Western European gross domestic product per capita was about twenty times larger in 2003 than it was in 1700. Geoff Hodgson questions whether greater security in property rights really did fuel this surge in production and innovation.

Addressing the growth of British capitalism, Douglass C. North and Barry Weingast (1989) stressed the importance of institutional changes following the Glorious Revolution of 1688 in which the beginnings in the UK of parliamentary supremacy over the monarchy were established. They argued that the development of Britain’s modern economy depended on “secure property rights” and the “elimination of confiscatory government” North and Weingast (1989: 803).

Other institutional economists have adopted similar arguments. Daron Acemoglu, Simon Johnson and James Robinson (2005) highlighted the political settlement of 1689, which limited the power of the monarch and facilitated ‘”the development of property rights”.

But key elements in these arguments have been criticised by historians. While the Glorious Revolution did lead to a change in the de facto balance of power between the monarch and Parliament, this was not a result of any major de jure legislation.

“Restrictions on the saleability of property greatly inhibited the use of land as collateral for loans.”

Others have pointed out that property rights were already relatively secure by 1600 or even earlier. Furthermore, Julian Hoppit (2011) and Sheilagh Ogilvie and André Carus (2014) argued that property was no more secure after the Glorious Revolution: the very fact that Parliament met more often posed greater legislative risks to property. The 1833 British abolition of property in slaves is a dramatic later example of property made insecure.

Furthermore the Industrial Revolution began more than 70 years after the Glorious Revolution. If 1688 brought such dramatic effects, why didn’t industrialisation occur earlier? Consequently, some authors have questioned whether secure property rights were necessary for industrial expansion. In a recent essay (Hodgson 2017) I take a different line of argument; property rights were of vital importance, but not in the way that North and others suggested. The Glorious Revolution did not itself secure property rights but triggered a chain of events eventually leading to important changes to property rights just prior to the Industrial Revolution.

The nature and evolution of property rights

Before the Industrial Revolution, by far the most important type of wealth was in land. A foremost obstacle to the development of commerce was not the insecurity of property rights, but the feudal nature of landed rights. Enduring and well-defined rights often carried feudal obligations that limited the use of this wealth for investment and constrained the growth of markets, finance and capitalism.

There were enduring restrictions on landed property, known as entails. Many entails enforced primogeniture, ensuring that a landed estate passed from one generation to another through the eldest son. Entails also “restricted the uses to which land could be put. … Holders could seldom sell, swap, or mortgage property under their control” (Bogart and Richardson 2011: 245).

Much additional land was set aside as commons, for the shared use of villagers. At the beginning of the eighteenth century about one-quarter of arable land in England was held as commons (Bogart and Richardson 2011: 247). This common land could not be sold or mortgaged. These restrictions on the saleability of property greatly inhibited the use of land as collateral for loans, which could be invested in mercantile, industrial and infrastructural ventures.
Barriers to the commodification of land and its use as collateral did not disappear spontaneously or easily. They were defended by strong and enduring vested interests.

Entails stubbornly endured, largely because the wealthy elite endorsed them. Owners were disinclined to sell or mortgage buildings or land that had been in their family for generations. Loss of land meant loss of status, influence, titles and privileges.

It took numerous varied Acts of Parliament to remove these restrictions, lasting well into the nineteenth century. Enclosure acts removed grazing and other rights from the commons and placed the land in the hands of a single owner. Estate acts undid strict settlements and statutory authority acts were used to develop infrastructure, including improvements to roads, rivers and the construction of canals (and later railways).

Hence a major problem with older property rights was not their insecurity, but their entangled, feudal nature. In a sense, the problem was not that there were too few property rights, but too many.

Strong vested interests protected the feudal nature of landed property rights. Major institutional changes were required to provide incentives for the commercialisation of land and to enhance a money-making culture, over and above matters of status based on landed property. A major problem was to reform well- established and secure property rights, not to establish them.

