In 1992, the American Economic Review published a “Plea for a Pluralistic and Rigorous Economics,” signed by a number of eminent economists, including John Kenneth Galbraith, Charles Kindleberger, Paul A. Samuelson, Robert Heilbroner, and Hyman Minsky. One of the organizers of the manifesto was Geoffrey M. Hodgson, now a research professor in business studies at the University of Hertfordshire in the UK. Since then, Hodgson has published a number of critiques of mainstream academic economics, including How Economics Forgot History: The Problem of Historical Specificity in Social Science (2001) and From Pleasure Machines to Moral Communities: An Evolutionary Economics Without Homo Economicus (2012). His new book, Conceptualizing Capitalism, is a capstone to a distinguished career devoted to rethinking modern economics and economies.
“Heterodox economics” is a label for a number of schools of thought that share nothing other than the rejection of the idea that the economy is a quasi-natural object that can be adequately described by means of mathematical modeling. Hodgson’s project, here and in his other books, contributes to one strain of the heterodox-economics tradition: the study of institutional economics, a broad field of inquiry that includes the nineteenth-century German historical school, early-twentieth-century institutionalists like John R. Commons and Thorstein Veblen, and more recent exponents like Douglass C. North.
The roots of the institutionalist tradition, which treats economics as an art of statecraft rather than a science, are much older than classical and neoclassical economics, and can be found in the disciplines of premodern moral economy and political economy, as well as in the Continental European tradition of “cameralism” or public policy. Indeed, if we adopt a wide-angle historical perspective, institutionalist economics arguably is the mainstream, from which classical and neoclassical economics have been deviations—and, if the institutionalists are correct, dead ends.
Hodgson calls his contribution to the discipline “legal institutionalism,” because he stresses the constitutive role of law and the state in structuring the economy in modern capitalist societies. According to Hodgson, “from diametrically opposite policy positions, both Marxism and promarket libertarianism focus on markets.” In opposition to this approach, he argues that the definition of capitalist societies is far from exhausted by a narrow focus on how markets operate or are ostensibly thwarted by the state. “While markets are central to capitalism,” he writes, “capitalism is not simply a market system: unavoidably it contains different subsystems of governance, production, distribution, and exchange.” Hodgson’s goal in Conceptualizing Capitalism is to restrict the use of the term capital: “I define capital differently from Marx and most other economists. . . . Capital is money, or the realizable money value of owned and collateralizable property.” This definition of capital—the one commonly employed in ordinary business—was marginalized, Hodgson argues, by promiscuous adaptations of the term.
He contends that the model of capitalism associated with this definition has, in another sense, become too broad and unfocused: “Along with Marx, the historical school, the original institutionalists, and others, I argue that capitalism is a relatively recent phenomenon,” originating over the past few centuries. The capitalist economy evolved in states characterized by a system of checks and balances, property rights, and a more or less autonomous legal order. “Foreshadowed in the Italian city-states, [such states] did not appear on a national scale until the seventeenth century, in Britain and the Netherlands.”
Following many historians of international relations, Hodgson argues that competition among multiple states in early-modern Europe “helped create the conditions for the emergence of capitalism.” It did this mainly by encouraging states to strengthen their relative economic and military standing by means of “policies to encourage merchants and trade.”
Hodgson defines capitalism as “a socioeconomic system with . . . six characteristics”: a legal system supporting property rights; money-based commodity exchanges and markets; private ownership of the means of production by profit-driven concerns; production organized outside the domain of home and family; contracts spelling out the terms of employment and wage labor; and a sophisticated system of banking and collateralized debt.
Weberian “ideal types” can be a useful tool in the study of society. But definitions are, inescapably, somewhat arbitrary. It’s not clear from Hodgson’s analysis just why the defining traits of modern capitalism should number six and not five or fifteen.
