Hodgson, Geoffrey M. “Conceptualizing Capitalism: A Summary.” Competition & Change 20, no. 1 (February 2016): 37–52. https://doi.org/10.1177/1024529415611264. --- Progressive Summary: Several wars in England – the Nine Years’ War (1688-97) and the War of Spanish Succession (1701-13) – spurred the passing of legal reforms that enabled the negotiability of debt. The negotiability of debt is the key feature that led to the rise of capitalism. --- # Definitions Definition of capitalism: 1. A legal system supporting widespread individual rights and liberties to own, buy, and sell private property 2. Widespread commodity exchange and markets involving money 3. Widespread private ownership of the means of production by firms producing goods or services for sale in the pursuit of profit 4. Much of production organized separately and apart from the home and family. 5. Widespread wage labor and employment contracts 6. A developed financial system with banking institutions, the widespread use of credit with property as collateral, and the selling of debt An institution is a system of rules that structure social interactions. Examples of institutions are language, money, law, weights and measures, traffic conventions, table manners, and organizations. An organization is a special type of institution involving - criteria to establish its boundaries and to distinguish members from non-members - principles of sovereignty concerning who is in charge - a structure delineating responsibilities within the organization A social position is a specified social relationship with other individuals or social positions. The occupant of a social position brings his own qualities and powers and acquires additional qualities, power, and obligations associated with that position as well as enduring its constraints. --- If we define capitalism as private ownership and markets, then it has been around for 5000 years. Trade has existed between tribes for tens of thousands of years. There is evidence of organized markets in China 5000 years ago. There are records of organized marketplaces (agora) in 6th-century BC Athens. Capitalism took off in the eighteenth-century. Some explain it as the result of technological discoveries. But what made these discoveries happen at this time? Certain institutions must have encouraged it. Karl Marx theorised that the rise of wage labour in the sixteenth-century was the main contributing factor. But wage labour had been around for two centuries prior to that, when serfdom went into decline. Some claim that the main factor was the securing of property rights after the Glorious Revolution of 1688. But property rights had already been secure as early as the twelfth-century in England. The Glorious Revolution limited the power of the sovereign and enhanced that of Parliament, and this allowed legal reforms that eventually changed property rights, but it was not immediately decisive in that regard. In a footnote to his History of Economic Analysis, Joseph Schumpeter wrote: ‘Owing to the importance of the financial complement of capitalist production and trade, the development of the law and the practice of negotiable paper and of “created” deposits afford perhaps the best indication we have for dating the rise of capitalism.’ He singled out the development of a financial system as the key factor in the birth of capitalism. ‘If we were asked – Who made the discovery which has most deeply affected the fortunes of the human race? We think, after full consideration, we might safely answer – The man who first discovered that a Debt is a Saleable Commodity.’ – Henry Dunning MacLeod, the first lawyer-economist In the seventeenth century, the failure of common law courts to deal adequately with the negotiability of debt led businessmen to press Parliament for robust legislation. In 1704, during the reign of Queen Anne, Parliament passed ‘An Act for giving like Remedy upon Promissory Notes, as is now used upon Bills of Exchange, and for the better Payment of Inland Bills of Exchange.’ Significant further legislation, including another Act as late as 1758, was required to consolidate negotiability. Once negotiability was established, the capitalist financial genie was out of the bottle. This financial revolution was motivated by war, specifically the Nine Years’ War (1688-97) and the War of Spanish Succession (1701-13). --- >In my book Conceptualizing Capitalism I propose a definition of capitalism that includes private property, widespread markets, widespread employment contracts and developed financial institutions. The latter item is included for the reasons given above – capitalism is above all a system based on finance. The development of financial institutions was crucial to its birth and take-off. >Widespread employment contracts are included in the definition not because they mark the beginning of capitalism – as Marx wrongly suggested – but because their possible future replacement by widespread self-employment or worker cooperatives would change the system into something quite different. > My claim that the rise of sophisticated financial institutions marks the dawn of capitalism is not original, but why have so many economists and historians (including Marx) downplayed these vital developments? >A major part of the answer lies in the metaphors that economists and others have used to frame their basic concepts and understandings of key elements in the system. These problems were evident in Adam Smith’s classic book on The Wealth of Nations (1776). Inspired by developments in astronomy and physics, Smith made extensive use of mechanical and physical metaphors. In business usage, then and now, the term ‘capital’ means money held or invested, or the money value of other assets on the balance sheet of an individual or firm. But Smith changed the meaning of ‘capital’ from money or money value, to the assets themselves. Capital became a physical force or thing – including machines and labour – rather than a monetary asset. This change of meaning has pervaded economics ever since and has spread into sociology with mutated terms such as ‘social capital’. But ‘social capital’ cannot be readily owned, valued, sold or used as collateral. It is thus highly remote from the still prevailing business meaning of capital as money or the money-value of owned assets. >In all the discussion of Thomas Piketty’s celebrated book on Capital in the Twenty-First Century it has been rarely noted that he abandoned all these perversions of the term ‘capital’ and reverted to its proper meaning of money or monetizable assets. On this basis we can see that the concentrated distribution of collateralizable assets is a major generator of further inequality within capitalism. >Economists and other social scientists often think of property as a thing, rather than a legally-sanctioned right to a thing. Marx was reluctant to emphasise the crucial role of the legal system because he saw it as part of the ‘superstructure’ rather than of ‘the economic structure … the real foundation’. But he never defined these terms clearly. His relegation of law was partly inspired by an architectural and physical metaphor. >Other social scientists downplay the role of state law because they want categories such as property and exchange to apply to all human existence since the birth of our species. Accordingly, custom is misleadingly identified as law, even in the absence of an institutionalised judiciary or legislature. Property is treated as primarily a matter or possession or control. The economic analysis of these mis-labelled ‘property rights’ may bring insights on how people control assets in the absence of a developed legal system, but it is inadequate to deal with the mechanisms of authority, legitimation and legal control in modern, largescale, complex economies. >Consequently, the understanding of the modern system that we describe as ‘capitalism’ requires a new approach to analysis that differs from much found in economics, sociology and Marxist theory. The underlying physical metaphors of things and forces are replaced by the notion of an economy as an evolving, information-processing system. This system entails the generation, allocation and exchange of recognised legal rights over many kinds of asset. --- > The proposed new approach to the analysis of capitalism can be described as ‘legal institutionalism’. It puts legal institutions and relations at the centre, seeing them as a major source of power in modern society. Among others, this approach is influenced by Marx on the question of historical specificity, by Schumpeter in regard to the central role of finance, by Friedrich Hayek on the understanding of markets as information-processing systems, and by the American institutionalist John R. Commons with respect to the foundational and constitutive role of law. --- # Shortcomings of Marxian view - Marx failed to see the importance of collateralization in the development of capitalism. - He failed to see the legal system as a key feature of capitalism. - His notions of property are hampered by a "physicalist ontology". - By defining capitalism as a system which extracts surplus value from workers, he is guilty of making a circular argument. Ie capitalism is bad because it is bad.