Wars and financial revolution

An immediate effect of the Glorious Revolution was the renewal of war. Before 1688 Britain was allied with France and Spain against the Netherlands. After 1688 Britain and the Netherlands became allies, against France and Spain. The Nine Years’ War (1688-97) was quickly followed by the long War of Spanish Succession (1701-13). Subsequently there came the:

■  Jacobite Rebellions of 1715 and 1745;

■  War of the Quadruple Alliance (1718- 1720);

■  Anglo-Spanish War (1727-1729);

■  War of the Austrian Succession (1740- 1748; and

■  The global Seven Years’War (1756- 1763).

Overall, Britain was plunged into a long period of war, requiring major reform of its fiscal and administrative arrangements

The invasion of 1688 led to an influx of Dutch merchants and financiers who brought knowledge of Dutch financial institutions and helped establish London as the world’s leading financial centre (Dickson 1967). The establishment of the Bank of England in 1694 was prompted by the need to finance war abroad. It was part of a chain of institutional events that led to the development of a modern financial system in Britain, with the crucial role of the state in gathering taxes, issuing bonds and loans, buttressing private banks, and acting as lender of last resort.

The needs of war and the combined pressures of global and domestic commerce were major forces behind the development and reform of financial institutions and state administration (O’Brien 2011). As Henry G. Roseveare (1991: 4) pointed out, accompanying the political and fiscal changes after 1688 there was “an administrative revolution – or, at least, a striking growth in the power and effectiveness of the state which manifested itself not merely in war but in the subtler tasks of peace.”

The state administration established a stronger fiscal base and empowered a growth in tax revenues, particularly to finance wars. The settlement of 1689 strengthened the political consensus, creating the foundation of an effective fiscal state (Roseveare 1991). The major part of state revenue was through customs and excise charges, which increased with the growth of Britain’s power and trade abroad (Mathias 1983: 428). Ironically, the most obvious and immediate effect of 1688 was not a growth in free enterprise, but a considerable expansion in state bureaucracy and taxation.

The Financial Revolution involved several legislative steps, including changes to laws concerning usury and the sale of debt, and the development of new organisational structures and business habits. Addressing the evolution of finance in Britain and elsewhere, Geoffrey Ingham (2008: 70) concluded that ‘the capitalist monetary system developed from the integration of private networks of mercantile trade credit-money with public currency – that is, state money.’ For Ingham (2008: 74) and others, crucial to this system was the role of debt: ‘Capitalism is distinctive in that it contains a social mechanism by which privately contracted debtor-creditor relations … are routinely monetized.’

Capitalist finance and the transformation of property rights

Capitalist finance involves a complex web of contractual obligations. Commercial banks keep only a fraction of their deposits in reserve as cash or gold. Any debt is funded by current assets, or by claims owed by a third party. The purchaser of debt receives the right to an asset that itself can be used as collateral to borrow. Credit money thus feeds on itself: commercial bank money is created endogenously (Moore 1988, Wray 2012). With such arrangements, banks can create more money ‘out of nothing’ (Schumpeter 1934: 73). After 1688 a modern financial system developed, which rested on the pillars of collateralisable property, negotiable debt, global trade, and state power.

“The most obvious and immediate effect of 1688 was not growth in free enterprise, but a considerable expansion in state bureaucracy and taxation.”

The evolution of the financial system in the first half of the eighteenth century facilitated more and more industrial and infrastructural projects based on large- scale borrowing. As large-scale investments demonstrated their profitability, wealthy landowners and other investors were enticed by further commercial ventures.

Growing opportunities for profit eroded longstanding, sentimental, family commitments to their estates. This impelled the removal of entails, so that land could be used as collateral for loans. Hence the major capitalist reforms to property rights in land followed rather than preceded the Financial Revolution.
This account puts the growth of finance at the centre of the explanation of the rise of capitalism. While secure property rights, trade and wage labour may be taken as necessary features of capitalism, they are insufficient to define that system. At the core of capitalism – as it emerged in the eighteenth century – is a set of financial institutions based on collateralisable property and credit creation. These institutions and the financial system are typically buttressed by the state (Ingham 2008, Hodgson 2015a).