Nor is it clear why, for instance, free labor by wage earners qualifies as a constitutive element of capitalist societies. Hodgson argues that chattel slavery and other kinds of labor that can be owned and collateralized and sold are incompatible with capitalism: “Precisely because waged employees are not slaves, they cannot use their lifetime capacity for work as collateral to obtain money loans. . . . By contrast, capitalists may use their property to make profits and as collateral to borrow money, invest, and make still more money. Differences become cumulative.” And over time, these incommensurate modes of accumulation separating wage workers from owners contribute to rising inequality.
In advancing this argument, Hodgson would seem to agree with those who believe that, in the American Civil War, the capitalist, free-labor North defeated the “feudal” South. But various forms of unfree labor, including chattel slavery, indentured servitude, and debt tenancy, have existed in otherwise indisputably capitalist societies and continue into the present—see, for example, the highly straitened terms of employment extended to H-1B, H-2A, and H-2B foreign guest workers in the United States. After abolishing slavery within its empire in the 1830s, Britain transported great numbers of contract laborers—“coolies”—around the world. Was imperial Britain any less capitalist because of that? Today, immigration reforms that would greatly expand the number of both skilled and unskilled foreign indentured workers, who are bound by contract to their employers and threatened with deportation if they quit, are a priority for America’s capitalist elite.
Hodgson’s schematic definition of a capitalist social order also necessarily excludes what makes industrial capitalism different from premodern agrarian capitalism—labor-saving technology, mass-production industries with increasing returns to scale, urbanization, state-sponsored R & D, and social-insurance systems. The strain of institutionalist economics associated with the nineteenth-century German-American thinker Friedrich List (who merits only a passing mention in Hodgson’s book) and championed today by other heterodox economists, including Richard R. Nelson and Erik S. Reinert, emphasizes that the central phenomenon of our time is the transition from agrarianism to industrialism. That transition, in turn, has been based on the substitution of machinery, powered chiefly by fossil fuels, for human and animal labor, supplemented by primitive wind and water power. In this view, industrial societies—capitalist, socialist, communist, and mercantilist—more closely resemble each other than they do premodern agrarian societies (capitalist, feudal, and patrimonial). In many if not most respects other than property rights and civil rights, industrial, communist East Germany was more like industrial, capitalist West Germany than the latter was like the agrarian, capitalist Germany of the past.
Hodgson equates the system of radical, world-altering productivity that originated in Western Europe in the eighteenth century with capitalism. But why not call this modern system by another name—industrialism. In the past two and a half centuries, industrialism has come in a number of nonliberal forms, like fascist state capitalism, Soviet and Chinese communism, and modern East Asian mercantilist economic nationalism. Hodgson might reply that liberal market societies have been the most consistently innovative ones. Indeed, he thinks that many projections for the future growth of authoritarian China and other illiberal or preliberal societies are too optimistic. This may prove to be the case. Still, from the eighteenth century to the present, the state has taken an ever-greater role in fostering technological innovation, through military and civilian research, funding, and procurement. Hodgson himself acknowledges the central role of military competition in spurring states to try to maximize economic growth. It is possible to imagine an alternate history in which great-power rivalries led to the development and diffusion of the science-based industrial economy, even in the absence of many of the factors that constitute capitalism in Hodgson’s definition.
For all that one might quibble with the particulars, Hodgson’s view of capitalism as a relatively recent system embedded in and supported by nonmarket legal and political structures is a great conceptual advance. His argument stands as a long-overdue corrective to conventional treatments of capitalism as a system of interlocking markets that tend toward equilibrium unless disturbed by human interference. Unfortunately, this version of heterodox economics is unlikely to displace conventional neoclassical approaches. Since the nineteenth century, neoclassical economists have consistently won the battle for professorships, as well as the broader competition for professional recognition, prizes, and media exposure. The reason for this is a case study in the real-world operation of institutional economics: Universities, foundations, prizes, and the prestige publications that popularize economic ideas are funded chiefly by rich individuals who favor the notion that their wealth is the result of impersonal forces that can be tampered with only at terrible cost to society as a whole. Conceptualizing Capitalism is a magisterial achievement that deserves a wide audience. But it is unlikely to find one among capitalists themselves.
Michael Lind is a cofounder and fellow at the New America Foundation.
