system. Ron Harris contributes an important chapter on the spread of legal innovations in capitalism. Finally, Peter Lindert writes on the crucial topic of “Private Welfare and the Welfare State.”
The second volume shows that fully fledged capitalist institutions first flourished in the West, especially from the late 1600s. It also demonstrates that the consequent growth in productivity and markets was intimately tied up with the role of government. For example, in his essay, Robert Allen argues that Alexander Hamilton ensured the prosperity of the fledgling United States by promoting public investment in infrastructure. By contrast, the bequest of Western colonizers to Africa was corrupt governments and institutions that were more oriented to resource extraction than to production and development. The rise of capitalism was additionally bound up with violence and unfree institutions. As Gareth Austin points out in his essay, much of the Industrial Revolution was fed by cheap cotton produced by African slaves. In his chapter, Mark Harrison explores the ways in which several wars stimulated capitalist manufacturing.
My foremost criticisms concern the conceptual organization of the volume and the notion of capitalism that it entertains. These criticisms do not devalue the overall contribution of this massive work, but they do reflect on the editorial guidance given to the contributors. I should point out that my own views on the nature of capitalism depart from a more commonplace conception that is signaled in this work.
In his introduction to Volume I, editor Larry Neal identifies four elements that are common to capitalism: (1) private property rights, (2) contracts enforceable by third parties, (3) markets with responsive prices, and (4) supportive governments (p. 2). These four points are also described as a “definition” of capitalism. The first three conditions are consistent with frequent dictionary definitions of capitalism as private property plus markets. Elsewhere, though, I have challenged this definition on historical and analytic grounds, some of which I summarize later (Hodgson Reference Hodgson2015a).
Although the two volumes amply document important roles for the state, Neal has added a further problem with less-commonplace conditions (element 4 in the previous list). Addressing this in his illuminating chapter on “China before Capitalism,” R. B. Wong (vol. I, p. 126) writes that the first three elements were present in China long before the nineteenth century, but he opines: “Neal’s fourth feature of ‘supportive governments’ is complicated to assess.” Wong raises the question as to whether the promotion of war could be regarded as a case of such support. What does “support” mean in this context?
A key problem with state “support” is that it has to be protected against itself—from potential heavy-handedness or corruption from within the state machine. This raises what Douglass North and Barry Weingast (Reference North and Weingast1989) described as a “commitment problem” and the importance of countervailing power to keep the government in check, while recognizing the importance of state protection of property rights and trade. Hence North and Weingast emphasized the balance of powers between king and parliament that was established in Britain after the Glorious Revolution of 1688. Although they are central to condition (4) on the list, these issues receive little discussion in the work under review, with the exception of a mention by Ron Harris (vol. II, p. 130) in his chapter on legal innovations in capitalism. The notion of state “support” might refer to a developed legal system or to aspects of state intervention in the economy, and these require further exegesis.
Turning to the first three—more commonplace—elements, these conditions point to trade and its expansion, and on the legal, political, and technological conditions that allow trade to take place. The first volume is dominated by discussions of the growth of trade and markets in different parts of the world. The words property and market are ubiquitous, but they, too, are problematic.
Briefly, a problem with the term property is that it is often conflated with mere possession or control, as in both Marxism and in much of “the economics of property rights” (Honoré Reference Honoré, Guest and Guest1961; Cole and Grossman Reference Cole and Grossman2002; Heinsohn and Steiger Reference Heinsohn, Steiger and Decker2013; Hodgson Reference Hodgson2015a, Reference Hodgson2015b). The significance of a more specific notion of property that involves legal title (and, when necessary, public registration of such ownership) is that property can be used as collateral to obtain loans that can be used for entrepreneurial activities (De Soto Reference De Soto2000, Arruñada Reference Arruñada2012). The modern scale and function of property collateralization receives inadequate attention in the work under review, except for a mention by Harris (vol. II, pp. 135–136). Clearly, such a system of property requires an institutionalized legislature and judiciary with some separation of powers from state. Again, this raises the importance of countervailing power (North, Wallis, and Weingast Reference North, Wallis and Weingast2009).