As Joseph Schumpeter (1939: 223) pointed out, “capitalism is that form of private property economy in which innovations are carried out by means of borrowed money, which in general … implies credit creation.” Money is borrowed on the basis of collateral. Yet this aspect of property is neglected in much of the “economics of property rights”, which concentrates instead on property in terms of control (Heinsohn and Steiger 2013, Hodgson 2015a, 2015b). Schumpeter (1954: 78 n.) also emphasised “the importance of the financial complement of capitalist production and trade”. Hence “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.”

If this analysis applies to the development of capitalism in countries beyond Britain, then it would suggest that the building of a state administration, that can sustain a modern monetary system and secure the use of private property as collateral, is an important precondition of rapid economic growth. Hence an emphasis on the “security of property rights” would be insufficient in developing countries. The nature of property, and its connection with finance and politics, have to be better understood.


■  Acemoglu, Daron, Johnson, Simon and Robinson, James A. (2005) ‘Institutions as a Fundamental Cause of Long-Run Growth’, in Philippe Aghion and Steven N. Durlauf (eds) (2005) Handbook of Economic Growth: Volume 1A (North Holland: Elsevier), pp. 385-472.
■  Bogart, Dan and Richardson, Gary (2011) ‘Property Rights and Parliament in Industrializing Britain’, Journal of Law and Economics, 54(2), May, pp. 241-74.
■  Dickson, Peter G. M. (1967) The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756 (London: Macmillan).
■  Heinsohn, Gunnar and Steiger, Otto (2013) Ownership Economics: On the Foundations of Interest, Money, Markets, Business Cycles and Economic Development, translated and edited by Frank Decker (London and New York: Routledge).
■  Hodgson, Geoffrey M. (2015a) Conceptualizing Capitalism: Institutions, Evolution, Future (Chicago:
University of Chicago Press).
■  Hodgson, Geoffrey M. (2015b) ‘Much of the “Economics of Property Rights” Devalues Property and Legal Rights’, Journal of Institutional Economics, 11(4), December, pp. 683-709.
■  Hodgson, Geoffrey M. (2017) ‘1688 and All That: Property Rights, the Glorious Revolution and the Rise of British Capitalism’, Journal of Institutional Economics, 13(1), March, pp. 79-107. This paper is open access and is available HERE.
■  Hoppit, Julian (2011) ‘Compulsion, Compensation and Property Rights in Britain, 1688-1833’, Past and Present, 210(1), February, pp. 93-128.
Ingham, Geoffrey (2008) Capitalism (Cambridge: Polity Press).
■  Mathias, Peter (1983) The First Industrial Nation: An Economic History of Britain 1700-1914, second edition (London and New York: Routledge).
■  Moore, Basil J. (1988) Horizontalists and Verticalists: The Macroeconomics of Credit Money (Cambridge: Cambridge University Press).
■  North, Douglass C. and Weingast, Barry R. (1989) ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth- Century England’, Journal of Economic History, 49(4), December, pp. 803-32.
■  O’Brien, Patrick K. (2011) ‘The Nature and Historical Evolution of an Exceptional Fiscal State and its Possible Significance for the Precocious Commercialisation and Industrialisation of the British Economy from Cromwell to Nelson’, Economic History Review, 64(2), May, pp. 408- 446.
■  Ogilvie, Sheilagh and Carus, André W. (2014) ‘Institutions and Economic Growth in Historical Perspective’, in Philippe Aghion and Steven Durlauf (eds) (2014), Handbook of Economic Growth, Vol. 2A (Amsterdam: Elsevier), pp. 403-513.
■  Roseveare, Henry G. (1991) The Financial Revolution, 1660-1760 (Harlow: Longman).
■  Schumpeter, Joseph A. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (Cambridge, MA: Harvard University Press).
■  Schumpeter, Joseph A. (1939) Business Cycles: A Theoretical Statistical and Historical Analysis of the Capitalist Process, 2 vols. (New York: McGraw-Hill). Schumpeter, Joseph A. (1954) History of Economic Analysis (Oxford and New York: Oxford University Press).
■  Wray, L. Randall (2012) Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems (London and New York: Palgrave Macmillan).

Geoffrey Hodgson

Geoffrey Hodgson is Editor-in-Chief of the Journal of Institutional Economics, published by Cambridge University Press. He has written 16 books, over 140 articles in academic journals, and over 80 articles …

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