The term market is used in different ways. A narrower, everyday definition of market treats it as a place where regular trading activity is conducted. In broader definitions it can refer to any kind of trade, including one-off bargaining and long-distance exchanges. The writers in this work adopt a broader definition. Nevertheless, the editors and some of the authors underline the importance of mechanisms of meaningful price formation, and the operation of supply and demand. It is not stressed enough that sporadic, long-distance trade, sometimes based on ritualistic gift-giving and sometimes involving barter, offers only imperfect mechanisms for establishing meaningful prices.
The emergence of markets in the narrower, everyday sense is an important historical question that is neglected in this work. It so happens that organized markets in Europe or the Middle East first emerged around the sixth century BCE (but organized markets appeared in China much earlier), not coincidentally shortly after the appearance of coinage (Hodgson Reference Hodgson2015a). Again, it is important to note that the state was involved in the production of the first coins (Peacock Reference Peacock2006).
Whether we choose a broad or a narrow definition of markets, they have existed for thousands of years. With a market-centered definition of capitalism, the system has a similar longevity, and attention focuses on the growth and development of markets.
But why call this capital-ism? It may depend on the meaning that we attribute to capital. Neal, in his introduction, follows widespread practice in economics and describes capital as “a factor of production that is somehow physically embodied” (vol. I, p. 3). However, a string of dissidents, including Thorstein Veblen, John A. Hobson, Werner Sombart, Max Weber, Alfred Mitchell Innes, and Joseph A. Schumpeter, have protested that this physical notion of capital is misleading (Hodgson Reference Hodgson2014, Reference Hodgson2015a).
First, if capital is a physical thing used in production, then it dates back to the stone tools of our cave-dwelling ancestors. With this meaning, capital ceases to be a historically specific entity and capitalism slides in the same universal and ahistorical direction. Second, the enduring, commonplace business meaning of capital, which was universal before economists mangled it with their physical metaphors, is that capital is a stock of money or the money value of owned, enduring tangible or intangible assets to be used for the purposes of production. Third, a money-based conception of capital is much better suited to contemporary capitalism, when much corporate wealth consists of nonphysical, intellectual property and other intangible assets (Pagano Reference Pagano2014).
Accordingly, a more adequate and historically relevant notion of capitalism would center on the development of legal and financial institutions that facilitated property collateralization and the amassing of capital (as money) to be invested in production in agriculture, industry, or services. Another vital component of such an advanced financial system is the buying and selling of debt (MacLeod, Reference MacLeod1872, Commons Reference Commons1934, Hodgson Reference Hodgson2015a). Such a financial system was consolidated in Britain in the first half of the eighteenth century, although elements were foreshadowed in Italy and the Netherlands (Kindleberger Reference Kindleberger1984, Roseveare Reference Roseveare1991, Hodgson Reference Hodgson2015a).
These capitalist financial institutions, which were consolidated in the eighteenth century, immediately preceded the massive explosion in productivity that we should reasonably associate with capitalism. By 2003, Western European GDP per capita was about twenty times larger than it was in 1700. World GDP per capita in 2003 was about eleven times larger than it was in 1700 (Maddison Reference Maddison2007).
With the market-centered notion of capitalism, tracing the long history of trade over the millennia, the obvious question, as Neal puts it, is: “Why did capitalism and modern economic growth take so long to get started in the first place?” (vol. I, p. 2). The focus is on barriers and disruptions that prevented growth over millennia, when evidence suggests that markets and property can promote economic growth.
But if we shift to a capital-centered (financial) view of capitalism, then our whole perspective changes. From a financial and capital-centered view, the question becomes, “What peculiar circumstances led to the evolution of these preconditions of capitalism, such as secure property rights, the possibility of property collateralization to raise capital, and the evolution of monetary instruments including trading in debt?” Instead of searching for barriers, the focus shifts onto the extraordinary political and other circumstances, in a remote corner of Europe, that allowed such institutions to emerge, and promoted growth and technological change that was explosive, compared with previous sluggish millennia.
